At what point does my hobby farm become a business for tax purposes?
Only individuals, and not companies or trusts, can have a hobby or a private recreational pursuit.
The pursuit of a hobby by an individual may be in order to supplement wages, create income after having lost a job, test the waters for a new venture or to follow a passion. It’s not the same as carrying on a business for tax purposes, which means money derived from a hobby is not income and therefore not assessable. Conversely, hobby expenditure is not tax deductible. There’s a risk for individuals conducting profitable hobbies that the commissioner will regard them as carrying on business operations. A hobbyist is not entitled to an ABN and cannot register for GST because private recreational activities, pursuits or hobbies are excluded.
Taxpayer activities involving market gardening, macadamia cultivation, avocado plantations, gambling on horse racing, horse breeding, cattle breeding and goat breeding have been the subject of tax cases concerning whether a hobby or a business was being conducted.
The Queensland Supreme Court in 1985 concluded that an individual was in the business of primary production after he acquired and used one purebred female angora goat for the purposes of breeding and selling her kids. Afterwards, the commissioner withdrew his long-standing guidelines on what quantity and land areas were considered necessary for the carrying on of a business operation.
Court cases over the years have established the circumstances that generally need to be present before a business is regarded as being operated by a taxpayer. A summary of these business indicators from a primary production perspective is found in the Commissioner’s ruling TR 97/11 which analyses an individual’s activity based on whether:
- They have a significant commercial purpose
- The taxpayer has more than just an intention to engage in business
- There is a purpose of profit as well as a prospect
- There is regularity and repetition
- The activity is of the same kind and carried out in a manner characteristic of the industry
- The activity is planned, systematic and organised in a businesslike manner
- They have the necessary size, scale and permanency
- Whether the activity is better described as a hobby, form of recreation or sport
No one indicator is decisive, and analysis of the indicators must be considered in combination.
Given the complexity of these rules, we recommend that you discuss your specific circumstances with your Crowe Horwath tax adviser.