If a taxpayer is not operating a business, they are not able to deduct net loss from other income earned.  For that reason, it is vital to determine if a taxpayer's activity is an operational business or just a hobby.  Losses sustained from hobbies are not deductible from other income. Most party-plan ventures (such as Tupperware) are considered hobbies; therefore, losses sustained are not tax deductible. For this reason, it is vital to know the difference between a potential hobby and an established business. 

How to know if your hobby is actually a business

The ATO has attempted to provide some guidance on this issue. In a recent publication, it said, “A hobby is a spare-time activity or pastime pursued for pleasure or recreation…Unlike a hobby, a business is run with the intention of making profit and has basic reporting requirements, such as declaring income and claiming expenses.” Although the ATO states that there is no one specific rule that determines whether an enterprise is considered a business, the following scenarios are good indicators that it may indeed be one:

• A specific decision has been made to start a business and steps have been made towards that, such as registering a business name or obtaining an ABN
• The potential owner aims to make a profit or genuinely believes that the enterprise will bring profit eventually
• The potential owner repeatedly completes related tasks
• The size or scope of the enterprise is consistent with similar types of businesses in that specific industry
• The task is planned, scheduled, and completed in a business-like method

Possible examples:

• Retaining business records and accounting information
• Having a separate corporate bank account
• Working from a business property
• Having specific licenses or credentials

As additional help in this confusing matter, the ATO has provided a decision tool named “Hobby or Business?” on its site. (This decision tool is hosted on the business.gov.au site and is not a corporate tax-specific tool as it addresses other topics such as consumer law so be mindful of that).

If it is determined that a taxpayer’s activities are merely a hobby, the ATO generally does not require added income tax or disclosure obligations.  However, it does advise that taxpayers regularly check to see if their activities still qualify as a hobby.

An additional note states that even if a taxpayer’s activity is considered a hobby, if they provide goods or services to a business, the business may in turn request an ABN from the taxpayer when they make payment for said items.  The ATO states: “As you don’t need an ABN, you can use the “statement by supplier” form to avoid the business withholding an amount from their payment to you for not having an ABN.”

So if you find yourself in that grey area between business and hobby, it would be in your best interest to speak to your  tax practitioner for advice on where you stand.