Distinguishing a Business from a Hobby: Taxation Law and Practice

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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 hobby and becomes a business (Small Business Development Corporation, 2012). The Australian business law provides clear guidelines as to whether an activity is a business or a hobby which are determined by using quite a number of indicators. The indicators have to be looked into in totality and not a single indicator should be used independently to make a determinative decision on an activity. The fact that an activity does not fully qualify as a business having looked at the general indicators provided by ATO does not therefore disqualify an activity from being categorized as a business. A taxpayer’s activity might fail to qualify as a business and as result any incomes generated from such activities are not subjected to tax according to the Australian taxation laws. However, disqualifying an activity from being a business should not be used by the taxpayer to utilize the hobby in pursuit for a business operation since the Australian law makes a provision for not taxing the income generated from hobbies. Hobbies on the other hand can be carried on for a long time and can be turned into businesses which are taxable the moment the intension changes from that of pursuing pleasure or for recreational purposes to that driven by a profit motive (Australian Taxation Office, 2011). Common law rules

The Australian Taxation office outlines several laws which are used as a basis for qualifying activities as either a hobby or a business, the commonly used are the Capital Gains Tax law (CGT) and the taxation ruling law. The Capital Gains Tax law applies to the gains made mainly from the sale of assets in accordance with the Australian Tax, Office, (2011) where the assets which are stocked for more than one year have the privilege of getting discounted in terms of the profits made from the sale of such assets. Personal assets are however separated from the rest of the assets and losses are minimized to the taxpayer’s advantage where high capital gains are achieved in the...
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