On the other hand, the ‘business losses’ you’re claiming could actually be from a hobby, and don’t belong in your tax return.
It is important to understand if you are carrying on a business. This will influence your tax obligations among many other obligations such as insurance, qualifications and sometimes the ability to undertake the activity at all.
There is no single factor that determines whether you are in business or not and you will need to consider all aspects of your situation. We will examine a few factors below.
In most instances, figuring out if you carry on a business is straight-forward. However, there could be grey areas.
- If your hobby becomes a business – from which date does the business start?
- If your activities cease due to being unable to operate, are you still a business if the activities aren’t carried on continuously?
- If your activities are purely seasonal with no income in the off-season, is it still a business?
If you’re carrying on a business there are income tax obligations and there may be GST obligations. Should sales exceed (or likely to exceed) $75,000 in a 12 month period, the business must be registered for GST.
Put simply, if you’re not carrying on a business, what you’re doing is a hobby.
It’s usually something you do in your spare time. You may be working (contractor, employment or as a caregiver), so your hobby is not your main source of income. You don’t really expect to make a profit from it and sometimes do a swap or barter instead of receiving cash.
However, it’s possible that what was once only a hobby, could in fact become a business over time. You may as well make a living while doing something you love!
Trading in crypto-currency is always considered to be a business and subject to tax, rather than a hobby.
Here are some comparisons between operating as a business or undertaking a hobby.
This is guidance only and will depend on your specific circumstances. Meeting a couple of descriptions for ‘business’ doesn’t necessarily mean that you’re a business for tax purposes. Many factors are considered – either separately or on a combined basis.
Numerous transactions with customers, or large transactions with a couple of customers. Repetition of similar types of activities is also indicative of a business.
Sometimes sell items to friends, on Gumtree or Ebay, but not on a regular or substantive basis.
It’s the type of customer (not necessarily the number) that’s important, as a business can be run with one or two major customers.
Could be large in scale – you may store items in storage facility or in your garage, have a bricks-and-mortar shop for sales, or set up a website for online sales. You may decide to perform your activities under the umbrella of a company. The scale is often compared with other business in your industry.
Not very large at all. You may be using a separate room for making the product, but it’s not uncommon for you to work from the living room or kitchen, rather than having a dedicated space.
Just because you have a company, doesn’t mean you’re a business. And not using a company doesn’t mean you have a hobby.
You’re buying and selling with the intention of making a profit because that’s the bulk of your income. Perhaps you make a loss when starting up, or during difficult periods, but it’s not intended. If you don’t make a profit, you don’t eat.
A profit would be nice, even a small one, but it’s not expected. The money you spend on materials (which you’re probably purchasing retail, not wholesale), and the value of your time isn’t sufficient for you to rely on profit for income.
Whether or not an actual profit is made is not the important factor – it’s the intention to make a profit.
Your activity is planned, organised and carried out in a business-like way. This may include: keeping business records and accounting software, having a separate business bank account, having licenses and registering a business name.
You spend time when you have it, and your planning is sporadic. There is no business like organisation to your actions.
Having to comply with rules and regulations in order to operate takes time (making sure you have appropriate internal processes in place) and money (paying subscriptions to professional organisations, or fees to government organisations. It’s unlikely you’d make this effort for a hobby.
You wouldn’t be paying fees or be governed by anybody other than yourself. If you make chocolate brownies to sell now and then*, you won’t want to be subject to Food Safety Standards! Also important is that the people buying your brownies don’t expect you to follow those laws.
* Whatever you end up not eating yourself!
Researching the industry before you start, preparing budgets and forecasts, going to the bank for a loan, all indicate that you’re operating a business.
You enjoy the limited time you spend on your activities. You don’t bother with a budget and generally confine your spending to what the household can comfortably afford. If you don’t have enough money for materials, or your time is limited, you’ll wait.
The main benefit of classifying your hobby as a business is being able to deduct (any) losses from your taxable income (subject to the non-commercial loss rules).
Not many ‘hobbyists’ would voluntarily declare profit and add to taxable income.
If you don’t expect or intend to make a profit, it’s highly likely your operations are a hobby and not to be included in your tax return.
It sounds harsh, but if you’re a business but making losses, it may be time to think of doing something else or change your business model.
Making consistent business losses is going to force you deeper into debt (to pay your household bills) and will be extremely stressful. Have a chat with family, friends, and business advisers to consider your options.