Whether someone has a business or a hobby is very important from a tax standpoint. Tax authorities all around the world require taxes to be paid on the profits of a business, whereas money from a hobby does not get taxed.
The effects of this need to be considered from both sides.
For example, in the network marketing industry many people get started on the basis that they are going to get tax deductions for all their expenses including automotive, accommodation and travel as well as the products they purchase for their personal use. However, in many cases this just won’t happen because it is very obvious that they are not running a ‘business’.
On the other side of the coin, some people classify themselves as a hobby so they do not need to pay the tax on the money they are generating from their activities.
An accountant will tell you that whether someone has a business or a hobby is a question of fact. But how does someone who is not an accountant or trained in taxation matters know?
There was an interesting case in Australia that is useful for helping understand this no matter where you are situated.
It was reported in an article titled “ATO warns part-time entrepreneurs not to confuse a business with a hobby after the case of the 1,200 turtles”
Here is an excerpt of the article:
‘Although tax law does not provide a detailed definition of a business, the following business indicators have been used by various courts and tribunals to determine whether a business exists for tax purposes:
- Does your activity have a significant commercial purpose or character?
- Do you have more than just an intention to engage in business?
- Do you have a purpose of profit as well as a prospect of profit?
- Is there repetition and regularity to your activity?
- Is your activity of the same kind and carried on in a similar manner to businesses in your industry?
- Is your activity planned, organised and carried on in a business-like manner?
- Does your activity have characteristics of size, scale and permanency?
- Would it be true to say your activity is really better described as a business, rather than a hobby, recreation or sporting activity?’
If you are conducting activities that may be considered a business, make sure you seek some professional advice to avoid the potential wrath of the tax authorities. That is the last thing you would want.