Distinguishing a Business from a Hobby: Taxation Law and Practice
Assessment 1 of BLO2206 Taxation Law and Practice
Topic:Distinguishing a hobby from a business, explaining how legislation and case laws determines whether an activity is a business or hobby. Further to make a comment on the impact of a determination by the ATO on whether a taxpayer’s activity is actually a business.
Distinguishing a Business from a Hobby
Activities are classified in terms of a business or a hobby and it is important that the two are separated. The difference depends on whether the activity is being carried for tax purposes or not. It is of great importance for the taxpayer to take into a consideration whether an activity they are involved in is for commercial purposes or whether it is situated in an environment suitable for carrying out business. Individuals have different professions which they actively do and devote much of their time and resources in doing which generate some taxable income. Engaging in another activity on the side whether in a small scale but with a profit motive or with an intension that profits will be generate from such an activity qualifies it as a business (Braedon Clark DR, 2004).
It is therefore important for a taxpayer to consider their intensions before being able to get into an activity and make any commitments in terms of investments. It is their intensions that will differentiate whether such an engagement will be considered as a hobby or business. A tax payer should be at a position to make a sound decision based on the ATO guidelines, that in order to qualify an activity as a business, the investor should have been driven by a profit motive, that from such an investment he/she expects to profit out of the investment or profits are expected at a later date in future. In certain situations where the taxpayers activity is sustained by activities in the same industry which therefore puts the investor in a position to make a justifiable amount of profit the activity is disqualified from being a
Topic:Distinguishing a hobby from a business, explaining how legislation and case laws determines whether an activity is a business or hobby. Further to make a comment on the impact of a determination by the ATO on whether a taxpayer’s activity is actually a business.
Distinguishing a Business from a Hobby
Activities are classified in terms of a business or a hobby and it is important that the two are separated. The difference depends on whether the activity is being carried for tax purposes or not. It is of great importance for the taxpayer to take into a consideration whether an activity they are involved in is for commercial purposes or whether it is situated in an environment suitable for carrying out business. Individuals have different professions which they actively do and devote much of their time and resources in doing which generate some taxable income. Engaging in another activity on the side whether in a small scale but with a profit motive or with an intension that profits will be generate from such an activity qualifies it as a business (Braedon Clark DR, 2004).
It is therefore important for a taxpayer to consider their intensions before being able to get into an activity and make any commitments in terms of investments. It is their intensions that will differentiate whether such an engagement will be considered as a hobby or business. A tax payer should be at a position to make a sound decision based on the ATO guidelines, that in order to qualify an activity as a business, the investor should have been driven by a profit motive, that from such an investment he/she expects to profit out of the investment or profits are expected at a later date in future. In certain situations where the taxpayers activity is sustained by activities in the same industry which therefore puts the investor in a position to make a justifiable amount of profit the activity is disqualified from being a
References: Accounting Tools Online, (2012). ATO Highlights Difference Between Hobby And Business. Retrieved May 30, 2012 from http://www.accounting.com.au/ato-highlights-difference-between-hobby-and-business Australian Taxation Office, (2011). Division 35-Non commercial business loss. Retrieved May 30, 2012 from http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR200114/nat/ato/00001 Australian Taxation Office, (2011). Am I Carrying on A Business of Primary Production? Retrieved May 30, 2012 from http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9711/nat/ato/00001 Australian Taxation Office, (2012). Introduction to Capital Gains Tax. Retrieved May 30, 2012 from http://www.ato.gov.au/corporate/PrintFriendly.aspx?ms=corporate&doc=/content/00208572.htm Australian Treasury, (2007). Architecture of Australia’s Tax and Transfer system. Retrieved May 30, 2012 from http://www.taxreview.treasury.gov.au/content/Paper.aspx?doc=html/publications/papers/report/section_2-04.htm Braedon Clark DR, 2004). The meaning of Income: The Implications of stone VS FCT. Retrieved May 30, 2012 from http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1153&context=rlj Greenwoods & Freehills, (2008).Weekly Tax Highlights. Retrieved May 30, 2012 from http://www.gf.com.au/477_633.htm Real Estate Institute of Australia, (2005). Negative Gearing. Retrieved May 30, 2012 from http://www.reiaustralia.com.au/policy/negativegearing.asp Small Business Development Corporation, (2012). Hobby or Business? Retrieved May 30, 2012 from http://www.smallbusiness.wa.gov.au/hobby-or-business/