I have a friend who buys and sells Lego on eBay. He loves it. He buys a piece and keeps it on the shelf for a while – always still in its box, always in pristine condition. Eventually, he sells it to fund his next Lego purchase.

He usually makes a profit on his sales – probably because he takes such good care of his Lego. The question is – does he have to pay tax on this profit?

In October 2016, the ATO announced that it will require eBay to give it the details of users who sold more than $12,000 of goods and services during the 2015-16, 2016-17 and 2017-18 financial years. It has run the same data matching program in previous years (with a lower limit of $10,000 in sales).

How does the online sales data matching program work?

Under this data matching program, the ATO will look for compliance risks – basically, it will look at what has been sold and how, and then look at whether these eBay sales amount to a business, rather than a ‘hobby’. If the ATO thinks you’re running a business, it will want a cut of the profits and will even expect you to be collecting GST (if you’re turning over more than $75,000 a year in sales).

Similar programs have been run since the 2007-08 financial year, and those programs have resulted in the collection of over $4 million in tax and penalties.

What to do if you get a letter from the ATO about your eBay sales

If you receive a letter from the ATO about your eBay sales, you should act quickly. The ATO has said it will give you at least 28 days to respond – you should use this time to make sure your response is fully considered and supported by the available information. It’s also important to remember that the ATO will already know a lot about your sales, so honesty should be the name of the game.

Even if you agree with the ATO that you are carrying on a business, you will still need to carefully look over its calculations. Chances are, the ATO won’t work very hard to include any deductions that you would be entitled to in your business (like your postage costs or the commission paid to eBay). You will want to review these and make sure they are included, so you are not paying more tax than you really owe.

If you don’t agree that you’re carrying on a business, then you need to let the ATO know this and explain why. Read below for some of the indicators the ATO looks for when considering whether your sales are a business, and the factors that I think could indicate that you are not carrying on a business.

If you don’t respond to the ATO’s letter, then you can expect to receive an amended assessment which will require you to pay tax on the amount that the ATO has deemed to be business income. Once the ATO issues the amended assessment, the only way to avoid having to pay the tax is to prove that you were not carrying on a business. To do this, you generally need to start by lodging an objection.

So – do you have to pay tax when you sell items on eBay?

With the ATO’s data matching activities in mind, it’s an ideal time to consider the distinction between a ‘hobby’ and ‘business’ when it comes to online selling and whether my buddy should be paying tax on his Lego sales. Here’s what the ATO says on the subject:

There are questions you can ask yourself to work out if you are undertaking a hobby, or carrying on a business that should be declaring income:

• Did you set up your online sales with the intention of being a business?
• Do you pay for your online-selling presence?
• Is your main intention to make a profit?
• Do you make repeated or regular sales?
• Do you sell your online items for more than cost price?
• Do you manage your online selling as if it were a business?
• Is what you are selling online similar to or the same as what might be sold in a ‘bricks and mortar’ business?

Each time you answer ‘yes’ to a question the likelihood that you are carrying on a business increases. However, all of the questions need to be considered together to get an accurate picture of your personal situation.

The test is not clear-cut, and it seems that at times the ATO relies on the ‘vibe’ when considering if you’re running a business.

The kinds of things that might indicate that you are not carrying on a business include:

• you have no business plan
• all of your payments are received into your personal bank account; you don’t have a separate eBay bank account
• you don’t keep track of your sales
• you don’t keep track of the costs incurred in making the sales
• you sell things that you already own – you didn’t buy them with the intention of resale
• your sales were only occasional

These are just some examples. There are many other factors that could indicate you’re not carrying on a business. You would need to consider all aspects of your sales in order to be able to argue against the ATO if it decided to tax you for running a business.

If you’ve received a letter from the ATO asking you to explain your eBay sales, then I recommend that you respond. Don’t ignore it. Ignoring the ATO is rarely a winning strategy.