Clothing Hire- When does a Hobby become a business for Tax + Small business advice

LLabelLender on 24/04/2018 - 21:52

Hey Guys,

First post but long time browser. Over the past 2 years I’ve amassed quite a few dresses (700) that I hire out to girls looking to avoid the hassle of purchasing a dress for a single event.

It started off small but it now can earn me $250-$400 some weeks but also none other weeks depending on interest and local events. I believe it’s turned from a hobby into more of a business but I’m unsure of the next steps I need to take.

At what stage is the tipping point from hobby to business for tax? I’ve read the ATO websites and believe I I have but want a second opinion.

And any advice for starting a small business?

Thanks,

=)

Financial

Comments

  • PissLUR on 24/04/2018 - 21:59

    Do customers ask for tax invoices?

    • LabelLender on 24/04/2018 - 22:07

      No never. I do supply a PayPal invoice for interstate hires but they aren’t as common.

  • 87percent on 24/04/2018 - 22:03
    +2

    Rent a Swag?

    • cassidy02 on 25/04/2018 - 00:40

      Came to say the same thing :D

  • D C on 24/04/2018 - 22:14
    +1

    It's a business when you decide it's a business.

    The only real exception is if your sales hit $75k you need to register for GST, for that you need an ABN so hey presto you're now a business.

    That said being a business has a few advantages. You can get a .au website, B2B purchases are GT-exempt, you can offset business expenses again your regular income (you need to make $10k? 20k? for that though) and so on.

    Plus as a small business owner you can justifiably ramp up the whinging at parties, if nothing else it shuts the SMSF tossers up for a while.

    • LabelLender on 24/04/2018 - 22:18

      Does it count separately from my other job for total income under a certain amount. I have a full time job grossing 80k already and just do this as a side thing to pay the mortgage of quicker. Don’t want to put my foot in it at tax time.

      • D C on 24/04/2018 - 22:26
        +2

        Well, you should be declaring the money from your hobby at tax time, but anyway.

        If you set yourself up as a sole trader, then you have your personal tax and the business stuff. You can draw money from the business for personal use, this then becomes part of your income.

        It's not actually necessary, but creating bank accounts just for the business is a good idea.

        Whether to become a business really comes down to do the advantages outweigh that of doing it as 'just a hobby' and being somewhat under the ATO's radar.

      • kingmw on 24/04/2018 - 23:48

        You probably should be declaring some of this income on tax especially transactions that are easily traceable, e.g. Paypal, credit card etc, because the ATO could one day start auditing you for undeclared income…

        • ronnknee on 25/04/2018 - 10:23

          This. You should be at least declaring online payments (eg. PayPal and bank transfers). If you get paid in cash then no one else knows.

    • mskeggs on 24/04/2018 - 22:29
      +3

      While this is true, if you ever get audited you probably want to show you are organised as a hobby, not a business.
      So, if you have a separate phone number for the dress hiring, if you pay for advertising, if you are making a non-trivial profit, then the ATO will be inclined to judge you as a business.
      In this case, it is important to have good records of your expenses (both purchases of dresses but also stuff like dry cleaning etc.). If you don't have records of these expenses, they will want tax on any income, without the corresponding deductions that would offset this.

      In any case, it sounds like it is something you are enjoying.
      If making it more business like doesn't hurt that enjoyment, you can register for an ABN for free, keep records of your income and expenses, and add it to your tax return.
      You might have to pay some tax, if you are making a profit, but you will also be able to offset your expenses (no minimum amount, I think D C is confusing the immediate write off rules), and you will be building a business that might be useful, either as a supplement to your normal income, or perhaps to sell to someone else if you one day want a different hobby (much better than donating 700 dresses to the Salvos).

      If you want more info on becoming a business, this book is an adequate (if dry) source:
      https://www.allenandunwin.com/browse/books/general-books/bus…

      • LabelLender on 24/04/2018 - 22:36

        Thank you. Will definitely look at the book.

        I’m using the dresses as a bit of a nest egg at the moment they are all from my personal wardrobe or have been paid for with the hire profits. I worked out if I sold every dress for $50 (which would be easy, i’d get $200+ for some) that’s $35,000 I have if I ever need.

      • D C on 24/04/2018 - 22:39
        +1

        I think D C is confusing the immediate write off rules)

        Nah, not that. A few years ago to claim a tax offset you needed to have a minimum turnover - https://www.ato.gov.au/Business/Income-and-deductions-for-bu… but that that doesn't seem to be the case now.

        It was there to stop people creating fake businesses to claim the losses; "taking the piss" basically.

