The key administrative differences between a hobby and a business are your tax, insurance and legal obligations. It's important to consider the differences in characteristics of businesses and hobbies to ensure you correctly determine what your activities are.
Hobby
A hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure.
Taking on a hobby can have the following key benefits:
- You can gain personal enjoyment and satisfaction from the activity.
- You can gift or sell your work for the cost of materials.
- You can do it in your own time or when people contact you.
- You have no reporting obligations of a business.
Manage payments for your hobby
If your activity is a hobby you may need to meet certain requirements to transact with a business.
A business generally collects the seller’s Australian business number (ABN) when it makes a purchase. If the seller can't provide an ABN, then a business must withhold the top rate of tax from the payment for any total more than $75 for tax purposes.
Since you’re not in business and therefore not entitled to an ABN, you need to provide evidence that your activities are a hobby. If you don’t provide evidence the payer will withhold the top rate of tax from their payment to you. Provide a Statement by a supplier form to notify the payer that this payment contributes to your hobby.
Did you know?
- You don’t need to declare the income amounts you make from your hobby to the ATO.
- You can’t claim any losses from your activity if it’s a hobby.
Income-earning hobbies can sometimes grow into businesses. Make sure you monitor any change in income or practices so that you’re aware of your obligations before they happen. Once your hobby becomes a business, you may need additional licences and permits specific to your type of business.
Business
You’re in business if your activity, as a whole, is commercial with an aim to make a profit. Consider these key questions to determine if you run a business:
- Is the activity you undertake for commercial reasons?
- Is your main intention, purpose or prospect to make a profit?
- Do you regularly undertake your activity?
- Is your activity planned, organised and carried out in a businesslike manner?
If you’re running a business the following key benefits will apply to you:
- You can apply for an ABN to use in your business transactions.
- You can register a .com.au website once you have an ABN.
- You have access to government information, services and concessions for business.
- You can establish a business identity when selling to customers and other businesses.
- You can claim tax deductions for business expenses against your taxable income.
Manage payments for your business
When running a business you:
- need to declare your income to the ATO in your annual return
- can claim for deductions on your expenses and generally need an ABN
- need to keep records for your business for tax and other obligations
Let us help you decide
Is your activity a hobby or a business?
We built a tool to help creatives, artists and makers determine if they run a business or practice a hobby.
Use our tool to find out if you’re running a business or a hobby.
If you’re still unsure whether your activity is a hobby or business, you can:
- visit the ATO website for more on the difference between a hobby and a business and whether the income you've earned from your activity is taxable
- talk to a legal, accountant or business adviser in your area who can help you decide whether you’re running a business or a hobby
- get a private ruling from the ATO, which will provide an answer that protects you from penalties and interest