By KYLIE CALLANAN*
When you first have that idea to go into business sometimes it is a big step.
Sometimes a hobby can turn into a business, particularly if it is a product that you are creating. i.e candles or crafty products.
Please be aware that what I am offering here is the basic guidelines to give you something to think about, and to help you with your understanding of the difference between the two. I recommend and encourage you to seek professional advice, as every situation is different.
The big difference between a hobby and a business is your intention.
1) Your intention to make a profit, and
2) Your intention to run a business.
Now we have all sold items on ebay or Gumtree and more recently Facebook. Right?
Often it is with the purpose to re-home some of our clothes, furniture and other items; you have not done anything to improve the items and generally you would have received less than the original purchase price. This is just a hobby.
Where people often get confused or start to dance on the grey line, is when the more entrepreneurial ones among us, see the value in selling through these mediums, or at markets, and they might start to buy items with the intention of on-selling them; maybe to restore it, paint it or clean it up first and then resell it, usually at a profit.
How would the ATO view such an activity, particularly if we started to sell a lot of items? Could what was originally a hobby start to be viewed as a business? The answer is most likely yes.
In a nutshell, the ATO views the differences between the two as shown below.
- No intention of making a profit
- No intent to run a business
- Short period of time
- No repeat sales
- You don’t advertise
- No need to report income
- Intention of making a profit
- An intention of running a business
- Extended period of time
- Regular repeat sales
- You advertise
- You must report income
Once you have determined you want to go into business you will need to give some thought to the business structure.
The structure depends upon how much business you think you will generate.
Often businesses can start out as a Sole Trader to feel the market.
However most accountants will advise setting up either a company on its own or a family trust and a company. This is because primarily this kind of set up gives more security to the individuals as the company is, in itself, its own entity separate from the directors, which gives the directors protection from some liabilities, and also tax wise it can be more favourable.
Keep in mind you can always change the structure as your business changes and grows.
Each structure has different obligations regarding paperwork, ongoing costs and responsibilities as the business owner and all-importantly the tax you pay. Let’s face it that is what we all want to know.
Very basically, the differences tax-wise are:
- Sole trader – Taxed as an individual. And subjected to the increasing tax rates which depend upon net income level.
- Partnership – Often the net income is split 50/50 between two partners. This income, if going to an individual, is treated the same as above. However because the income is shared the overall tax may be less. You can also have a partnership set up between two family trusts.
- Company – Set tax rate depending whether considered a small business or large. Current rate is 27.5% for small companies.
- Family Trust – Specific rules apply to a trust, but the income can be shared between individual members of the family trust at the discretion of the trust within the guidelines. This split income will be distributed to the individual and then be taxed subject to the individual tax rates.
Once again I urge you to contact your tax agent when deciding what structure or combination of structures would suit you the best.
• Kylie Callanan is the owner of Kylie’s Coastal Bookkeeping in Victor Harbor. She can be contacted on 0402 741 896.