Is your hobby a business?

If you apply the tax laws strictly, your hobby may actually be a business with income being taxed, and expenses claimed.

On the other hand, the ‘business losses’ you’re claiming could actually be from a hobby, and don’t belong in your tax return.

Carrying on a business
Business
Hobby
Hobby vs business
Is your business actually a hobby?
Is your hobby actually a business?
Should you even be in business?

Carrying on a business

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?

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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.

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Hobby

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. 

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Hobby vs business

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.

Is your business actually a hobby?

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.

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Is your hobby actually a business?

Again – it all comes down to whether you’re undertaking a ‘Taxable activity‘. Do your activities meet all of these factors? If so, you’re a business and must declare the income (but you can deduct business expenses).

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Should you even be in business?

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.

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