ATO Highlights Difference Between Hobby And Business

by Mary Swire, Tax-News.com, Hong Kong

30 November 2010

A recent court case in Australia has highlighted the difference between a hobby and business in the eyes of the Australian Tax Office.

In Liverpool Local Court on November 11, an individual who raised and sold more than 1,200 turtles was found to be in business rather than, as the person claimed, simply enjoying a pastime. The turtles were sold in New South Wales after purchasing them from an interstate supplier, advertised via the internet and payments were received in both cash and direct deposit to a bank account. Gross sales were in excess of AUD100,000 (USD104,000) over a three year period and were not reported on the income tax returns.

The person was convicted and fined, including a penalty of AUD1,500, costs of AUD122 and an order to pay an additional tax penalty in excess of AUD9,000.

While Australian tax law does not provide a detailed definition of a business, the following 'business indicators' have been used by various Courts and Tribunals to determine whether a business exists for tax purposes:

• Does the activity have a significant commercial purpose or character?
• Does the individual have more than just an intention to engage in business?
• Does the individuial have a purpose of profit as well as a prospect of profit?
• Is there repetition and regularity to the activity?
• Is the activity of the same kind and carried on in a similar manner to businesses in the same industry?
• Is the activity planned, organized and carried on in a business-like manner?
• Does the activity have characteristics of size, scale and permanency?
• Can the activitiy be better described as a business, rather than a hobby, recreation or sporting activity?

These indicators give general guidance as to whether an activity is a business. If the activity does not satisfy all of the indicators it does not automatically mean that it is not a business. However, it is likely that, if one answers 'no' to all these questions, the activity would be considered a hobby.

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