Small Business Series – Part 2: When does a hobby become a business?

Thanks for joining us on this journey towards starting your small business!

We all have activities that we enjoy doing, and you wouldn’t be alone if you held a quiet dream to turn your passion project into a profit project and throw in your day job.

The Australian Taxation Office (ATO) has some key guidelines to help you differentiate, as this distinction has important tax implications.

Hobby

• Personal enjoyment or recreation is the primary motive.

• You do not intend to make a profit.

• There’s no regularity or system in place to promote or sell goods/services.

• Expenses incurred can't be claimed as tax deductions, but equally, you don’t need to declare any income.

Business

• The activity is carried out with the intention of making a profit.

• You promote your goods/services, have customers, and operate regularly.

• There’s a commercial nature, which means you’ll likely need to apply for an ABN, declare your income, and pay tax on profits.

• You can claim deductions for business-related expenses.

As we mentioned in Part 1, we are going to use a case study throughout our series. Katie has been making cupcakes and gifting them to family and friends for a few years now.  She usually doesn’t receive any payment, or if she does it is a minimal contribution towards ingredients. Until now, Katie’s cupcakes have been a hobby.

If you’re unsure whether you are looking at a hobby or starting a business, the ATO offers a decision tool to help clarify your situation here: https://www.ato.gov.au/business/starting-your-own-business/are-you-in-business/

The information in this blog is general only as we can’t take into account your personal circumstances.  For tailored advice, reach out to LCB Accounting Solutions. We’re here to help you make the best choices for your small business.

In the next instalment in our Small Business Series we will look at planning before you start your small business.