When does a hobby become a business for tax purposes?

Published on the 28th of June, 2023

You might have a hobby on the side, like hosting podcasts, developing games, or creating videos for social media.

At some point these hobbies may start generating an income or you could start receiving benefits, like promotional items and tickets to events.

You may not be disclosing these items on your income tax return if the amounts are small and irregular. But if the amount and frequency of this income increases, your hobby might turn into a business.

Earning income from a hobby

A hobby is something you do occasionally and for fun. It probably won’t be your main source of income, or income you count on to pay the bills.

You don’t need to disclose the income you earn from a hobby on your tax return, but you also can’t claim any deductions for the expenses you incur in pursuing that hobby.

Although you don’t need to keep a record of your income or expenses, you probably should. It’s possible that your hobby could grow into a business at any point and then you’ll need those records.

Running a business

If you regularly do an activity, and regularly earn money from it, you’re running a business according to the Australian Taxation Office.

It doesn’t matter if you’re employed and only do the activity on weekends or at night ─ it could still be considered a business.

If it’s a business, you’re required to disclose all your income on your tax return, but you’re also allowed to deduct all the expenses you incurred to produce that income.

You also need to disclose the cash value of any gifts or promotional items you receive.

If you have another source of income, like a salary, the additional income from this business or side hustle could put you into a higher tax bracket ─ so remember to save some money. (Your accountant can help you calculate how much tax you’re likely to owe.)

Once it’s a business, you must also comply with all the regulations that apply to businesses. These include:

· Registering and paying GST if your turnover exceeds $75,000 per year or is likely to exceed that amount

· Getting the required licences and permits to run your business

Although it isn’t compulsory to get an Australian Business Number (ABN), other businesses will have to withhold 47% of any income they pay you for services rendered if you don’t have an ABN.

If you don’t know whether your activity is considered a hobby or business you can talk to an accountant, business adviser or ask the ATO for a private ruling.

Case study

Sally plays the harp for her own enjoyment. A friend asks her to perform at their wedding and offers to pay her for it. Sally performs at the wedding and receives the money.

At that moment, playing the harp is Sally’s hobby and she doesn’t need to declare the money she received on her tax return.

But the wedding guests enjoyed Sally’s performance so much they kept booking her and paying her to perform at their events. Sally started performing every other week and her hobby might now be considered a business for tax purposes.