Many of us are a little compulsive* about our creative pursuits and sometimes we make the decision to sell items we create. So, does this mean we can claim all the costs associated with our obsession pastime?
As with all tax-related questions, the answer is, “it depends”!
A hobby is an activity done in your spare time for recreation or pleasure.
A business is where you perform an activity with the objective of making a profit.
Clearly the answer is not black or white and there are many variables to consider.
So why might you want to class your activity as a business? The most obvious one is that you can claim tax deductions for your expenses against your income. That in itself sounds quite enticing!
Deciding to operate as a business also means you are entitled to register for an Australian Business Number (ABN). This means you can establish a separate business identify to sell to your customers and have a .com.au website.
On the other hand, you will have extra responsibilities including additional reporting obligations (especially to the Tax Office) and the need to declare any income you receive. There’s also the risk that something which was once relaxing and enjoyable becomes work.
To make an assessment about whether you are undertaking a business or a still enjoying a hobby, consider the following:
- You intend to make a profit, even if that’s not possible in the short term.
- The same activity is repeated in a systematic way.
- The size and scale activity are similar to others within the industry.
- The activity is planned and carried out in an organised way. A business plan has been prepared.
- You maintain financial records of income and expenses.
- A separate bank account is maintained.
- You have registered a business name.
- You undertake marketing and promotional activities to generate sales.
If most of these apply, you would be considered a business and therefore eligible to apply for an ABN.
You will also be able to claim all the costs associated with the activity against the income you earn from the activity. This will include costs of materials, marketing, internet and communications, workshop running costs etc. The list is extensive and will vary depending on the activity you undertake. You will need to declare all this information on your annual income tax return. If you have made a loss on the activity, you may be able to claim the loss against any other income such as salary and wages.
If you have made a loss, you need to understand there will be certain circumstances where you are not able to claim the loss immediately. In the case of Non-Commercial Losses, you can defer the loss until you make a profit from the business. You will be eligible to claim the loss against other income if:
Your income from other activities of less than $250,000. AND you meet one of the following four tests:
- Have income from the activity of more than $20,000.
- Have made a profit in three of the past five years.
- Your business uses real property of at least $500,000 in value on a continuing basis.
- Your business uses other assets of at least $100,000 in value on a continuing basis.
Additional special rules apply if your business is in primary production or the professional arts. There is also the option to apply to the Commissioner of Taxation for discretion to claim the loss.
Finally, what about if the situation arises whereby you’ve determined you are not operating a business, but you want to supply goods or services to a business. Generally, a business will require you to provide a tax invoice which includes an ABN and if you don’t they are required to withhold part of your payment. In order to avoid having part of the payment withheld, you can complete a “Statement by a supplier” form which is available on the Tax Office website.
If you are still uncertain about whether to categorise your activities as a business or a hobby, I’m more than happy to chat with you and offer a FREE 30 minute initial consultation. You can easily book online here and I look forward to helping you sort your finances!
*some would disagree with my definition of “little” and “compulsive”!