You might be surprised how many people fall into small business from a hobby. What might start off as a few cushion covers for friends or a couple of birthday cakes, soon turns into something much bigger than anticipated. But how do you know when you’ve reached that turning point where your hobby becomes a business. We clear up some key points around when does a hobby become a business and explain how you can transition.
What is a hobby?
A hobby is an activity you undertake for enjoyment. It could be baking cakes, building model aircraft or growing cactus plants from off-cuts. Whatever your hobby, it is usually something you undertake because you enjoy it and you do in your spare time. With that being said, a hobby is not usually something you get paid for.
What is a business?
A business is a structured set up that involves being paid for the work you are doing. Any intent to make a profit or undertake commercial operations is a business.
When does a hobby become a business?
A hobby becomes a business when you switch from leisurely making your craft or doing your activity in your spare time for no profit to building the intent to make a profit or gain. For example: Jane has a hobby baking birthday cakes for friends and family. She charges only what it has cost her for the ingredients and makes the cake in her own time. After a few months, Jane’s cakes have become increasingly popular and she decides to start charging for her cakes, building a customer base in the meantime. Jane is now considered to be running a business in which she needs to begin the business registration process.
How to transition from a hobby to a business.
Moving forward, once it is established you are now running a business and not a hobby, you need to register your business and report your earnings to the ATO. Steps you may need to undertake:
- Apply for an ABN
- Register your business name
- Complete annual tax returns to declare your income
- Register for GST if your business will be generating more than $75,000
- Complete BAS statements if your business is set up for GST
- Keep records of your business for taxation purposes
Benefits of turning your hobby into a business
There are many benefits to turning your hobby into a business with the main one being earning an income from something you enjoy. Once you transition from a hobbyist to a business owner, you can charge for your time as well as materials. You can also initiate set hours to operate your business, giving you a better work/life balance – with work theoretically being your hobby. As a registered business with an ABN, you are also entitled to claim business related expenses against your business – this includes any materials or stock needed. If you are running a home based business, this could also include aspects of your home.
Turning your passion into revenue is half the battle with business, so if you are doing something you enjoy the transition will be a lot easier.
If you are still unsure whether you are carrying out a hobby or operating a business, we can help you work through it. Our specialist business accountants can also help you set up your business if your hobby is heading that way. Please feel free to contact us for an obligation free chat.