A business or a Hobby?
With more Australians earning income from side hustles, online activities and small ventures, an important tax question arises: When does a hobby become a business?
ATO Draft Taxation Ruling TR 2026/D2 outlines the factors used to determine whether someone is genuinely carrying on a business for income tax purposes.
The distinction matters because it affects how income is taxed and whether expenses can be claimed as deductions.
The Seven Indicators of a Business
The ATO identifies seven key indicators that you are running a business not a hobby
- Commercial purpose – Is the activity conducted in a genuinely commercial manner?
- Business intention – Is there evidence of an intention to operate a business?
- Profit potential – Is there a genuine purpose and prospect of making a profit?
- Not a hobby – Is the activity more than personal enjoyment or recreation?
- Business-like organisation – Are proper records, systems and procedures maintained?
- Size and scale – How substantial are the operations?
- Repetition and regularity – Are activities conducted consistently rather than occasionally?
Importantly, no single indicator determines whether a business exists. The ATO considers the overall circumstances.
When Does a Hobby Become a Business?
Consider someone who makes furniture on weekends and occasionally sells items online.
Initially, this may be a hobby. However, if they begin advertising, taking regular orders, maintaining financial records and operating with a profit objective, the activity may develop into a business. The key is identifying when that transition occurs.
When Does a Business Actually Start?
Simply registering an ABN, establishing a company or creating a website does not necessarily mean a business has commenced.
The taxpayer must have started undertaking the activities necessary to operate that particular business.
This distinction can affect when business expenses become deductible.
Can You Run a Business While Employed?
Yes. Having full-time employment or other income does not prevent someone from operating a separate business.
What matters is the commercial nature of the activity, not whether it is the taxpayer’s primary source of income.
What Does This Mean for Taxpayers?
Anyone starting or expanding a commercial activity should maintain proper financial records, document their business intentions and regularly review whether their activities constitute a business.
Even where a business exists, other rules, including non-commercial loss provisions and GST requirements, may apply.
Our View – Substance Matters
The ATO’s guidance reinforces a simple principle: Calling something a business does not automatically make it one.
Equally, a small side venture may qualify as a genuine business if conducted commercially and systematically.
The important issue is how the activity operates in practice.
If you are starting a business, operating a side hustle or turning a hobby into a commercial venture, speak with our office to ensure you understand the tax implications.
Based on ATO Draft Taxation Ruling TR 2026/D2 as supplied. Draft guidance is subject to change. General information only.
