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In earlier times, before that ATO caught onto the idea, it was common to have a little side business that lost money and became a refund generator. I had many clients whose sideline business generated massive tax refunds every year. Of course if they made money it was always a hobby. Hobbies as such were not taxable.
Then along came Division 35 – the non commercial loss provisions. Basically this division set guidelines as to what constituted a business. If you don’t pass the tests then your loss couldn‘t be offset to your other income to create tax refund. Previously the rules were more flexible, now they are clearly defined by the ATO. For more information on this go to: https://www.ato.gov.au/youth/content.aspx?doc=/content/66884.htm
It is important to get this right as it affects firstly whether losses will be deductible and secondly whether profits will be taxable.
For example, you love playing on ebay, buying and selling a few items. Initially you make a loss and eventually get good at it and make money. While it might be a sideline, a “hobby”, how will the ATO see it? Chances are if you have lots of transactions and make lots of money then yes, you will be taxed. But all is not lost. This is where a clever accountant can help you. It is my view that you work within the law and use the law to help you. Be clever, every expense you incur relating to investigating, buying, selling and running your “business” can be a tax write-off. So even if you make money, by the time you consider the tax write-offs the tax may not be significant.
The last thing you want is to receive a letter from the ATO saying that you have been under declaring your income. Penalties and interest can be high, and you can also be jailed. So work within the law, and use it to your advantage. That’s what every clever businessperson does.
