You might be thinking about starting, or perhaps you already have started, some sort of side hustle – from selling handmade clothing or refurbishing old furniture, to selling drawings, paintings and even performing the occasional gig. It’s something you love doing anyway, so why not earn a bit of extra cash doing it?
But when do you cross the line from having a hobby to operating and running your own business?
Unfortunately, contrary to what The Jackson 5 will tell you, it’s not as easy as 1 2 3. There is no single element that differentiates a hobby from a business. Rather, it is often based on the consideration of several elements, in the context of your individual circumstances.
While this may sound confusing, don’t worry! This article will run you through the differences between having a hobby and running a business, and how to work out what kind of operation you’ve got going.
Being clear on what you are doing is integral to making sure that you are meeting your obligations in terms of the law, tax, and insurance.
What Is A Hobby?
The easiest place to start when it comes to distinguishing between two activities is to know what each of them are and what they involve.
Let’s begin with hobbies.
A hobby generally takes the form of an activity you do in your free time, for your own personal enjoyment or satisfaction. You’re in complete control. You can choose to keep your hobby private, give your products as presents, or even sell them for the cost of materials. The good news is, when your activity is a hobby, you don’t need to worry about reporting obligations, such as declaring income amounts, to the Australian Taxation Office (ATO) as part of your tax return.
But, income-earning hobbies can grow into a business – and this is where things can get a bit tricky! It can help to keep track of any changes you experience in terms of income or practice. Staying on top of this will make sure you’re prepared to take on obligations you may end up having and avoid any penalties.
Tip: Some types of hobbies and activities may require a licence or permit if you wish to operate as a business. Find out if this applies to you by using the Australian Business Licence and Information Service’s tool here.
What Is A Business?
Now that we know what a hobby is, we can look at what makes a business a business.
One of the main ways to tell if you’re operating a business is if you engage in the activity with the aim of making a profit.
If you answer ‘yes’ to at least 2 of the following questions, it would be reasonable to assume that you’re in business:
- Are you doing the activity for commercial reasons?
- Do you undertake the activity with the main intention of making a profit?
- Do you perform the activity on a regular basis?
- Do you carry out the activity in a planned, organised or business-like manner?
Why Would You Want To Operate A Business?
You might be wondering why you should bother starting a business if you can make a bit of extra money with your hobby. After all, when you have a hobby, you won’t need to to deal with the headache of figuring out how to comply with any reporting obligations you might have.
Before you jump the gun, it’s important to consider the benefits that come with being in business and what they mean for you.
One of the biggest advantages to operating a business is that you will be able to apply for an Australian Business Number (ABN) – a unique 11-digit number that will identify your business. Having an ABN can help to identify you in your business dealings – from ordering materials from suppliers and/or distributors, to invoicing your own customers and clients. For those looking at getting a website up and running, possessing an ABN will enable you to apply for an Australian “.com.au” site and domain name.
In addition to this, running a business and obtaining an ABN means that you will have access to government information, services and, in some cases, concessions for small business. Depending on your aggregated turnover, you could be eligible for:
- Income tax concessions
- Capital gains tax (CGT) concessions
- Pay as you go (PAYG) concessions
- Fringe benefits tax (FBT) concessions
- Super concessions
- GST and excise concessions.
You can find out if you qualify for these concessions here.
What Are My Obligations If I Decide To Run A Business?
As Spiderman says, with great power comes great responsibility. Or in this case, reporting obligations.
Once you’re operating a business, certain reporting requirements will kick in that you will need to comply with in order to ensure you are meeting your legal, tax and other obligations. Although these processes may seem tedious, you can use them to your own advantage to make informed business decisions.
Maintaining good records can help you to:
- Manage and keep track of your business’ cash flow
- Present your business’ financial position to investors, banks, and other potential lenders
- Quickly and easily access an overview of how your business is going to make good business decisions
Reporting Obligations For Tax And Superannuation
You will need to keep a record of all tax and superannuation transactions, and respective supporting documents, related to your business.
The specific records you will be required to keep will depend on your business structure (such as whether you are a sole trader, partnership, company, or trust), as well as what the tax and superannuation obligations are for your particular business.
There are four main requirements set out by the Australian Taxation Office (ATO):
- Records must not be changed, and they must be stored in such a way that restricts the information or records from being changed or damaged
- In most cases, the ATO requires that records must be kept for 5 years. The 5-year period commences from the date you have prepared or obtained the records, or when the transactions were completed.
It is important to note that the Australian Securities and Investments Commission (ASIC) requires you to keep records for 7 years, so this may be a preferable time frame for you to comply with.
- If the ATO asks for your records, you will need to be able to produce them
- Records must be in English, or be able to be easily translated to English
Although there is no express requirement to keep your records in electronic form, it is a good idea to use electronic record keeping in situations where you can. Electronic systems are, in many cases, more convenient – saving you time and making many tasks easier. It also means you can reduce your paper usage as you won’t need to keep paper copies, unless required by a particular law or regulation. In addition to this, the ATO is also in the process of transitioning towards electronic reporting for tax and super obligations, so setting up an electronic record keeping system will mean you are prepared when this change comes into effect.
