Generally speaking, once you start to receive money for doing certain things, you need to consider whether you’re simply conducting a hobby which is generally beyond the reach of income tax (unless CGT is applicable) and GST, or whether you have a taxable business.
For GST purposes, registration for GST is generally based on having an ‘enterprise’, which is a lower threshold than running a business. This distinction needs to be kept in mind for, however this article focuses only on income tax.
When it comes to defining whether an activity is a hobby or business, there are some established principles that need to be applied. Each case is required to be examined within its own unique set of circumstances and there is no one particular indicator that is decisive. It is generally a weighting of various factors.
Definition of a Hobby
Generally, a hobby is defined as a pastime or leisure activity that is completed for recreation or pleasure. Money and other benefits received from the pursuit of a pastime or hobby are not assessable income. Usually there is a lack of profit-making intent or business-like organisation and any money received just covers costs and incidentals.
Characteristics of a Business
Numerous factors indicate that your hobby is a business and need to be weighed up. The key ones include:
- There is an intention of running a business – actions such as the registration of a business name and obtaining an ABN
- There is an intention to make a profit which is commercially viable and not too distant in the future
- There is repetition of the activities that are being carried out
- The scale of the activity is consistent with that of other businesses within this industry, and carried out in a businesslike manner, as indicated by having:
- A business plan
- Business records and books
- A separate bank account
- Business premises
- Relevant registrations or licences.
Here are two common examples where the lines between a hobby and business can be blurred.
Online selling has become increasingly common and accessible in households around Australia. In addition to the business characteristics above, you’ll need to consider these factors:
- Are you advertising your on-line space? Is there a fee to advertise the selling of the products? If so this can indicate business-like intentions.
- Does the sale consist only of excess household items? Examples may include – clothing no longer used, children’s toys, excess household furniture, materials, etc
- Is the seller willing to accept the best price available? – be that below or over cost.
As discussed in our article Online data matching, the ATO now matches various data relating to online sales to make sure people are complying with their tax obligations.
Sporting is another grey area. Traditionally, the receipt of money for a recreational sporting pursuit has been treated as a hobby for activities like coaching, playing, umpiring or referring.
There have been recent changes to rules with Australian Football within Victoria, where AFL Victoria has implemented a salary cap state-wide. The salary cap varies depending on the level of competition. This entails all players signing standard contracts that will be audited in order to ensure compliance within the salary cap limits.
Whether or not this formality has taken things beyond being a ‘hobby’ is still being determined. AFL Victoria has taken the step of asking the Australian Taxation Office for guidance as to whether these payments are to be considered assessable income. This is an interesting scenario as the interpretation could have far reaching consequences beyond just sporting pursuits.