With more and more entrepreneurial businesses popping up, we’ve come across a few clients who are wondering when a weekend hobby turns into a tax generating “business”.
Generally, if the activity constitutes a ‘hobby’ or recreation, profit generated is not usually assessable for tax purposes. On the other hand, if you’ve got more a what appears to be a business activity, this will be assessable for tax purposes.
The ATO’s Guidance
We like the ATO’s humour in their answer to ‘Am I in business?’ – “There is no simple answer”…
Like a lawyer putting a bet on each way.
But there are some good guidelines that are provided, as each case needs to be looked at independently. The more “commercial” the activity is, the more likely it will be classed as a business. This is important as the profit that it generates may be treated as assessable income with tax consequences. Not only this, but you may be required to register for GST and an ABN.
8 Questions to Ask Yourself
To work these out, we’ve narrowed down the ATO’s list into what we think sums it up:
- Do you have a purpose of profit as well as a prospect of profit?
- Is your activity carried on in a similar manner to other businesses in your industry?
- Do you have a business plan?
- Do you use specialised knowledge or skills?
- How much capital have you invested in the activity?
- Is the activity a part-time side-line or your main income earning activity?
- Do you give quotes and supply invoices?
- Do you advertise?
The conclusion? Exercising professional judgement. If it walks like a duck, swims like a duck and quacks like a duck… Then it probably is a duck!