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That moment when your weekend pottery habit starts generating actual income feels pretty sweet—until you remember the Australian Taxation Office might want a word. While turning a profit from your passion is worth celebrating, it brings some financial responsibilities that need attention before they become headaches.
Below, we take you through everything you need to know to stay on the good side of the ATO.
The line between hobby and business can be surprisingly subtle
Perhaps you started selling those hand-knitted scarves at local Sydney markets, and suddenly there’s a waiting list. Or your weekend photography gigs have grown from covering your cousin’s wedding to booking complete strangers. The ATO takes a keen interest in when this shift occurs, and their interpretation might differ from yours. So in this case, you’d want to find a reputable Sydney tax accountant to help you make the distinction accurately.
Business vs. hobby: is there a threshold?
Unfortunately, there’s no simple, magic number after which your hobby becomes a business. However, the ATO does provide some guidelines.
Generally, if you’re making consistent profits and treating your activity like a business—keeping records, maintaining separate accounts, and actively trying to make money—the ATO will likely consider it a business. This matters because hobby income gets treated differently from business income, and the rules about claiming expenses vary significantly.
What you need to know about hobbies and taxes
With hobby activities, you typically don’t need to declare the income if you’re genuinely not carrying on a business. However, once your activity is deemed a business, you must report all income on your tax return. The ATO looks at factors like whether you’re operating in a business-like manner, the size and scale of your activities, and whether you’re trying to make a profit.
While you might prefer the simplicity of a tax-free hobby income, there are some benefits that come when you take the step-up to business status.
Business income opens up a world of benefits and responsibilities
Your home office, equipment, supplies, marketing costs, and even a portion of your internet bill might be deductible. But this comes with added responsibilities: GST registration if you earn over $75,000 annually, potential Business Activity Statements (BAS), and more detailed record-keeping requirements.
Speaking of record-keeping—no one ever regretted having too many receipts. Start a simple system early, before the paperwork piles up like that stack of unfinished projects in your garage. A basic spreadsheet or accounting app can save hours of frustration when tax time rolls around.
Business vs. hobby: real-world example
A woodworker who spent years making furniture as a hobby started selling pieces at local craft markets. Initially, she kept her day job and treated the woodworking as a hobby. But when her revenue hit $40,000 in one year, she realised she needed to restructure. By officially establishing her business, she could claim expenses, set up an ABN, and properly account for her growing enterprise.
Running a small business often surprises new owners with its tax obligations. You might need to register for GST, make quarterly PAYG instalments, and understand your superannuation obligations if you’re working full-time in the business. These requirements exist alongside your regular income tax obligations.
Some strategic moves can help manage your tax burden legally
Setting up a separate business bank account keeps personal and business finances distinct. Consider consulting a registered tax agent early—their fees are generally deductible, and their advice could save substantial money and stress.
Different business structures offer varying tax advantages. A sole trader setup might work initially, but as income grows, a company or trust structure might provide better tax benefits. These decisions deserve careful consideration and often benefit from professional guidance.
The transition from hobby to business also affects state and territory requirements. Some jurisdictions require specific licenses, permits, or registrations. Missing these requirements can lead to penalties that cut into your profits.
Are you ready to outgrow your hobby and go into business?
Running a business requires more attention to taxes than maintaining a hobby, but the rewards tend to outweigh the administrative burden. If you’re about to make the step-up, remember to keep solid records, understand your obligations, and seek professional advice when needed.
Your passion project can become a profitable venture without turning into a tax nightmare. The trick lies in staying organised and informed from the start.
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