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Warning for hobbies claiming GST credits

Posted by Northadvisory on February 8, 2018

An entity cannot be registered for GST unless it is carrying on an enterprise (GST Act s 23-5; 23-10). The term “carrying on an enterprise” is defined in s 9-20 as an activity, or series of activities done in the form of a business. This is the general concept for being registered for GST. And, specifically, under the GST Act an “enterprise” does not include an activity done as a private recreational pursuit or hobby (GST Act s 9-20 (2)(b)).

The term “business” is statutorily defined in the GST Act as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee. However, the term “hobby” is not defined by the GST Act and must take its ordinary meaning. Various ATO rulings over the years (MT 2006/1; GSTD 2006/6) have used “hobby” interchangeably with income tax laws interpreted by courts and regulators.

With this in mind, it is clear that the ATO determines that the same rules apply to hobbies from both an income tax perspective and a GST perspective. A recent media release issued by the ATO has specifically dealt with this similarity.

The ATO has warned of GST reviews in situations where an entity has irregular activities which generate little income and no profits. Clearly, their first group of taxpayers to review would be businesses who have deferred non-commercial losses by not meeting the assessable income test ($20,000).

Even though there is a GST turnover threshold of $75,000, an entity may choose to register for GST as long as they are carrying on an enterprise (or in this case, a business)

If you are currently operating at a loss but claiming GST credits, this may bring an ATO review for GST. You may need to show the ATO that you are operating a business and the following documents may be necessary to present to continue claiming GST credits:

  • business plan
  • repetition of activity
  • marketing/advertising materials, and
  • evidence to show size and scale of the business and its commerciality

If you have any questions on any of the above issues raised, please do not hesitate to contact us.

Norman Ruan
Accountant
T: 02 9984 7774
E: normanr@northadvisory.com.au