If you’ve ever thought about turning your side gig or passion project into a business, you’ve probably wondered where the line is drawn between a genuine business and a hobby—especially when it comes to claiming tax deductions. In 2025, the Australian Taxation Office (ATO) is putting hobby loss claims under the microscope, and the financial consequences of getting it wrong are bigger than ever.
What Is a Hobby Loss—and Why Does It Matter?
A ‘hobby loss’ refers to the financial losses incurred from an activity that the ATO considers a hobby rather than a business. Unlike a business, a hobby’s losses typically can’t be offset against other income (like your salary) for tax purposes. If you’re not clear on the distinction, you could be exposing yourself to penalties or missing out on legitimate deductions.
- Hobby: Activities done mainly for personal enjoyment, with no real intention to make a profit (e.g. baking cakes for friends, selling handmade crafts at local markets occasionally).
- Business: Activities carried out with a genuine intent to earn a profit, demonstrated by regularity, planning, and a commercial approach.
In 2025, the ATO has updated its digital systems to better flag suspicious hobby loss claims, meaning audits and reviews are more likely for those who get it wrong.
ATO’s 2025 Crackdown: What’s Changed?
Recent ATO guidance and technology upgrades have made the distinction between hobby and business a top compliance issue this tax season. Here’s what’s different this year:
- Data Matching: The ATO now cross-references ABN registrations, bank transactions, and even social media to identify potential hobbyists claiming business losses.
- New Reporting Standards: From July 2025, platforms like Etsy and eBay must report seller income above $10,000 directly to the ATO. This makes it harder to under-report or disguise hobby income.
- Targeted Audits: Industries flagged for high rates of hobby loss claims—artisans, home bakers, weekend tradies—are facing increased scrutiny.
Real-world example: Sarah, a Melbourne-based pottery enthusiast, started selling her ceramics online in 2024. She claimed her studio expenses as a business loss, but the ATO determined her activity lacked a commercial plan and regular sales. Her deductions were disallowed, and she faced back taxes and penalties.
How to Tell If You’re Running a Business or a Hobby
The ATO uses several criteria to decide if your activity is a business. Ask yourself:
- Do you have a business plan and keep detailed records?
- Are you advertising or marketing your products/services?
- Is your activity regular, organised, and commercially viable?
- Are you registered for an ABN and GST (if turnover exceeds $75,000)?
- Do you genuinely intend to make a profit?
If most answers are ‘no’, your activity is likely a hobby—and you can’t claim losses against your other income. If you’re unsure, the ATO’s online ‘Are you in business?’ tool can help you self-assess based on the latest 2025 guidance.
Steps to Stay Compliant (and Protect Your Finances)
- Keep Clear Records: Document all income, expenses, and evidence of business intent—like marketing spend, business plans, and ABN registration.
- Register Properly: If you’re serious about running a business, ensure you have an ABN, and consider GST registration if your turnover is likely to exceed $75,000.
- Review Your Tax Position Annually: Circumstances change, and what started as a hobby can evolve into a business—or vice versa. Reassess each year, especially as ATO rules tighten.
- Don’t Overclaim: Only claim deductions you’re legitimately entitled to. The ATO is actively reviewing returns for over-claimed hobby losses in 2025.
If you’re making the leap from hobbyist to business owner, consider seeking professional advice to ensure you’re on the right side of the tax law.
The Bottom Line: Don’t Let a Hobby Loss Derail Your Tax Return
Australia’s tax landscape is evolving rapidly, and the ATO’s focus on hobby loss claims in 2025 is sharper than ever. Being proactive, keeping good records, and understanding the difference between a business and a hobby can save you stress, money, and potential penalties. Whether you’re selling cupcakes, art, or handmade furniture, now is the time to make sure your side hustle stands up to ATO scrutiny.
