Are You Running a Business or Is It a Hobby? What to Know
Updated: May 24
So, you’ve been baking some cupcakes, and friends and family members have been ordering them. Or perhaps you like making bespoke jewellery, and you’ve been getting some orders as well. But at this point, you may be asking yourself whether what you’re doing is still a hobby or is already considered a business?
Keep in mind that there are a few differences between a commercial business and a monetised hobby, and you want to make sure that you know those differences for tax purposes and other reasons. To help you understand it better, your trusted small business accountants at New Wave Accounting will break it down for you:
What Is a Hobby?
A hobby is a leisure activity that you do during your spare time for your pleasure. Some of the main characteristics of a hobby include the following aspects:
You do a hobby because you love doing it and not because you want to earn money from it.
You can choose to sell your finished products just for the cost of the materials you used.
You can give your finished products as a present for your loved ones.
You can do it just whenever you feel like it.
You are not obliged to do it regularly.
If you can tell that what you are doing is a hobby from the details above, then you won’t have to worry about reporting it because there are no tax implications.
However, if you do supply some goods to other businesses from your hobby, you may be requested to give your ABN when they pay. But since you do not have an ABN because it is just a hobby, you can use the Statement By a Supplier ATO form. This is so the business you supply won’t have to withhold an amount from the payment they make to you.
Can Your Hobby Become a Business?
Yes, income-generating hobbies can grow into an actual business without you realising it or even meaning for it to, so you have to track changes in your income from your activities. You also need to monitor your practices because when a hobby becomes an actual business, you will have to pay taxes for that and must secure licenses and permits to operate legally.
Are You Already Running a Business?
Here’s a simple way to put it: if you are doing your activity for commercial purposes and because you want to make a profit from it regularly, you may already be running a business. While there is no specific factor that says you are indeed in business, these may be signs that you are already an entrepreneur:
You have obtained an ABN.
You registered a business name or prepared a different set of contact details for it.
Your intention of doing the activity is to make a profit.
You are doing your activity on a scale that is comparable to businesses in that industry.
You carry out your activity in a businesslike manner.
It may be hard to determine whether you are doing a hobby or already in business, especially if you enjoy doing the said activity as often as you can and are starting to get profits from it. You want to make sure that you know what you are doing with the activity you enjoy because you don’t want to neglect your taxes and other possible obligations that come with running a business.
Talking to an accounting expert can help you determine the actual status of your activity. They can tell you whether or not you need to register it for tax. Keep in mind that you can’t base it on other similar cases because it depends on your particular circumstance.
New Wave Accounting is a reputable small business accountant in the Gold Coast. We can help you determine whether yours is a hobby or a business and help you through the process of registering if you determine that you have a business. Get in touch with us today to learn more about our services!