American business magnate Warren Buffet once said "Whatever you like to do, make it a hobby and whatever the world likes to do, make it a business". The truth is that all too often the distinction between what is a hobby or business becomes blurred. Small scale production and irregular earnings can quickly grow into a significant and regular source of income.
The main difference between a hobby and a business lies in whether the activities conducted are done for commercial purposes. This has important consequences for taxation. For example, if you are selling something over the value of $75.00 and you don’t quote an ABN, the buyer is required to withhold 47% of the payment and send it to the ATO. Furthermore, there can be implications on income tax returns if your hobby is indeed a business, but the business is not paying tax.
When wondering whether your hobby has become a business ask the following questions:
Is your activity being undertaken for commercial reasons?
Do you undertake it to make a profit?
Do you regularly and repeatedly undertake your activity?
Is it planned, organised and carried out in a business-like manner?
When setting up a business or turning a hobby into a business it is important to be compliant with laws and regulations. Whilst the ATO offers useful advice on its "Are you in business?" webpage, where there may be doubt there is no substitute for qualified legal or accountant’s advice.
If you discover that your hobby really is a business, then you might need advice on whether the business should be a sole trader, a partnership, a private company, a trust, a unit trust, alongside who in the family and which of your assets might be exposed to risks associated with the business, just to name a few of the challenges associated with establishing a business.