What is a business?

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Business facts

A business is any activity where goods or services are sold with the intention of making a profit. The business calculates profit by deducting expenses from the income earned by the business. The profit earned from these activities is taxed.

A business can be set up using one of a number of legal structures, for example, sole trader, partnership, company and trust.

If an activity has not been set up with the aim of making a profit, it is considered to be a hobby. Unlike a business, money received from a hobby is not taxed, and the expenses incurred cannot be claimed as deductions.

The following example demonstrates the distinction between businesses and hobbies.

Madison loves horse riding. She decides that she will set up a horse riding school to teach young people how to ride. This will be her main occupation, so it will be considered a business. She will be taxed on the income earned and can claim the allowable expenses of running the business.

However, if Madison has a regular job as a bank teller and only teaches horse riding at weekends for a friend’s children, this is regarded as a hobby. This means any money she gets from the lessons is not regarded as assessable income and is not subject to tax. She is also unable to claim any of the related expenses as tax deductions.

  • Fact 12

    The expenses of World War I were so great that the Commonwealth Government introduced three new taxes in 1917: an entertainment tax, a wartime profits tax and a bachelor tax that raised such a bitter protest that it was never put into operation.

Assessable income

Gross income, including salary and wages, dividends, interest and rent before any deductions are allowed. Assessable income also includes net capital gains and other amounts that are not ordinarily classed as income.

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