TAX INFORMATION

[FAQ]

Disclaimer-The information obtained from the interview in between Michael Hung & Taxation Office on Vietnamese television C31 Australia. Therefore we however, cannot guarantee that every document will appear in the correct tax year, should check the content of all documents returned by this web site in response to your query and seek independent advice before embarking on a transaction.

Hobby vs Business

We will be looking at the differences between a hobby and a business. We will also give you some advice to help you prepare for the lodgment of your next tax return.

It is important that you understand the differences between a hobby and a business, so you will know whether or not details of your income earning activity need to be shown in your tax return.

Hobbies and businesses are not subject to the same tax requirements. If you conduct a hobby, you don't need to include the income in your tax return. But you cannot claim any expenses or losses you incurred in conducting the hobby. Where you are conducting a business, you must include all the income earned by the business in your tax return. You may also be able to claim tax deductions for expenses incurred in conducting your business or claim business losses against other income you have received, Who decides whether a person is conducting a hobby or a business?

The Australian taxation system is based on self-assessment. You are expected to know and comply with all of your taxation obligations. What this means is that you are responsible for determining if the income you are earning through an activity is a hobby or a business.It is best that you seek advice from your tax adviser. If you are still not sure you can seek a private ruling from the Tax Office.

Are there any guidelines that can help viewers decide whether they are conducting a hobby or a business? A question I would be asking is, if I make a profit, am I in business?

Yes, there are guidelines available which should help you to determine if you are conducting a hobby or a business. Some of these are outlined in a Tax Office fact sheet entitled "Am I in Business?"This fact sheet, which is in English, outlines factors that may indicate whether a hobby or business is being conducted.

The decision of whether someone is conducting a hobby or a business is not decided on any one factor alone. Can you go through some of these factors which viewers may need to consider in deciding whether they are operating a hobby or a business?

Yes, here are some factors you need to take into consideration: Ask yourself if there is a significant commercial character or purpose to the activity you are performing?

In other words, do you operate the activity in a business like manner? Is your intention to make a profit from this activity? Other questions I would ask myself are "…am I showing more than just an intention to go into business? Have I made a commitment to going into business? Do I have a business plan?"S

I would also ask myself "…have I set up a record keeping system to record my activities?""Does my market research and business plan clearly set out how I plan for the activity to make a profit, even if it's not in the short term?""Is there repetition and regularity of the activity that I do? Do I plan to do as much work or provide as many sales as I can?" Or do I only want a few irregular transactions to make some pocket money?

Are there any other indicators?

Yes, and these are important to consider."Is the size, scale and permanency of my business, like other businesses in the same industry?"

"Do my clients consider the activity I undertake a business?"

Most importantly, would the activity best be described as a hobby, recreation or sporting activity? If it is, then it is probably not a business.

What happens if I decide that my activity is a hobby and the Tax Office later decides that I am really a business?

Firstly, the income from the activity would need to be included in your tax return and any allowable deductions claimed against that income. If you document the reasons why you reasonably believed that you were operating a hobby, penalties, if any, would be reduced.

What about the issues around the commencement of the business? If I decide that I am in business, how do I know when the business actually started for tax purposes?

That's a very good question. It depends upon the circumstances. Simply obtaining a business trade name, obtaining an Australian Business Number or opening a business bank account does not indicate that you have started a business.If you set up a business record keeping system in conjunction with a business plan, this may indicate the commencement. If you take more positive steps such as buying plant or equipment, buying or leasing business premises or setting up a home based business premise - these all would generally indicate a business has commenced.Similarly, advertising, employing staff and selling goods or services are also good indicators.

Ideally, you should keep a record of the dates that these and other important business start-up events took place. You should provide this information to your tax adviser who will then be able to assist you in working out the start date of your business. Once you have decided you are in business, what do you have to do?

You must ensure you have a record keeping system in place to record all of your total income and expenses from the business commencement date. You should also establish a filing system to store receipts, invoices and other records in order to easily locate them.You may be interested to know that the Tax Office runs free BizStart seminars in English, which can assist you in determining if your hobby is a business or not. For more information, you can call BizStart on 1300 661 104.

I think the information you have provided viewers with today makes the distinction between a hobby or a business quite clear. Before we go onto answering a viewer question, do you want to quickly give some advice on lodging your tax return.

Yes. I just wanted to emphasise how important it is to keep good records so that preparing for your tax return is easier and more accurate. It may also save you money in bookkeeping and accounting fees. So do keep your business records up to date. Make sure you ask for and file receipts, invoices and tax invoices.

If you are lodging your own tax return, make sure it is lodged by 31 October to avoid any possible late lodgment penalties.

Yes, and if your tax return is to be prepared by a tax agent, make sure you contact them before 31 October, to find out what the due date for lodgment of your tax return is.

If you think you might have to pay tax, you should seek advice from your tax agent on how much to set aside, so that you can meet your income tax, GST or Pay As You Go Instalment liabilities.

That's right, and you should budget for your tax bill in the same way as any other expense. It's probably a good idea to make voluntary payments to the Tax Office during the year, so you don't have to try and find the money at tax time.

We have just enough time for a viewer question. This viewer purchased shares a couple of years ago and has incurred losses each year. He asks if he can report the losses in his tax returns? And can he offset the losses against his salary & wages income?

Firstly the viewer must determine whether he is a share trader or simply a shareholder. There is quite a difference between the two.To do this he should refer to the Tax Office's Fact Sheet in English on Carrying on a business of share trading available from our web site.

If he is a share trader, he will be able to report share losses in his tax return, and if he passes the non-commercial losses tests, he may be able to offset the losses against his other income. If, however, he is a shareholder, he cannot offset share losses against other income. He can only offset losses on share sales against capital gains from future share sales.