Q. Me and a mate from work are wanting to start up a small sign shop, all done from home with no real overheads - just doing small stuff on weekends and maybe the odd night. Wondering if we have to register this as a business and pay tax and so forth or would it be classed as a hobby. We're wanting to do business cards up and a small amount of advertising. Please help!
Whilst this is may seem a relatively simple question there are a number of issues that need to be considered. However above all it is imperative that you seek professional advice from an accountant. This response is general comment only as we are not aware of your specific circumstances.
Generally a hobby includes activities that do not have a significant commercial purpose or character, examples being hobby farming, motor car/bike racing and hobby ceramics.
The Australian Taxation Office has identified a number of factors in considering whether the activity is a business or a hobby. If you are carrying on a profit-generating activity, even in a small way, this could be deemed to be carrying on a business. Examples include gardeners, tradespeople and couriers.
Some questions that need to be considered include:
- Does the activity have a significant commercial character?
- Is the business similar to other businesses in the industry?
- Is there repetition and regularity of the activity?
- What is the size, scale or permanency of the activity?
- Is the activity planned, organised and carried out in a business-like manner?
- Is the purpose of the activity to make a profit?
The more positive responses to the above questions, the greater the probability that you are in business rather than conducting a hobby. No single indicator is decisive, they must be considered in combination.
Let’s consider the information that you have supplied in light of the above questions:
- As you are going to operate weekends and the odd night, and particularly as you intend to advertise and use business cards, I believe this gives a positive response to the first question.
- Yes, there are a number of other businesses in the sign writing industry.
- Yes, you have indicated that you plan to operate on a regular basis.
- The fourth question relates to scale, size or permanency, which also relates to your plans to operate on an ongoing and regular basis.
- Based on the information you have provided, it appears that the activity will be conducted in a business-like manner.
- In your question you mention low overheads, which suggests that your intention is to conduct a profitable business.
Based on the above I believe you are carrying on a business, and therefore suggest that there are a number of matters that need to be considered:
- First of all you should seek good professional advice.
- You indicate you are setting up the business with a mate. If this is the case you should consider preparing a partnership agreement.
- You should consider whether you are going to trade under a business name.
- You will need to apply for an ABN and register for GST if applicable.
- Whilst it appears that your intention is to initially start a small operation I believe it would be worthwhile for you to talk with your mate and develop a simple business plan, outlining where you see the business in three years. This will ensure you are both operating on the same basis.
Graeme Sayer, Small Biz Connect (Murray Hume)