If you are selling a product or service online, for example Ebay or Etsy, you first need to be able to determine whether you are operating as a hobby or a business.
What is the Difference?
A hobby is considered a spare time activity pursued for pleasure. Whereas a business requires some form of investment and enough customers to whom you can sell your product to constantly, with the intention of making a profit. Once you are a business receiving income you are required to pay tax.
How do I know if I need to pay tax?
The following checklist (click here to access to access the checklist via the ATO website) will help to assist you in determining whether you are operating as a business that should be declaring income. Each time you answer ‘yes’, the more likely it is that you are in fact operating a business, however the questions should be considered collectively rather than in isolation.
- Did you setup your online sales with the intention of being a business? If your home-based hobby has grown and increased in size, it is more likely you are becoming a business.
- Did you setup your online sales with the intention of being a business? You may be carrying on as a business if you have set up a ‘shop’ or an online trading site.
- Do you pay for your online-selling presence? If your online space has a brand name or proper business name you are considered a business.
- Is your main intention to make a profit? If you are selling your items to make a profit than you are likely to be carrying out a business. However if you are selling unwanted possessions or household goods that you may receive a good price for, you arent considered a business.
- Do you make repeated or regular sales? If you are selling a number of items every week for an extended period of time you are generally considered a business.
- If you make the items that you sell online, do you charge more than they cost you to make? If you answered yes, then you are most likely carrying out a business.
- Do you manage your online selling activity as if it was a business? If you have systems and processes in place, are advertising online, keeping your records and you have a business plan, than it is likely you are carrying on a business
- Do you sell goods onlne, which would be sold in an offline store?
Why Does it Matter?
If you are operating a business, there are tax and reporting obligation and benefits. There are also a number of issues you need to consider, including the following;
- Declaring your online income
- The money you receive is generally assessable income
- Expenses incurred while earning the income can generally be deductible
- Accurate records of sales and expenses will need to be kept
- You may need an ABN
- You may need to register for GST
- If your business results in a loss you may be entitled to offset this loss against other income, or carry it forward to offset against future income.
This Tax Tips Tuesday is brought to you with love by Nudge Accounting. You can read other Tax Tips here.