How much can I earn as a hobbyist before paying taxes?
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First and foremost, it’s essential to dispel the myth that there is a hard and fast income limit for hobbies versus businesses. In other words, there is no fixed threshold (e.g., $5,999 for hobbies and $6,000 for businesses) that distinguishes between the two. Instead, several factors play a role in determining whether you are engaging in a hobby or running a business. Some of these factors include the level of organization and commerciality involved in the activity, the degree of time and effort expended, and the intention to make a profit.

It’s worth noting that many businesses start as hobbies, where individuals may have pursued their interests as a side gig, and gradually grew into something more substantial. Therefore, the transition from a hobby to a business can be gradual and might not have a clear demarcation.

Am I running a business?

How much can I earn as a hobbyist before paying taxes?

It’s essential to note that if you’re running a business in a partnership, trust, or company, you cannot be treated as engaging in an activity as a hobbyist. This means that even if you’re undertaking the activity purely for personal enjoyment or recreation if you’re operating through a business structure, it will be treated as a commercial enterprise for tax purposes.

When determining whether you’re carrying on a business, there are several indicators that you should consider. These include the degree of organisation and business-like activities involved, the intention to make a profit, the repetition and regularity of the activity, and the size and scale of the operation. Other factors that may be relevant include the level of skill or expertise required to carry out the activity, the existence of a business plan or strategy, and the level of commercial risk involved.

It’s important to note that these indicators are not definitive, and no single factor is determinative. Rather, the ATO considers the overall context and circumstances of each case when determining whether an activity constitutes a business. If you’re uncertain about whether you’re running a business or engaging in a hobby.

Am I still pursuing a hobby?

To be considered a hobby, an individual must be pursuing the activity purely for personal enjoyment or recreation. In addition, several factors must be taken into account to determine if an activity is a hobby or a business.

Indicators that suggest an activity is not a business include the absence of significant commercial purpose or character, the absence of the intention to carry on a business, and the absence of the intention to make a profit from the activity. If the activity is inherently unprofitable or is carried on in an ad hoc manner, it may also be considered a hobby.

Furthermore, if the activity is not organized or carried on in the same way as a regular business, such as failing to keep records, it may be deemed a hobby. The size and scale of the activity may also be considered, although a business can be carried out on a small scale.

Finally, if the products or services are primarily sold to friends and family or in very small quantities, and if there is no business plan or strategy in place, the activity is more likely to be classified as a hobby. However, it’s important to note that these indicators are not definitive, and each case will be assessed on its particular circumstances. If you’re unsure whether your activity constitutes a hobby or a business, it’s best to seek professional advice to ensure compliance with taxation and regulatory requirements.

    Example of pursuing a Hobby

    Sarah is in her mid thirties and works full time as a social worker. She has always enjoyed making things and, since leaving school, has developed an interest in jewellery-making. Four years ago she took a couple of courses at TAFE to improve her skills and technique. She makes pins, neck pieces and earrings in a variety of materials and incorporates found objects. The amount of time Sarah spends making jewellery varies, depending on her interest and available time. At first, she gave away the things she made to friends and family as gifts. However, in the last two years, she has started selling her jewellery, but still only to family and friends. Sarah is starting to think about trying to sell her jewellery at the local markets that operate on the first weekend of each month. She has begun talking about sharing a stall with another jewellery maker at those markets.

    After taking into account the cost of materials, Sarah estimates that she currently makes a modest profit of around $60 a month from her sales to family and friends. She keeps documentary evidence of her income and expenditure. Is Sarah carrying on a business?

    No. Rather, her activities amount to a hobby for the following reasons:

    • Sarah has knowledge and expertise in the field of jewellery making and design, although only limited formal qualifications (formal qualifications are not essential, but are of some relevance to the issue of whether a business is being carried on by the taxpayer).
    • Her sales are only to family and friends, and she has not yet made any effort to bring her work to the attention of a broader market.
    • Her approach to jewellery making is not as systematic or organized as those persons who are carrying on business as a jewellery maker and designer.
    • Although she makes a small profit, she is motivated by personal enjoyment rather than a desire to be a professional artist.
    • Her record keeping is inadequate for a person carrying on a business.
    • While she regularly practices her craft, her activity is conducted on a small scale, and it does not yet have sufficient other hallmarks of a professional jewellery making and design business. However, if Sarah decides to sell her jewellery at the local markets and expand her customer base, she may need to review whether her activities still fall under hobby or become a business.

    Becoming a Business

    On these facts, Sarah may be on the verge of commencing a jewellery making and designing business. If she decides to sell her jewellery at local markets and expands the scale and regularity of her activities to accommodate this, Sarah could be considered to have started carrying on a business.

    Conclusion

    In conclusion, determining whether an activity constitutes a hobby or a business requires an assessment of various factors, and there is no fixed income threshold that separates the two. The Australian Taxation Office (ATO) considers factors such as the level of organization and commerciality involved, the degree of time and effort expended, and the intention to make a profit when assessing whether an activity constitutes a business. It is worth noting that many businesses start as hobbies and that the transition from a hobby to a business can be gradual.

    To be considered a hobby, an individual must be pursuing the activity purely for personal enjoyment or recreation. The absence of significant commercial purpose or character, the absence of the intention to carry on a business, and the absence of the intention to make a profit from the activity are all indicators that suggest an activity is not a business. If individuals are unsure whether their activity constitutes a hobby or a business, it is best to seek professional advice to ensure compliance with taxation and regulatory requirements.

    Attached is a link to the taxation rulingĀ TR 2005/1, which contains approximately 45 pages of in-depth reading material, complete with practical examples and case studies.

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    1 Comment

    1. Well, nowadays you can opt to combine hobbies and businesses into one, thus having fun and making profit at the same time. Although the profits won’t be too high, at least you are generating some to cover your hobby expenses.
      Cecile Lan
      http://ohealthlounge.com.au

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