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.

Taxable activity
Business
Hobby
Hobby vs business
Is your business actually a hobby?
Is your hobby actually a business?
Should you even be in business?

Taxable activity

This is the core determination as to whether you simply have a hobby, selling items from time to time, or whether you’re a business subject to income tax and possibly GST.

There is a clear definition in GST law, which is also followed for income tax purposes (DB3(3) if you’re interested).

A taxable activity is:
  • Any activity which is carried on continuously or regularly by any person, and
  • Whether or not for a pecuniary profit, and
  • Involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration; and
  • Includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association, or club.

In most instances, figuring out if you have a taxable activity 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 out a taxable activity as defined in the section further above, you have a business for income tax purposes. Should sales exceed $60,000, the business must be registered for GST.

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Hobby

Put simply, if you’re not conducting a taxable activity, 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.

There are no strict examples of what constitutes a hobby, however, if you do not meet all the requirements for a taxable activity (see previous section), you’re a hobbyist.

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. Find out more in our blog on crypto-currency.

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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.

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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