ASF TAKEAWAYS: With the emergence of the gig economy and money becoming tighter as inflation rises, many people are looking to make some extra income from a ‘side hustle’. But beware the ATO 'big brother'.
As we move towards a cashless society and transact more online, it’s becoming easier for the ATO to follow the money trail. Whether you rent your caravan on Camplify, drive the family car for Amazon delivering packages, or even if you simply sell household items on Gumtree, the tax man will be paying attention.
Not all online income needs to be declared, but it is important to understand the difference between an online hobby and a business. One thing is certain - you don't want to find yourself with an unexpected tax bill.
BUSINESS OR A HOBBY?
Even with a well-paying day job, we are finding many clients having an online side hustle for fun or to earn extra cash.
Whether your online activity is just a hobby or a business makes a big difference.
Income earned from hobby activities is non-assessable for tax purposes, while income from a business is assessable and must be declared in your tax return. This could include revenue from an eBay shop, rental income through platforms such as Stayz, and fees from work sourced from Airtasker.
To check whether the ATO is likely to consider your side hustle a business, you need to think about the issues it looks at when deciding.
Online selling – hobby or business?
If you are selling products or services online, you’ll need to consider whether it’s a hobby or if you are carrying on a business. Unfortunately, there is no legislative definition of ‘carrying on a business', but the ATO provides the following questions to help you decide. Every ‘yes’ means you are more likely to be carrying on a business:
Did you set up your online sales with the intention of being a business?
Do you have an online ‘shop’ and pay fees for your online-selling presence?
Is your main intention to make a profit, or to get rid of items you no longer want?
Do you make regular sales?
If you make the items you sell online, do you charge more than they cost you to make?
Do you manage your online sales activities as if they are a business?
Do you advertise your online space?
Do you keep records and have a business plan?
Is what you are selling online similar to what might be sold in a brick-and-mortar business?
SIDE BUSINESSES AND TAX
Where your side activities are a business, you must declare all your secondary income, regardless of how much or how little you make each year.
If your side hustle is considered a business for tax purposes, it means your business-related costs are tax deductible and you may be able to access the various business tax concessions on offer.
With online activities that remain a hobby, the income is non-assessable and you do not have compliance obligations, but you can’t claim a deduction for your costs.
For side businesses where your annual turnover exceeds $75,000, you need to register for GST. This tax needs to be added to all your taxable sales and paid to the ATO every quarter.
ATO SURVEILLANCE AND DATA-MATCHING
Although some taxpayers think their online hustle will go unnoticed, the ATO has vast data-matching powers to help it identify any unreported income – wherever it is earnt.
In recent years, the review and audit activities conducted by the Commissioner for Taxation have made it clear, online-generated revenue is an important target for its non-compliance surveillance activities.
The ATO receives and collates information from a wide range of third-party sources, including banks, payment systems, and online selling platform providers such as eBay, Amazon Commercial Services, Airbnb, and Uber. More than 600 million transactions are reported to the tax office each year.
The ATO also has the power to collect information for its data-matching projects to address concerns about specific industries, issues or tax risks, and one of its ‘special purpose acquisition data’ programs covers online selling.
Under its online selling data-matching program, the ATO tracks the activity of registered online sellers and obtains details of businesses with annual trading activity in goods and services of $12,000 or more.
GET PROFESSIONAL ASSISTANCE
If your side hustle is successful and becomes more than a spare time activity, it makes sense to talk to an accounting professional well before tax time. We can help you decide whether your activities will be considered a hobby or a business.
A business must substantiate any tax deductions it claims, so you need to keep detailed records of all your business-related activities and ensure you lodge your business activity statements (BAS) and tax returns.
We can also help you work through your tax obligations such as applying for an ABN, registering for GST, and establishing a proper recordkeeping system for your income and expenses. You may also need help with preparing and lodging your quarterly BAS.
If you need assistance with your growing online side business or meeting your tax obligations, please feel free to contact the ASF team.