Q & A – Could my hobby be the beginning of a feasible business?

Q: I make some money on the side from my hobby – what is the difference between a hobby and a business?

A:  The tax, legal and administrative obligations and reporting requirements that are involved in running a business are what differentiates it from a hobby. The way in which you conduct your hobby may even be considered a business irrespective of the fact you never intended it to be a business. You need to consider the following indicators in determining whether your hobby is in fact a business or has the characteristics of a business:

• Is there a significant commercial purpose? Are there existing businesses that provide similar or comparable products?
• Is there an intention to make a profit or do you believe the activity is profitable?
• Are these activities conducted regularly or repetitively? Are you ordering, making and/or selling items regularly?
• Do you conduct your activities in an organised, planned or businesslike manner? Do you have a separate bank account for your hobby activities? Having a separate bank account or paying an ecommerce platform a fee to set up an online store may indicate your activities are conducted in a businesslike manner.

If you think these indicators may apply, you may be running your hobby as a business.

Q: I think my hobby has the characteristics of a business, do I need to get an ABN and TFN?

A: You are not required to have an ABN if your annual GST turnover is, or estimated to be, under $75,000. Once your annual GST turnover is over $75,000 you are required to have an ABN and be registered for GST. Although you may not be required to have an ABN, there are benefits to applying for one. Having an ABN will avoid payers withholding tax from your payments and allows you to register for GST and PAYG withholdings. Once you are registered for GST, you will be able to claim a GST credit for any GST you have paid for goods, services or materials you have used in your business.

As your hobby is performed by you as an individual, once it takes on the characteristics of a business you will be acting as a sole trader. Acting as a sole trader, the business income and expenses will be reported under the individual’s personal tax file number and included in the individual’s income tax return under the section for business items – There is no separate tax return for sole traders.

Q: There seems to be a lot of work involved in turning my hobby into a business, what are the benefits of turning my hobby into a business?

A: Turning your hobby into a business will allow you establish a legitimate business identity that connects your customers to you and your product. A business is also able to claim tax deductions for business expenses such as advertising, bank charges, home office expenses, education and training, merchant fees, business motor vehicle expenses and much more. Depreciation on assets used in your business can also be claimed over several years. If your business is not as profitable as you originally intended it might end up making a business loss. You may be able to offset your business losses against some of your personal assessable income for that year if you satisfy certain tests, otherwise you can carry it forward and claim the deduction in a future profitable year.

Q: I don’t think my hobby satisfies the characteristics of a business; can I continue to sell my products or services as a hobbyist without an ABN?

A: You are allowed to sell or gift your products as a hobbyist for the cost of materials without an ABN; If you sell your goods or services for a profit there is an intent to make a profit and your hobby will have the characteristic of a business. If you wish to sell or gift your products to a business however, you will be required to either provide an ABN or provide evidence that you are acting as a hobbyist. If you do not provide an ABN or are unable to prove that your activities are conducted as a hobby, the business that is purchasing your product must withhold the highest rate of tax from any payment made to you above $75.

Should you have any queries regarding the above information, please do not hesitate to contact us on (08) 9316 7000.

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Superannuation opt out for employees with multiple employers

Employees with multiple employers can now opt-out of superannuation guarantee from all but one employer.

Employers are required to pay 9.5% superannuation guarantee for all eligible employees. But what happens if you are an employee with multiple employers? Until recently, these compulsory payments meant some employees risked unintentionally breaching their concessional contributions caps. New laws however provide a potential solution.

Legislation that passed Parliament late last month allows an employee to apply to the Commissioner of Taxation for an employer shortfall exemption certificate to opt-out of the SG system for specific employers. This certificate prevents their employer from having a superannuation guarantee shortfall if they do not make superannuation contributions for the period covered by the certificate.

It’s important to note that the exemption certificate does not require the employer to stop paying SG, it merely protects them if they fail to make SG payments. The employer may choose to continue paying SG – either because they could not reach an agreement with the employee on their total remuneration package once SG is removed, or the administration required to exclude an individual employee is too onerous.

The Commissioner will only issue an employer shortfall exemption certificate where:

• The taxpayer is likely to exceed their concessional contributions cap for the financial year (just because you have multiple employers does not mean you can opt out of SG), and
• At least one employer is paying SG for the employee.

The Commissioner might deny the certificate if it’s not appropriate, the application would significantly reduce the amount of SG by an amount larger than necessary (for example, opting out of SG from the largest of the multiple employers), or where there is a contrived arrangement to take advantage of the new rules.

The due date for the employer shortfall exemption certificate is 60 days before the first day of the quarter to which the application relates.

Before applying for a certificate, it’s important to understand the impact of opting out of SG. You will need to negotiate your total remuneration package with your employer and the impact of this on your tax position, understand the tax outcomes if you did nothing and exceed your contributions cap, and the impact on your retirement savings over time.

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