The financial difference between a hobby and a business

When you’re first starting out, it can be hard to tell whether your new venture is a hobby or a business. There are some key differences between the two that can help you make the distinction. Namely, it comes down to your tax, insurance, and legal obligations.

Businesses are taxed differently than hobbies. For businesses, taxes are based on profits. That is, after you’ve taken care of all your business expenses, whatever is left over is considered profit and is subject to taxation. Hobbies, on the other hand, are not taxed on profits. Instead, any money earned incidentally from a hobby is considered tax-free.

Another key difference between businesses and hobbies are expenses. Businesses can deduct certain expenses from their taxes, such as the cost of goods sold or marketing expenses. Hobbies cannot deduct any expenses. 

So how do you know if your new venture is a hobby or a business? There’s no one-size-fits-all answer, but there are some general guidelines you can follow. First and foremost, businesses are typically undertaken with the goal of making a profit. If your primary motivation for starting your venture is to make money, then it’s likely a business. 

Another way to tell if your venture is a business or a hobby is by looking at how much time and effort you’re putting into it. Are you treating it like a job, putting in regular hours and working towards specific goals? Or are you just working on it when you feel like it, without any real structure or plan? Businesses require dedication and consistency; hobbies do not.

As noted on business.gov.au, There is no single factor that determines if you’re in business, but some of the factors you need to consider include:

• You intend to make a profit – or genuinely believe you will make a profit from the activity – even if you are unlikely to do so in the short term.

• You've made a decision to start a business and have done something about it to operate in a businesslike manner, such as registering a business name and/or obtaining an ABN.

• You repeat similar types of activities.

• The size or scale of your activity is consistent with other businesses in your industry.

• Your activity is planned, organised and carried out in a businesslike manner. This may include:

  • keeping business records and account books

  • having a separate business bank account

  • operating from business premise

  • having licenses or qualifications

  • having a registered business name.

In short, a hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure whereas a business has reporting obligations and financial gain. 

If you’re looking for guidance on whether or not your new venture is a hobby or a business, contact us today.