        • mskeggs on 24/04/2018 - 23:02

          to stop people creating fake businesses to claim the losses

          Yes, this used to be the thing with "hobby farms" where people would stick a goat on their holiday home lot, call it a farm and claim all the costs as tax deductions against their job income. If the business is making a profit there isn't any restriction on legitimate expense amounts.

        • D C on 24/04/2018 - 23:14

          @mskeggs:

          "hobby farms"

          Worked for a rural council years ago, you'd see an 'orchard' consisting of three apples trees (one dead) on a half-acre block with 400 owners.

    • ronnknee on 25/04/2018 - 10:21

      It's a business when you decide it's a business or until the ATO does.

      Fixed that for you.

      • D C on 25/04/2018 - 10:54

        Fixed that for you.

        Cheers champ, but if you read a bit more of the comment (or even the thread) you'll realize your assistance wasn't required.

        But hey, you be you.

  • JimmyF on 24/04/2018 - 22:20

    I’ve read the ATO websites and believe I have but want a second opinion.

    Who cares about what other people think…. The only true source of the TRUTH is the ATO, and if you're saying they are saying you have now flipped over into a 'business' you're a business, no matter what other people say.

    Simple as that.

    • mskeggs on 24/04/2018 - 22:58

      This is bad advice, the tax office is far from so black and white. There is no place on their website where they list what "flipped" to a business is.

      The ATO website provides information that is slanted toward being very cautious to make sure you pay all the tax possible, and takes a very narrow view of deductions, exceptions etc.
      They say 'better to be safe than sorry' but if you incorrectly class your hobby as a business and end up paying tax they won't advise you of your mistake and provide a refund. They will assume you know what you are doing and take the tax.

      Your obligation to the ATO is to pay tax on income from any job or business activities (and I think you should), but you don't have to pay tax you don't owe.
      To give an example:
      If you love birds and breed them, spending hours each week on your hobby, and end up selling some to other hobbyists via your club meeting to a total of $500 a year, you clearly have income, but I would argue it is equally clearly incidental to your hobby, and likely not a profitable hobby, even if you don't keep records of your expenses etc.

      If you scale that hobby up and make $50,000 in income from breeding, and have expenses of $2000, then it does look much more like a business, and I think it would be hard to argue that isn't a business.

      In between is a spectrum where whether you have a business or not really depends on how you are organised. If you are the first guy, who then happens to get sick and can't look after your birds any more, you might sell them all for $15,000. This is clearly a chunk of income in the year you sell them, but is very easily argued you aren't operating a business, so shouldn't pay tax on those sales, despite it being thousands of dollars.
      In the same way, if you registered a limited company, set up a website, bought aviaries, ran adverts but at the end of the year your profit from selling birds was only $900 of income, you would clearly be operating a business (just a not very successful one) and should pay tax on that income.

      So if you are a mad keen dress collector who funds expanding their collection by occasional hiring of dresses, then it probably isn't a business.
      But if you aim to do more and more hiring, so you make a profit above your costs, and you want to maximise your income and minimise your costs, then it probably is a business.

      • JimmyF on 25/04/2018 - 11:20

        This is bad advice, the tax office is far from so black and white. There is no place on their website where they list what "flipped" to a business is

        I should have stopped reading after this but didn't anyhow, the OP clearly has looked and feels they have flipped from hobby to business now, as they said

        At what stage is the tipping point from hobby to business for tax? I’ve read the ATO websites and believe I I have but want a second opinion.

        I'm not really sure how you can have 700 dresses, and hire them out all year round, including sending them interstate for 'hire', and not be classed as a business.

        The OP also sends PayPal invoice for interstate hires….

        They also say they use the profit to expand the dress collection, and claim this dress collection is their 'nest egg'. All sounds like a BUSINESS to me.

        If you love birds and breed them, spending hours each week on your hobby, and end up selling some to other hobbyists via your club meeting to a total of $500 a year, you clearly have income, but I would argue it is equally clearly incidental to your hobby

        The ATO would disagree with you, if you breed these birds with the intent to sell, then this is a business activity.

        Size of profit, has nothing to do with if its a business or not.

      • JimmyF on 25/04/2018 - 11:42

        So if you are a mad keen dress collector who funds expanding their collection by occasional hiring of dresses, then it probably isn't a business.

        The question is, is this 'collector' buying the dresses for themselves or just expanding the range they have to hire out while padding their 'nest egg' as they put it?

        Calling it "occasional" is questionable when you're racking in between $250-400 a week in hire fees.

        But if you aim to do more and more hiring, so you make a profit above your costs, and you want to maximise your income and minimise your costs, then it probably is a business.

        They are making a profit and returning that into the business by expanding the dresses.

        Again the ATO is about intent, and the intent is to grow this hire business and expand its range.

  • [Deactivated] on 25/04/2018 - 01:21

    Google hobby or business then click I'm feeling lucky.

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