Ever wondered if your hobby income could be deductible as tax? This is some important information you need to know. Hobby is anything extra we do in our spare time. We all have certain hobbies, and some of us are so involved in it that it becomes difficult to distinguish if it’s a mere hobby, or business.
It’s important to understand the differences between a hobby and a business for tax, insurance and legal purposes.
Some key questions to consider include:
- Is the activity being undertaken for commercial reasons?
- Do you regularly and repeatedly undertake your activity?
- Is your main intention, purpose or prospect to make a profit?
- Is your activity planned, organized and carried out in a businesslike manner?
Although contingent to your individual circumstances, if your answer to most of these questions is yes, then you are likely to be running a business. To get an answer specific to your circumstances, you can:
- Talk to an accountant or a business advisor who can help you decide whether you are running a hobby or a business.
- Get a cloistered ruling from the ATO, which will provide an answer that protects you from the penalties and interest.
What do I need to do if it’s a hobby?
If your activity is a hobby, then you will have to meet a certain provisions to transact with a business. When making a purchase, a business generally collects the seller’s Australian Business Number (ABN), otherwise it must hold back 49% of the payment for tax purposes.
Since you are not in business, and hence not entitled for an ABN, you need to provide evidence that it is a hobby or the payer will hold 49% of your payment.
Income-earning hobbies can sometimes grow into businesses, thus it is important to monitor any change in income or practices so that you are mindful of your obligations before they transpire.
What do I need to do if it’s a business?
When running a business you are required to declare your income to the ATO in your annual return. So, check the tax return for assistance on where to declare this income. Also, find out more about what income you need to include and what all you can exclude.
In addition to this, once your hobby becomes a business, you may need additional permits and licenses to your type of business. For instance, if you are running a home-based business, you may need the approval of the council to operate from your home, which is dependent on the type of the business.
You can also visit the Australian Business and Licenses Informative Service (ABLIS) to find out more about the permits and the licenses required for your activity.
Irrespective of being a hobby or a business, you will either way be required to hire an accountant to keep up with the taxation obligations. At Medvisors, we are expert accountants in Melbourne, astute with the correct business advices for businesses, whether it is a hobby or a business. Feel free to contact us for any information on identifying your deductibles or any other accountancy needs!