Differentiating between a business and a hobby can be a tough nut to crack. One may start something with an intention of doing it out of a hobby or just because they enjoy it and end up building an empire out of it.
With numerous e-commerce stores popping up, it is high time you align your activity with either of the two sides to avoid any inconvenience.
If you have been having a hard time figuring out whether your venture is a hobby or business, here are a few points to help you get started!
The Difference
The activity qualifies as a business if:
- The intention of starting a venture is driven by profit. While many of us won’t mind getting profit out of our hobbies, if the sole purpose behind establishing something is profit, it fulfills the textbook definition of a business.
- It has a registered business name with an ABN (Australian Business Number).
- It has its own business bank account associated with it and has obtained all the required licensing to perform certain activities.
- Activities through it follow a similar pattern (example: you sell the same things through the same means).
- The activities, as well as the scale of income from it, are coherent with what others in the same business might be doing and gaining respectively.
Important points to remember:
Payment declaration
If it is a hobby, you do not need to declare your payments to the taxation office. You are doing it solely out of leisure/pleasure and the intention is not to make a profit out of it. For a business, it is the other way around.
Claiming tax deductions
Registered businesses can claim tax deductions since they have ABN (Australian Business Number) whereas ventures out of hobbies cannot (You do not need an ABN if it is a hobby).
Licenses and permits
Hobbies do not qualify for any sort of license or permit. In contrast to it, it is extremely important for businesses to obtain mandatory licenses and permits related to their niche.
Record keeping
Record keeping is an integral part of every business. For a hobby, it is ideal to keep records just to be on a safer side but not mandatory.
Source: ATO
