Distinction between self-employment and hobby activities

The distinction between self-employment and hobby activity is often not entirely clear. However, it is crucial as the tax consequences of classifying an activity vary. One way to delineate is to consider the profitability and profit-seeking nature of the activity. Nevertheless, each case must be assessed individually.

On August 3, 2018, the Federal Court ruled on case 2C_548/2018, in which the operation of a farm was no longer classified as an independent (secondary) business by tax authorities but as a hobby. The taxpayer, residing in the canton of Aargau, was employed full-time as a salaried mechanical engineer. In addition, he operated a farm, which had been classified as an independent business until 2011. For the tax period 2011, the taxpayer declared a business loss of 66,625 CHF. The responsible tax commission did not accept this and reclassified the operation of the farm as a hobby, resulting in the transfer of the property from business to private assets. The transfer led to a liquidation profit of 81,107 CHF, which calculated from the depreciations on the business assets previously regarded as business-related, minus the contribution to the AHV. The taxpayer took the case to the Federal Court after rejections by the lower courts, demanding that the business loss of 66,625 CHF not be offset and that the liquidation gain of 81,107 CHF be ignored.

The Federal Court confirmed the view of the lower court that in this case for the tax period 2011, it should be assumed to be a hobby and not an independent business activity, as the business lacked profitability (objective element of independent business) and profit-seeking intent (subjective element). Moreover, the full-time employed taxpayer did not have the time to professionally manage the agricultural operation. Therefore, the Federal Court also denied the possibility of deducting the business loss, since there was no independent business activity. An alleged positive cash flow ("Cashflow") did not change this, as the commercial profit relevant for tax purposes of self-employed persons was decisive and it was declared as a loss in the tax statement 2011.

The taxpayer's request to defer taxation of the liquidation gain was also dismissed. The Section 23 proposed by the taxpayer in the Aargau Tax Act, which allowed a deferral even in a hobby case, was not applicable here, as the dispute involved federal income tax and not cantonal and municipal taxes. However, even the less generous Art. 18a DBG, which provides the possibility of a tax deferral when transferring property from business to private assets, could not be used as it was only considered at the request of the taxpayer. The taxpayer had not made such a request.

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