If you are selling products or services to businesses or individuals either personally or online, it can sometimes be hard to determine if what you are doing creates a business. The Tax and other obligation for a business start as soon as the business does, so it is important to understand the difference between business activity and a hobby.
So, am I running a business?
There is no single factor that can be identified, or question that can be answered to determine if you are running a business. Instead the entire scope and nature of the activity is taken into consideration, important factors to consider are:
- If you’ve made a decision to run a business and have begun operating in a businesslike manner
- You intend to make a profit from your activities – even if you do not record a profit, it only matters if there is an intention and opportunity to make a profit
- Size of operation
If the organisation of the activity is also conducted in a business like fashion, such as:
- Record keeping
- Separate bank accounts
- Operating on a business premise
- Licences or qualifications
- Obtaining an ABN and/or registering a business name
Breaking down these factors, important questions to ask yourself when determining if your activities are a business include:
- Did I begin with the intention of running a business?
- Am I charging more than the cost price of the materials I need?
- Am I trying to make a profit?
- Am I selling to the public?
- Is my record keeping and organisation similar to that of established businesses?
So I said yes to a lot of these questions… is it still a hobby?
Every yes to these questions increases the likelihood that you are running a business. If you conclude that you aren’t running a business, it is important to keep these factors in mind in case your activities grow or change over time.
From this criteria, if you determine that your activities are a hobby you do not have any additional tax or reporting obligations. On the other hand, if you decide you are running a business you will need to declare any income and expenses coming from the business to the ATO in your annual return. You will also need to set up an ABN and keep records for future reference.
© Fitzpatrick Group 2017
Jarrod Dengate – Accountant
Jarrod started working with Fitzpatrick Group in August 2016. He is currently studying a Bachelor of Commerce at the University of Wollongong, specialising in Accounting and Economics.