Understanding whether you’re earning money from a hobby or a business activity is crucial when it comes to tax in Australia. The ATO treats these two types of income very differently, and getting it wrong can lead to penalties, missed deductions, or unexpected tax bills.
Here’s the answer up front: If you’re simply enjoying a pastime and occasionally earning money (like selling homemade candles at a market), it’s likely a hobby. But if you’re running your activity with the intention of making a profit, advertising, and keeping records like a business, the ATO may treat it as a business,meaning you need to declare your income and possibly pay tax.
Let’s explore how to tell the difference and what it means for your tax obligations.
What Counts as a Hobby?
Personal Enjoyment Without the Goal of Profit
A hobby is an activity done for personal enjoyment, not for commercial reasons. You might still earn some money from it, but the key is that you’re not relying on it for income or running it with a business mindset.
Examples of hobbies:
- Knitting scarves and occasionally selling them at a local market.
- Painting as a creative outlet and selling a few pieces a year.
- Baking cakes for friends and family, with the odd paid order.
No Business Systems or Intent
Hobbies generally don’t involve structured systems for pricing, marketing, or expansion. You’re not registering a business name, creating business plans, or keeping detailed financial records.
Tax Obligations for Hobby Income
- No need for an ABN.
- Income is usually not declared.
- No GST registration.
- No deductions for expenses.
That said, if a buyer requests an ABN and you don’t have one, you may be required to fill out a “Statement by a supplier” form to declare the income is from a hobby.
What Counts as a Business?
Clear Intention to Make a Profit
If you’re carrying out an activity with a genuine aim of making money, not just as a side gig or for fun, it could be considered a business. It doesn’t matter whether you actually make a profit—what matters is your intent and how the activity is run.
Indicators You’re Running a Business
The ATO uses several factors to determine if an activity is a business. These include:
- You’ve registered an ABN and business name.
- You keep financial records.
- You advertise or market your goods/services.
- You operate in a business-like way (with planning and systems).
- You’ve made repeated or regular sales.
- You intend to make a profit (even if it hasn’t happened yet).
Examples of business activities:
- Regularly selling handmade jewellery online with a branded store.
- Running a side hustle photographing events with a structured pricing model.
- Starting a food truck or catering gig with a marketing plan and cash flow forecast.
Tax Obligations for Business Income
- Must register for an ABN.
- Income must be reported in your tax return.
- Can claim deductions for business-related expenses.
- May need to register for GST if turnover exceeds $75,000.
- Need to pay income tax on profits.
Why the Difference Matters
You Could Be Missing Out on Deductions
If you’re running what is effectively a small business but treating it as a hobby, you might be missing out on valid deductions—like materials, marketing, or home office expenses.
Risk of ATO Audits and Penalties
Claiming expenses without declaring income, or underreporting business income, could lead to fines and back taxes. The ATO has tools to identify undeclared business income, especially from online platforms like Etsy, eBay, and Airbnb.
Access to Small Business Benefits
Operating as a business gives you access to:
- Instant asset write-offs
- Small business tax offset
- Deducting pre-business startup costs
- Superannuation deductions (for self-employed individuals)
What If You’re Not Sure?
Use the ATO’s Decision Tool
The ATO has an online tool called “Are you in business?” that can help assess whether your activity counts as a hobby or a business. It asks questions about how you operate and your intentions.
Seek Professional Advice
If you’re in a grey area—say, you sell goods regularly but don’t feel like you’re running a business—it’s wise to check with a registered tax agent. Getting clarity early on helps avoid future tax headaches.
Converting a Hobby Into a Business
When to Make the Switch
As demand grows or your activities become more structured, it might make sense to register a business. This includes getting an ABN, considering GST registration, and maintaining proper financial records.
Prepare for Compliance
Once you transition, be prepared to:
- Lodge Business Activity Statements (BAS)
- Keep receipts and detailed expense records
- Track your income and pay tax on profits
Final Thoughts: Know Where You Stand
In Australia, the line between a hobby and a business isn’t always crystal clear. But understanding the tax treatment of each helps you:
- Avoid penalties
- Claim what you’re entitled to
- Grow confidently if your side hustle takes off
When in doubt, treat your income conservatively and speak to a tax professional to make sure you’re on the right side of the ATO.
About The Author: Artur Osadchiy
Artur is a Certified Practising Accountant with over 30 years’ experience working as a trusted advisor to 600+ clients across Australia. Based in Melbourne, he started Tax Window with his wife Marina in 2009 and leads the firm’s tax and accounting team. In his free time, Artur enjoys watching the AFL (go Kangas!) and spending time with family.
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