If you already have a system in place that utilises paper records, you can choose to convert them into a digital file, and even destroy the original paper versions. The ATO will accept images of any business paper records that have been saved electronically, as long as they are a true and clear reproduction of the originals, and fulfil their record-keeping requirements.
It is recommended that you ensure your records are stored in a secure place. Be sure to back up your records regularly, especially if they are stored on a computer or other electronic device. To comply with your reporting obligations, you will also need to:
- have access to the computer or device the records are stored on;
- have the ability to control the information that is processed, entered and sent;
- and make sure that the records are backed up in the event that the device fails.
Tip: If you are a sole trader, the ATO has a myDeductions tool on their app that allows you to record your business income, as well as any expenses and vehicle trips. This can be extremely useful when completing your tax return.
Using A Business Name
Depending on your business, you might be thinking about whether you should register a business name to operate under, rather than using your own name.
There are a few things to think about before hitting the go button on registration.
First and foremost, you will need to check whether the business name is free and available for you to register. You can find this out by running a search on ASIC’s business name availability register. In addition to this, it’s a good idea to check IP Australia’s trademark database to ensure your proposed business name doesn’t infringe on an existing registered trademark.
Once you have decided on a business name, you have the option of registering the business name for one year or three years. If you wish to continue operating under your business name once this period has expired, it is important that you renew your business name before the renewal date to avoid ASIC cancelling it. You can find out the current registration fees here.
If you decide to change your business name details (e.g. updating the business address, the details of the business name holder, or adding an ABN) will need to notify ASIC within 28 days. Notably, once your business name has been registered, you will not be able to change it. Rather, you will need to register a new business name.
You will also need to notify ASIC within 28 days if you wish to cancel your business name. Similarly, ASIC must be notified if you, or another person involved in the management of the business, is disqualified from holding a business name.
Fair Trading Obligations
If you sell a product or a service in Australia, it is important to understand and comply with laws that operate to protect you, your business, and your customers from unfair trading practices. These laws are known as fair trading laws, and include the federal Competition and Consumer Act 2010 (Cth), as well as state laws. In NSW, the relevant piece of legislation is the Fair Trading Act 1987 (NSW).
In Australia, it’s unlawful for businesses to prevent competition. Fair trading laws operate in conjunction with industry codes of practice to help you conduct business in a fair and competitive way, whilst protecting customers and ensuring that they are properly informed.
Administered by the Australian Competition and Consumer Commission (ACCC), the Competition and Consumer Act 2010 (Cth) covers a range of areas, including but not limited to:
- Unfair market practices
- Product safety and labelling
- Price monitoring
- Industry codes and regulations
Is There Money Involved?
In many cases, if you sell your work publicly and make a profit, it may be indicative of you running a business. Contrarily, if you do not charge for your work at all, it is likely that you will be considered to be engaged in a hobby.
However, there are some cases in which you might charge money for your work even if you are carrying out a hobby. For example, if you are charging for the cost of materials, or charging for the cost of materials plus a little bit extra to cover additional costs, such as electricity.
Why Do You Advertise Your Work?
If you are promoting your work to establish your reputation and increase your reach in order to boost sales, it is likely that you are in business.
However, there are a range of reasons why you might want to share your work with others, and this is where things can get a little bit more murky. For example, sharing your work to build a reputation and/or following in and of itself, can be indicative of a hobby or a business.
Do You Keep Financial Records?
If you’re in business, it is likely that you will maintain records to ensure you are effectively managing your finances, and keeping track of your business expenses and sales.
Alternatively, if you have a hobby, you might not keep records at all, or may do so to understand and keep track of how much the hobby is costing you personally.
Tip: business.gov.au has a handy tool that can help you take the first step to determining whether or not your activity is a hobby or a business. Remember that this is a guide only and will only relate to the circumstances you base your answers on at the time you take the quiz. If your situation changes, it is a good idea to use the tool again.
Private Ruling From The ATO
In your own research, you may have come across something called a private ruling.
Essentially, you can apply to receive a private ruling for yourself or on behalf of another person or entity. It includes binding advice that outlines how tax laws will apply to your specific circumstances. It will bind the ATO in protecting you against liability for any tax shortfalls if you rely on it, even if the ruling itself is incorrect.
However, the ruling only applies to the specific circumstances it describes. This means that if there is a material difference between the description and the actual activity occurring, then the ruling cannot be relied upon to protect you.
Still Not Sure Whether You Have A Hobby Or Are Running A Business?
The lines between having a hobby and running a business can get quite murky and it is often quite tricky to define which of the two you are involved with.
It is always a good idea to seek advice that is specific to your own circumstances. This is especially the case when it comes to working out whether you have a hobby or a business, as it relies upon an evaluation of what actually takes place, and in what context. There is no clearly defined line or any one element that tips the scale one way or the other.
We are here to help! Reach out to our team of friendly and experienced lawyers for a free, no-obligations chat at firstname.lastname@example.org or 1800 730 617.
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