When does a hobby become a side business in the ATO's eyes?


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Everybody dreams of making money out of the thing they really enjoy doing. But what if your dream comes true? What are the tax consequences?

If you bake a few cakes and sell them at a local market on a Saturday morning, or make quilts that you sell to friends, you might think it can't possibly be taxable.

Sadly, you'd probably be wrong.

when does a hobby become a small business

Every year, the ATO pursues thousands of taxpayers who thought they had a hobby but it considered they had a business and taxed them accordingly.

So if you answer yes to any of these questions, your hobby might well have tipped over into being a small business:

  • Is your activity being undertaken for commercial reasons?
  • Do you undertake it to make a profit?
  • Do you regularly and repeatedly undertake your activity?
  • Is it planned, organised and carried out in a business-like manner?

The upside of being treated as a business, of course, is that as well as declaring your income you can also claim deductions for all your business-related costs.

Some people make a loss from their hobby-business.

Sadly, the ATO typically doesn't allow you to offset such losses against your other income. These "non-commercial losses" can normally only be offset against future profits from your hobby-business.

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Mark Chapman is director of tax communications at H&R Block, Australia's largest firm of tax accountants, and is a regular contributor to Money. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Previously, he was a tax adviser for over 20 years, specialising in individual and small business tax, in both the UK and Australia. As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. He is the author of Life and Taxes: A Look at Life Through Tax.

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