Knowing the distinction between a business and a hobby is important and getting it wrong may wake even the sleepiest giants at the ATO.
Whether you’re just trying to earn a little money on the side, diversify your income stream or turn your side hustle into a full-time gig, make sure you know how to avoid having your status questioned by our friends in the tax office.
Put simply, a hobby is a spare-time activity or pastime pursued for pleasure or recreation. It is usually an active unpaid pursuit. Hobbies are not necessarily cheap – in fact many creatives, particularly in the music industry, have very expensive hobbies. A ‘Fender’ custom made guitar doesn’t come cheap.
The main thing that distinguishes a hobby from running a business is whether you are going about your activities in a businesslike manner with an aim to make a profit.
This means if you play in a backyard band on an ad hoc basis to friends and acquaintances, you would more than likely not be regarded as running a business and therefore do not have to include your activities in your tax return.
If however you are performing in pubs and other gigs in an organised manner on a regular basis, and you are generally setting about maximising your income from your gigs, then you would more than likely be regarded as running a business by the ATO.
The ATO will look at several indicators. Here are some questions they may ask:
- Is there a commercial sale of a product or a service?
- Is the activity organised, regular and businesslike?
- Do you intend making a profit rather than just earning some income?
- Do you have a Business Plan?
- Have you registered a business name?
- Have you set up a separate bank account for the business?
- Do you keep accounting records for the activities of the business?
- Do you have the required knowledge and skill?
Income-earning hobbies, like that ad hoc backyard band, can sometimes grow into “Green Day.”
What matters is whether your activity is commercial with an aim to make a profit.
So you should monitor any change in your income or practises so that you’re aware of future taxation obligations, expenses, and dollar thresholds.
If you are looking for something to help you sleep, the ATO has issued a very long ruling (TR 2005/1) which discusses whether a professional artist was carrying on a business or not. The ruling does go through many worked examples that provide a useful guide. (But save that nitty gritty for your accountant!)
The Department of Industry, Innovation and Science is also currently trialling a tool (https://www.business.gov.au/info/plan-and-start/a-business-or-a-hobby) designed to help creatives and artists who are making money to identify the difference between a hobby and a business.
If you have any doubt that about whether you are operating a hobby or if you might be the next ‘Green Day’, then please get in touch with us so we can help you navigate the minefield.
Give me a call for a free half hour consult to get your finances on the right track!