More and more people are turning to the internet to sell. Whether it be jeans you’ve only worn once, or creative works you put significant time behind; you need to know whether or not you are selling online as a business or hobby.
Why do you need to know? You should know if your online sales activities qualify as a Hobby or Business because if your online selling does qualify as a business down the line, you could face hefty fines for selling for a profit without reporting for tax.
Hobby or Business: Selling Online
Have a look at some of the questions below to help you get a better idea of which category you fall into. For every question you answer “yes”, you increase the probability that you’re carrying on your sales as a business. Consider the following:
- Did you set up your online sales with the intention of being a business?
- Do you pay for your online selling presence?
- Is your main intention to make a profit?
- Do you make repeated or regular sales?
- If you make the items you sell online, do you charge more than they cost you to make?
- Do you manage your online-selling activity as if it was a business?
- Is what you are selling online similar or the same as what might be sold in a ‘bricks and mortar’ business?
The ATO provides the following two examples of online sales as a hobby, and online sales as a business:
Example – Selling online as a hobby
Marika wishes to clear an excess of clothing from her wardrobe.
She lists them on the internet for individual sale. Some of the items sell for more than her buying price, some for less.
She charges the buyers postage and receives a total of $2,075.
Marika is not carrying on a business because she:
- did nothing to improve the value of the items
- does not sell any more items for a long time
- does not pay the online auction site for a ‘shop’ space
- generally receives less than the original purchase price of the clothes
- has no intention to sell clothes online as a business.
Example – Selling online as a business
Shari Belmont pays for a store online to sell antique items from her grandmother’s estate after her death. This costs her $2,000 for the year.
As some of the items are quite valuable, the total value of the sales is $42,000.
During this time, Shari discovers she enjoys the activity and starts looking for other antiques to sell. She goes to garage sales, antique shops and op shops. She pays cash for the antiques, has them repaired if needed, and sells them on her online store.
Shari considers this is a hobby, as she only looks on the weekends and has a full- time job as an office worker.
Although she doesn’t pay to advertise, she has more than a thousand visits per month to her website via a Facebook page she has set up, where she posts photos and details about the items for sale. Her Facebook page is shared by many people in the antique-buying community.
Apart from the sale of her grandmother’s estate, Shari has total sales of $37,400 from 205 items sold during the financial year.
Shari is carrying on a business, even though her sales started off as a hobby. She should declare her online income because she:
- has a specific online store for her antiques
- advertises her antiques (although at no cost) through Facebook
- repairs and resells them for a profit
- makes repeated sales over an extended period of time.
The sales from her grandmother’s estate do not need to be declared as income, but her other sales should be declared as income.
If you have come to the conclusion that you may be running a business, it would be a good idea to consult a business adviser on how to proceed. Recognising your whether you are running a hobby or business could save you quite a bit of money in the long run.
© Fitzpatrick Group 2017
Ken Bond – Director
Ken is a certified taxation advisor and joined Fitzpatrick Group in 2006 after 31 years with one of Australia’s largest banks, where he held a variety of management positions from Branch Manager to Senior Business Banking Manager.