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Determine your business status and when it starts for tax purposes.
Definition of Business
Broadly speaking, a business comprises a series of ongoing and repetitive activities conducted to generate a profit. While profit can be in monetary form, it can also be earned through alternative means, such as being paid in goods or services (like a barter transaction).
Even a singular transaction can be classified as a business if it is either:
Intended for repetition
The first step in establishing a business
You can operate one or multiple businesses concurrently.
When You’re Not in Business
Not every income-generating activity qualifies as a business. It is not deemed a business when they involve:
A one-time transaction (unless it serves as the first step in starting or intending to repeat a business)
Employment activities
Hobbies or recreational activities that don’t seek to profit
Straightforward investments, such as passively holding shares that yield dividends or renting out property through an agent.
Even if you aren’t formally engaged in business, certain received payments may still need declaration as assessable income in your tax return. For instance:
Rental income or proceeds from service provision
Payments from a singular transaction
The fair market value of goods or services acquired through a barter exchange
Dividends from owned shares
When a Company is Not in Business While most companies are considered in business if they intend to and are likely to make a profit, exceptions exist. For instance, a company is not engaged in business if it:
Holds assets exclusively for private use by its shareholders, with running costs entirely covered by said shareholders
Provides social and recreational activities for members without pursuing profit.
Steps to Work Out if You are in Business
Step 1: identify all relevant, related activities This includes activities like record-keeping, obtaining licenses and permits, and, if applicable, the processes related to renting out premises or goods. Step 2: Evaluate the nature of the activities Answering yes to more of the following questions means it is more likely that your activities are a business:
Do you intend to engage in business?
Do you envision and have a prospect of profitability?
Is the scale of your activity sufficient for profit generation?
Are the activities continuous and repetitive?
Are your activities conducted in a planned, organized, and business-like manner, including maintaining business records and having a separate business bank account?
If uncertainty persists regarding your activities’ business status, further examination of indicators, as outlined in relevant tax rulings, may be necessary.
For individuals, partnerships, or trusts, refer to Taxation Ruling TR 97/11: Income tax: am I carrying on a business of primary production? While this ruling centers on primary production, its principles are broadly applicable.
For companies, consult Taxation Ruling 2019/1 Income tax: when does a company carry on a business?
Determining When Business Starts
It’s crucial to pinpoint when your business officially starts, influencing necessary registrations and their timing. This may impact:
The application of tax laws to your operations and the assets you use in them
The availability of tax concessions or deduction.
Your business starts once you move beyond mere intention, having:
Decided to start the business
Acquired the essential assets for business operations
Initiated business activities.
Monitoring Activity Changes
If your business undergoes significant changes, it’s essential to reassess its status. This could include scenarios such as:
Transitioning to a profitable state or intending to do so
Transforming a hobby into a revenue-generating venture, like monetizing online content
Modifying, pausing, or discontinuing business activities.
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