A business or a hobby?
What is a hobby?
A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure.
Benefits of being a hobby
- Personal enjoyment and satisfaction.
- You can gift or sell your work for the cost of materials.
- You can do it in your own time or when people contact you.
- You don’t have the reporting obligations of a business.
What is a business?
You’re in business, if your activity, as a whole, is commercial with an aim to make a profit.
Benefits of being in business
- You can apply for an Australian Business Number (ABN) to use in your business transactions. You’ll need to use the ABN entitlement tool to check your entitlement before applying.
- You can register a .com.au website once you have an ABN.
- You’ll have access to government information, services and concessions for business.
- You can establish a business identity when selling to customers and other businesses.
- You can claim tax deductions for business expenses against your taxable income.
- It may give you the flexibility to manage your time and work your own hours.
How do I know if it's a business or a hobby?
It's important to understand the differences between a hobby and a business for tax, insurance and legal purposes.
Key questions to consider:
- Is the activity being undertaken for commercial reasons?
- Is your main intention, purpose or prospect to make a profit?
- Do you regularly and repeatedly undertake your activity?
- Is your activity planned, organised and carried out in a businesslike manner?
If you answered yes to most of these questions, you're likely to be running a business, although it depends on your individual circumstances. The ATO website provides further questions, information and examples to help you understand the differences between a hobby and a business.
To get an answer specific to your circumstances, you can:
- talk to a legal, accountant or business adviser in your area who can help you decide whether you’re running a business or a hobby.
- get a private ruling from the ATO, which will provide an answer that protects you from penalties and interest.
Artists, Creatives and Makers: Use our new tool to help you decide
We are trialling a new way to help creatives, artists, and makers who are making money to find information for them about the differences between a hobby or business.
The tool has been designed for people who are getting money from creating things, such as jewellery, paintings, candles, textiles or baked goods.
By answering some simple questions, our tool can tell you:
- whether your creative work looks like a hobby or a business
- what government obligations you have.
We’ll be expanding the tool to include other industries over the coming months.
What do I need to do if it’s a hobby?
If your activity is a hobby you may need to meet certain requirements to transact with a business. When making a purchase a business generally collects the seller’s ABN, otherwise it must withhold 49% of the payment for tax purposes.
Since you’re not in business and therefore not entitled to an ABN, you need to provide evidence that you’re a hobby or the payer will withhold 49% of your payment. You can do this by providing the payer with a Statement by a supplier form (PDF, 145.0KB). Find out more at Statement by a supplier not quoting an ABN.
Income-earning hobbies can sometimes grow into businesses, so it’s important to monitor any change in income or practises so that you’re aware of your obligations before they happen.
What do I need to do if it's a business?
When running a business you:
- will need to declare your income to the ATO in your annual return. Check the tax return for guidance on where to declare this income. Find out more about what income you can exclude and income you need to include.
- can claim for deductions on your expenses and generally need an ABN.
- will need to keep records for your business for tax and other obligations.
Once your hobby becomes a business, you may need additional licences and permits specific to your type of business. For example, if you're running a home-based business, you may need council approval to operate from your residence depending on the type of business.
Visit the Australian Business and Licences Information Service (ABLIS) to find out more about licences and permits for your activity.
Did you know?
- You don’t need to declare the amounts you make from your hobby to the ATO. You can’t claim any losses from your activity if it’s a hobby.
- It's a myth that there is a dollar threshold to be in a business. Some people can have very expensive hobbies! What matters is whether, as a whole, your activity is commercial with an aim to make a profit. If you're in business, there are dollar thresholds that can affect what you can claim for tax purposes.