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Is your activity a Business or Hobby?

Ever wondered if what you are doing constitutes a business or a hobby?  You are not alone.

A lot of small businesses start off as a hobby.  Doing something your passionate about and enjoy as a side hobby can very easily turn into a successful profitable business.

Why is it important to differentiate you may ask?  Well, that is because running a business has important legal and tax obligations.

Below is a summary of some of the characteristics to help you determine if the activity you are undertaking is deemed to be a business or a hobby.

REMEMBER: Even if it’s a hobby to start, you may need to keep these factors in mind if your activities change and grow.  It is important to review your activities on a regular basis and consult an Accountant if anything changes.


Characteristics of a Business:

  • You’ve made the decision to start a business and operate it in a business-like manner. For example, registered a business name, obtained an ABN, opened separate bank account, obtained licenses/qualifications
  • You intend to make a profit
  • You repeat similar activities
  • The size and scale of your activity is consistent with other businesses in the industry you operate

As mentioned above, businesses have several legal and tax obligations.  If you believe you are, in fact, running a business, or are still unsure please get in touch with us for further clarification and advice.


Characteristics of a Hobby:

A hobby is defined as an ‘activity done regularly in one’s leisure time for pleasure’.  The important distinctions here are:

  • gain personal enjoyment from the activity
  • have the flexibility to do it in your own time
  • choose to gift or sell your work for the cost of materials. There is no intention to make a profit.

If your activity is a hobby, you do not have any reporting obligations.  Because no income is reported, you also cannot claim any expenses relating to the hobby and hence can’t claim any losses.

Sometimes, its beneficial to set your hobby up as a business, especially if you are looking at claiming losses.  It is recommended to get an Accountants advice if you believe that this may apply to you.



Online selling

If you are engaging in on-line selling, the same characteristics apply as above.  See below a list of questions.  The more you answer yes, the more likely your are carrying on an on-line business.

  • Did you set up your online sales with the intention of being a business?
  • Do you pay for your online-selling presence?
  • Is your main intention to make a profit?
  • Do you make repeated or regular sales?
  • If you make the items, you sell online, do you charge more than they cost you to make?
  • Do you manage your online-selling activity as if it was a business?
  • Is what you are selling online similar or the same as what might be sold in a ‘bricks and mortar’ business?


The Next Steps:

Please contact us immediately if you are unsure or if you believe you are carrying on a business based on the information above.  We can help guide you with setting up your business properly as well as providing training on how to run your business.





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How do I withdraw profits from my business?


The reason we establish and create a successful business from years of sweat and sleepless night is to improve our quality of life and to build future wealth. So, when your business becomes successful, cash is rolling in, and you have a healthy business bank balance, the next step would be to achieve your desired lifestyle funded by the fruits of your labour.

You will find a lot of advice out there, both expert and non-expert opinions. Even your gardener may add his 2 cents. However, the best advice is that of a professional accountant as we can look at your whole financial data and take into consideration any tax savings.

So, the golden question is, how do I withdraw money from my business under a company or trust structure?


Effectively there are three main ways to withdraw money from business:

1. Paying yourself a wage/salary like an employee– The process is exactly similar as you would have been working for someone else or as for your own employees. When you pay yourself wages, you will need to ensure PAYG is deducted at the correct rates and that superannuation is also accounted for.

The most important question to determine here is the annual salary to pay yourself. Here you will need to consider any tax benefits as well as your own personal situation, for example, how much you need to run your household, etc. It is a good idea first to speak with your accountant as they can help determine the best pay rate.


2. Dividend/Trust distribution – Depending on the structure, you can either issue a dividend or trust distribution at the end of the year. If you are running your business as:

a. Company- you can issue dividends to the shareholders of the company which is generally the owners of the business. With dividends the advantage is you can attach franking credits (that is the tax already paid by the company), so an income is not taxed twice. Another advantage is there are no super or PAYG requirements; however, the dividend becomes part of your assessable income as an individual.

b. Trust – if the trust makes a profit at the end of the year, generally, we accountants prefer to distribute the profit; otherwise, trusts are taxed at a higher marginal tax rate. Depending on what type of trust you created, the trust deed will decide the beneficiaries who are entitled to the profits. You still need to have a resolution at the end of June to determine the beneficiaries who are entitled to profit distribution. Again, the profit is taxed on the individual marginal rate.


3. Loan Repayment– When you initially started your business, you needed funds for working capital to cover the start up cost. Let’s be honest the banks do not favour small businesses with start up loans, so you as a small business owner must act as a bank for your business. When you provide personal funds to cover the business cost, it is treated like a loan. Meaning the business owes you money, and you can recover the money back (loan repayment) once the business can afford to pay back.

A Loan repayment is treated as tax free for both the owner and company/trust. There is a possibility like banks to charge the company/trust interest for lending your personal funds to the business. But then the interest income is taxable to the owner.


Whenever you think of implementing the above three strategies, it is wise to speak with your accountant. And if you don’t have one, we are available to explain all tax and accounting matters in simple English.



Written By
Arpana Patel
Tax Accountant

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