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 Tax 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 first table below.
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 second table below.
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.