In this digital age, we see a rapid rise in the number of social media influencers, bloggers and online content creators. Many may have started out their pursuit as just a hobby – a means of documenting their experiences but has perhaps what started out as a hobby is now a (taxable) business?
In the realm of personal interests and professional endeavours, the distinction between a hobby and a business can often blur. What begins as a passionate pastime may have evolved into a profitable enterprise, raising important questions about intention and important compliance requirements.
Understanding the differences — and potential overlap — between hobbies and businesses is crucial to ensure you comply with your income tax reporting requirements.
Hobbies are typically pursued for personal pleasure and enjoyment rather than for any income or financial gain and typically aren’t carried out in a business like manner. They often serve as a means of relaxation or creative expression without any pressure of producing income (or profit) and often, without any collaboration, gifts or sponsorship from external third parties. Any receipts generated by the activity are more likely a recoupment of costs, as opposed to something priced to generate a profit margin.
So, when does a hobby become a business? Typically, when a hobby starts to generate income or garner significant attention or subscribers, you may be running a business. Note that income is more than just cash and may present in many different forms ranging from gifts, collaborations with other content providers or creators, products or experiences you’ve been given to promote like clothing, make up or a free dining or travel experience to payments from platforms such as YouTube, TikTok, Instagram and various others.
Another key factor to examine is your motivation and intention behind the activity. If your content is commercially motivated like promoting certain products, services or experiences, then this adds weight to it being a business. A business doesn’t need to be profitable from the very start, but a profit making intention is important. Whether you have another source of income to support your lifestyle can also be a relevant factor.
The repetition and continuity of your activities, and whether your activities are planned, organised and carried out in a business-like manner are also indicators that your hobby may now be considered a business. For instance, a regular and systematic engagement on social platforms where you frequently post and interact, adds weight to your activities being recognised as a business.
So why is the distinction between hobby and business so important? Any income, generated from a business is assessable whilst one from a hobby is not. Of course, with any income declaration, comes too, the deductible expenses. The distinction is thus important in ensuring you also maintain accurate complete records of all income and expenses to facilitate accurate reporting.
Whilst there is no single rule to follow to recognise your hobby as business, several factors work together in the decision-making process. The Australian Tax Office has published guidance in a public ruling some of the key indicators of being in business or not. It is summarised herewith:
| Indicators which suggest a business is being carried on | Indicators which suggest a business is not being carried on |
| a significant commercial activity | not a significant commercial activity |
| purpose and intention of the taxpayer in engaging in the activity | no purpose or intention of the taxpayer to carry on a business activity |
| an intention to make a profit from the activity | no intention to make a profit from the activity |
| the activity is or will be profitable | the activity is inherently unprofitable |
| repetition and regularity of activity | little repetition or regularity of activity |
| activity is carried on in a similar manner to that of the ordinary trade | activity carried on in an ad hoc manner |
| activity organised and carried on in a business like manner and systematically – records are kept | activity not organised or carried on in the same manner as the normal ordinary business activity – records are not kept |
| size and scale of the activity | small size and scale |
| not a hobby, recreation or sporting activity | a hobby, recreation or sporting activity |
| a business plan exists | there is no business plan |
| commercial sales of product/services | sale of products to relatives and friends |
| taxpayer has knowledge or skill | taxpayer lacks knowledge or skill |
These indicators were published long before e-commerce and social media influencing became prevalent, but the principles are still applicable today. The indicators need to be weighed up to come to a conclusion, rather than being a box-ticking exercise or any one being determinative on its own.
Speak to your Accru advisor to ensure that you have met your tax compliance requirements.
