The dictionary states the following:
A “hobby” is an activity done regularly in one’s leisure time for pleasure. It is considered somewhat of a pastime, a leisure activity, pursuit or interest or maybe just a sideline gig.
A “business” on the other hand is a commercial activity.
Often a business evolves from a hobby, but it’s always a bit tricky in determining when that change officially occurs both from your eyes and the Australian Taxation Office’s (ATO’s) eyes.
It’s important to consider both perspectives. In addition to the legal requirements, there is a mindset shift that may also need to take place for you to take your hobby to the next level, to feel confident with tax and bookkeeping and to achieve the success you truly want to attract and deserve.
Let’s first look at what the ATO say…….
There are no single, hard and fast rules that determine if you are carrying on a business, but the ATO do look at the following indicators.
- You’ve made a decision to start a business and have done something about it like registering a business name or obtaining an ABN (did you know that if you have an ABN, you actually declared that you are carrying on a business and should already be declaring income and expenses from the business)
- You intend to make a profit or genuinely believe you’ll make a profit from the activity, even if you’re unlikely to do so in the short term.
- You repeat similar types of activities.
- The size or scale of your activity is consistent with other businesses in your industry.
- Your activity is planned, organised and carried out in a businesslike manner. This may include:
~ keeping business records and account books
~ having a separate business bank account
~ operating from business premises
~ having licenses or qualifications
~ having a registered business name.
As an artist, creative or maker and receiving or plan to receive money from creating things such as jewellery, paintings etc, you can actually use the ATO’s Hobby or Business tool to work it out –https://start.business.gov.au/. I would suggest that once you go through this, print out and take to your accountant for their expert opinion.
IF YOU ARE CARRYING ON A BUSINESS …….
Then it’s really time to get yourself a good record keeping system so you can accurately record your income and expenses. I suggest to start with, that you have an easy manual system that you will stick to all year round (you can certainly progress to digital/app systems and computerised accounting software down the track). For a simple, inexpensive, manual system, grab a few A4 lever arch folders and some monthly dividers. File your receipts in the appropriate month along with a list of how much money you have received. At the end of the month, tally up each category of expenses and your income, and voila, you will have all the information you need to produce a Profit & Loss Statement. This will show your how much money you have made. It will also identify if you need to increase your prices and best of all, can act as a wonderful motivator to set your sights on achieving even better results in the following month(s). To do nothing and wait until the end of the year when you see your accountant, is like driving a car blindfolded. The two typical scenarios when you see your accountant are that you haven’t made any money (ouch!!!) or that you have made money and you now have a tax bill (ouch too!!!).
IF YOU ARE CARRYING ON A HOBBY …….
Now you don’t get off scot free! My suggestion would be that you too follow the exact advice I have given above. Why, I hear you say?? Well what happens if the ATO come to you and say, “I think you are carrying on a business”? How do you prove that you think you are still operating a hobby and your expenses are actually more than your income when you haven’t kept any records? Wouldn’t it be great to actually start tracking your numbers? You may actually be investing into your “sideline gig” lots and lots of your time and lots and lots of your money into buying materials and the “winners” of your generosity end up being your customers. If you know accurately what your costs are, you may actually have the confidence to increase your prices to better reflect the value and guess what, your customers will more than likely be happy to pay this increased price. This change in mindset, could be all you need to take your hobby to the next level if that is something you are aspiring to.
| INDICATORS SUGGESTING YOU ARE CARRYING ON A HOBBY | INDICATORS SUGGESTING YOU ARE CARRYING ON A BUSINESS |
| You do not have significant commercial purpose | You have a significant commercial purpose |
| You don’t have any purpose or intention of carrying on a business | Your purpose and intention is to carrying on business |
| You do not intend to make a profit from the activity | You intend to make a profit from the activity |
| The activity is inherently unprofitable | The activity is or will be profitable |
| There is a lack of repetition or regularity of activity | There is repetition and regularity of the activity |
| The activity is carried on in an ad hoc manner | The activity is carried on in a similar manner to that of the ‘ordinary trade’ |
| The activity is not organised or carried on in a businesslike manner – eg records are not kept | The activity is organised and carried on in a businesslike manner and systematically – eg records are kept or records should be kept! |
| There is insufficient size and scale of the activity | There is sufficient size and scale of the activity |
| You are carrying on a hobby, recreation or sporting activity | You are not carrying on a hobby, recreation or sporting activity |
| You so not have a business plan | You have a business plan or should have a business plan! |
| You sell your products or services to relatives and friends, and there are very small commercial sales | You have sizeable commercial sales of your product or service, although your business can be carried on in a small way |
| You lack relevant knowledge, experience and/or skill in the activity being carried on | You have relevant knowledge, experience and/or skills in the activity being carried on |
Other things that you should consider and which are explained in other of my blogs are:
- when should I register for GST?
- how do I know how much money I should be putting away to cover my tax?
- beware of the ATO’s “big brother” techniques in determining the money you receive
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