Business or Hobby?

These guidelines will help you determine whether you are conducting a business or a hobby.

1. Does your activity have a significant commercial purpose or character?

Consider whether the activity is carried on for commercial reasons and in a commercially viable manner.

2. Do you have more than just an intention to engage in business?

If you are still setting up or preparing to go into business, you might not have actually begun business yet.

3. Do you have a purpose of profit as well as a prospect of profit?

It is important that you are able to show how the activity can make a profit, even if it does not make a profit in the short term.

4. Is there repetition and regularity to your activity?

Consider whether you undertake at least a minimal level of activities appropriate to your industry.

5. Is your activity of the same kind and carried on in a similar manner to businesses in your industry?

The manner of operation is consistent with industry norms.

6. Is your activity planned, organised and carried on in a business-like manner?

This may be indicated by:

business premises,
licences or qualifications, and
a registered business name.

7. What is the size, scale and permanency of your activity?

It is more likely that your activity constitutes a business if the size and scale of your activity is:

consistent with businesses in the same field or with industry norms, and
sufficient to allow you to make a profit, even if not in the short term.

8. Is your activity better described as a hobby, recreation or sporting activity?

If the manner in which you undertake your activity shows that it is more properly considered a hobby, recreation or sporting activity, then it will not constitute a business. However, a hobby may turn into a business.

9. Other factors that may be taken into account when considering whether a business exists include:

how much time you put into the business activity
whether there is significant capital investment from yourself or others
the extent of advertising
whether the activity involves the exercise of specialist skills, and
whether you have a business plan.

If your activity doesn't satisfy all of these factors, it does not automatically mean that it is not a business. However, it is likely that an activity that is not conducted in accordance with these factors would be considered a hobby.

EXAMPLE - Carrying on a business

Wendy sells wooden toys from a retail outlet. Her outlet is open the same hours as other retail outlets. She advertises in the Yellow Pages as well as regional toy magazines. She sells to clients within her region and to people who have seen her advertisement. She sells her toys at a price that enables her to make a profit. Wendy would normally be considered to be carrying on a business.

EXAMPLE - Conducting a hobby

Tchen makes wooden toys at home. He works about six hours a week and sells the toys only to his family and friends. He intends the activity to remain small and is happy if all he does is cover his costs. Tchen would be considered to have a hobby. As such, he would not include the amounts he received in his income tax return. Consequently, he cannot claim any expenditure he incurred in relation to his hobby against any other income he earns.

Being in business

If you are considered to be carrying on a business you must declare any income earned by the business. You can claim a deduction for allowable expenses incurred by the business against this income for taxation purposes.