Many taxpayers will have noticed that "pre-filling" has become much more widespread, which is only possible due to the amount of financial information that is able to be accessed by the Australian Taxation Office.

Each year the government's revenue collection arm extends further and further into the databases of financial institutions, employers and to other sources of relevant records, and with millions of dollars in play, the taxman's ability to pre-fill and use tools such as data-matching and performance benchmarks looks likely to increase.

With the amount of data kept online about taxpayers, it pays to be ever vigilant about meeting tax obligations and therefore avoiding otherwise unnecessary penalties.

This is especially so given the Tax Office's recent update to the protocols governing its Online Selling Data Matching Program. Now in its fourth year, the program was developed to assess the overall level of tax compliance for anyone involved in selling goods or services via online selling sites, such as eBay.

Both the Tax Office and the Department of Human Services (which governs Centrelink) have in the past asked for data from eBay, which is legally required to comply with a formal request for information. For a recent financial year for example, eBay was asked to reveal the identities of about 15,000 people who sold more than $20,000 worth of goods on the trading site.

The current program's threshold target is now $10,000 — so obviously a lot more buyers and sellers will be tapped on the shoulder. Matching this data to its own records, the Tax Office will use this information to identify omitted income as well as registration, reporting and lodgement obligations.

Is it a 'business' or a 'hobby'?

It is therefore crucial that a distinction be made between "recreational" selling (that is, a hobby) and being in the "business" of selling. There are income tax and GST obligations if the latter applies (see below).

In light of the Tax Office's activities, it is timely to revisit the indicators of whether a business is being conducted by individuals and how this may apply to online selling. The outcomes of court cases have over a long period established factors in working out whether an individual taxpayer is conducting a business or merely partaking in a hobby.

These indicators are succinctly summarised in the table below:

Indicators which suggest a business is being carried on Indicators which suggest a business is not being carried on
A significant commercial activity

 		Not a significant commercial activity
Purpose and intention of the taxpayer in engaging in the activity

 		No purpose or intention of the taxpayer to carry on a business activity
An intention to make a profit from the activity No intention to make a profit from the activity
The activity is or will be profitable

 		The activity is inherently unprofitable
Repetition and regularity of activity

 		Little repetition or regularity of activity
Activity is carried on in a similar manner to that of the ordinary trade

 		Activity is carried on in an ad hoc manner
Activity organised and carried on in a businesslike manner and systematically - records are kept

 		Activity not organised or carried on in the same manner as the normal ordinary business activity - records are usually not kept
Size and scale of the activity

 		Small size and scale
Not a hobby, recreation or sporting activity

 		A hobby, recreation or sporting activity
A business plan exists

 		There is no business plan
Commercial sales of product

 		Sale of products to relatives and friends
Taxpayer has knowledge or skill

 		Taxpayer lacks knowledge or skill

The indicators listed in the table equally apply in working out whether an individual is carrying on an "online" business. As well, a Tax Office checklist created specifically for online sellers, which takes into account these indicators, is shown in the table later in this article.

Why is it important to ascertain if your online activity is a business?

The classification of whether a taxpayer is conducting a business is critical as there are a number of tax and reporting obligations that are required to be fulfilled.

Obligations that are imposed on a taxpayer who is conducting a business include:

  • online sales income will have to be declared as assessable income; however, expenses incurred in earning this income will generally be deductible
  • an Australian business number (ABN) may need to be applied for if the taxpayer is conducting an enterprise
  • a taxpayer may be required to register for GST in some cases – this is typically the case if their annual turnover meets or exceeds the $75,000 turnover threshold
  • accurate records of expenses and sales will need to be kept in line with legal requirements – for example, it is necessary to keep the records for five years from the time that the documents are either prepared, obtained or when the transaction is completed (whichever occurs latest), and
  • if the online activity results in a loss, an individual may be entitled to offset this loss against other income or carry it forward to offset against future income. The ability of an individual taxpayer to apply current year tax losses from business activities against other income (such as salary and wages) are subject to the non-commercial loss rules under tax law.

If the activity of the taxpayer constitutes a hobby, the implications include:

  • any income derived from the activity is generally not assessable income to the taxpayer
  • the taxpayer would also not be entitled to claim tax deductions for any expenses incurred in carrying out this activity, and
  • if the activity results in a loss, the taxpayer is not entitled to offset this loss against other income or carry the loss forward.

Checklist for online selling: Hobby or business?

The simple checklist from the Tax Office below should help taxpayers determine whether their online selling constitutes a business or a hobby.

Each time that the answer is "yes" to a question, the likelihood that a person is carrying on a business increases. All the questions need to be considered together to get an accurate picture of the taxpayer's situation as no one indicator is decisive.

For taxpayers undertaking a "hobby", it may be necessary to periodically review this table to ensure circumstances have not changed.


Checklist for online selling: Hobby or business?

 		Y/N
1. Did you set up your online sales with the intention of being a business?
    Does it have a significant commercial purpose or character?
If you set up a 'shop' on an online trading or auction site, you may be carrying on a business – this is more likely if you paid fees to operate this 'shop'. You are also more likely to be considered a business if it involves commercial sales of product rather than sales to relatives and friends.
2. Do you have more than just an intention to engage in business?
If the online space you sell on looks like a shop, has a brand name, a proper business name and any other signs that people would likely consider to be a business, then you are most probably carrying on a business – again, this is more likely if you paid fees for this to occur.
3. Is your main intention to make a profit?
If the answer is 'yes', you may be carrying on a business. However, even if you do not make a profit, you may still be carrying on a business. If you deliberately buy items to sell online for more money than you paid, then you are likely to be carrying on a business. Conversely, if you sell household goods that you do not want anymore – although you may get a 'good price' – it is unlikely to be a business.

4. Do you make repeated or regular sales?
If you sell items online on a regular basis, you may be carrying on a business. These sales could be to the same customer, or a number of different customers. For instance, if you sell a number of items every week (or month) for an extended period of time, then you may be carrying on a business.
 
 
5. Do you sell your online items for more than cost price?
If your answer is 'yes', you are most likely carrying on a business. For instance, if you make or buy an item cheaply and then sell it online for significantly more than you paid for it, you have made a profit and may need to declare that income.
6. Do you manage your online selling as if it were a business?
In the Tax Office's view, you are most likely carrying on an online business if any of the following applies to you:

your online selling activity is organised, systematic, and has systems and processes in place

your activity has characteristics of size, scale and permanency

you have invested sufficient capital in the activity

you advertise your online space

you give quotes and supply invoices, and keep some or all of your records

you have a business plan

you use specialised knowledge or skills

you have prior experience in the activity's area

you have conducted ample market research

you spend a significant amount of time on the online activity

the activity is your main income-earning activity rather than a part-time sideline project
you sell your items in a similar manner to other businesses in your industry instead of in an ad hoc manner, and

your activity is better described as a business, rather than a hobby, recreation or sporting activity. Common areas where people are likely to carry out activities which may be a hobby rather than a business include hobby farming, motor car/bike racing, and hobby ceramics.
 		  
7. Is what you are selling online similar or the same as to what might be sold in a 'bricks and mortar' business?
If the items or services you are selling are reasonably easy to find in an offline store, then you are likely carrying on a business and these sales should be included as business income.
 		  

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