Tax basics for small business

Characteristics of a business

The following are some factors that courts and tribunals take into account in working out if a business exists for tax purposes. While no one factor can be used to work out if you are carrying on a business, taken together they can show if your activity is a business.

• Does your activity have a significant commercial character?
  It is important to consider if you carry on your activity for commercial reasons and in a commercially viable way.
• Do you have more than just an intention to engage in business?
  You must have made a decision to start your business and have done something about it. If you are still setting up or preparing to go into business, you might not yet have started the business.
• Do you have the purpose of profit as well as the prospect of profit?
  Do you intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term?
• Is there repetition and regularity to your activity?
  Businesses usually repeat similar types of activities, although one-off transactions can amount to a business in some cases.
• Is your business similar to other businesses in your industry?
  Is the way you operate consistent with industry norms or other businesses in your industry?
• What is the size, scale or permanency of your activity?
  Is the size or scale of your activity consistent with other businesses in your industry? Is it enough to allow you to make a sustainable profit?
• Is your activity planned, organised and carried on in a businesslike manner?
  This can be shown using
• business records and account books
• a separate business bank account
• business premises
• licenses or qualifications
• a registered business name.

Example: Carrying on a business

Bill sells wooden toys from a retail outlet. His outlet is open the same hours as other retail outlets. He advertises in the Yellow pages as well as in regional toy magazines. He sells to clients within his region and to other people who have seen his advertisement. He sells his toys at a price that lets him make a profit. Bill is carrying on a business.

Example: Conducting a hobby

Tchen makes wooden toys at home. He works on the toys about six hours a week and sells them only to his family and friends. He expects his toy making activity to remain small and is happy if all he does is cover his costs.

Tchen's toy making activity is considered a hobby. This means Tchen:

• would not include any amounts he received from selling his toys in his tax return
• cannot claim any expenses related to his hobby.

If you are a sole trader or partner in a partnership involved in a business activity that makes a loss, you must meet certain conditions to be able to claim that loss against your income from other sources, such as wages. See Offsetting your business losses.

Sections within Starting your business

• Get the right advice
• Working out if you are operating a business
• What is an enterprise?
• Characteristics of a business
• What is a non-profit organisation?