Tax on the income from your side hustle
Sally Preston
It is becoming more common for Australians to take on a second job or start a new venture or small business to make some extra money. This is often referred to as a “side hustle”.
If this is you, then this article unpacks the tax consequences of this for you. It will answer the following questions:
1. Do I pay income tax on my profits/income?
2. If I make a loss from my business, can this reduce my other sources of income (such as salary and wages)?
Question 1 – Do I pay income tax on my profits/income?
Whether you pay tax on your side hustle comes down to whether the activity is considered a business or more a hobby.
If it is considered a hobby, then no, you should not be paying tax on this, but you also will not be entitled to a deduction for any expenses you incur. However, if it is a business, this is generally taxable, subject to the answer to question 2!
The factors or ‘business indicators’ various courts and tribunals have taken into account in determining if a business exists for tax purposes include whether the activity:
has actually started
has a significant commercial purpose or character
is undertaken with a purpose of profit as well as a prospect of profit
is carried out in a manner that is characteristic of the industry
has repetition, regularity or continuity
is planned, organised and carried on in a business-like manner
is of a sufficient size, scale and permanency to generate a profit
is not more properly described as a hobby, recreation or sporting activity.
No one indicator is decisive, and analysis of each must be considered in combination. The conclusion is drawn from the general impression gained during the analysis. An individual can carry on a business of a limited nature which is preparatory to or in preparation for carrying on another business on a larger scale.
Let’s look at an example given by the ATO.
Example 1:
Angela is employed as a mechanic at a local garage. She helps her employer upload a few how-to videos on a video sharing platform to create awareness and drive business to the garage.
Angela discovers she can monetise popular content and creates her own video sharing channel with the intention of making a profit. She uploads videos of how to fix machinery.
When Angela's channel starts to grow, she:
sets up a production schedule that sets out the type of content she will produce on a weekly basis
buys lighting and sound equipment to improve her production quality
asks a friend to help her advertise her channel on social media
paints her channel logo on the side of her truck to advertise
joins the video sharing platform’s Partner Program and starts earning money
records all expenses from her content creation activity.
Angela wants to know if her ‘side hustle’ activities are a business. Angela looks at all her activities together. She determines that she is in business because she:
intends to run a business
intends to make a profit to supplement her salary and wage income
sets up a regular schedule for these activities
operates in a businesslike way, has a plan and system for making a profit, keeps records, and promotes and advertises her activity.
So, what does it mean if your hobby is a business for income tax purposes?
When am I entitled to an ABN?
A hobbyist is not entitled to an ABN and cannot register for GST because private recreational activities, pursuits or hobbies are specifically excluded from the definition of an enterprise.
Question 2 - If I make a loss from my business, can I offset this to reduce my tax on my other sources of income?
Because of the difficulty involved in determining whether an individual is carrying on a business or a hobby, and the sheer number of individuals making losses from these activities, parliament introduced law that limits the ability to offset the losses from these activities for an individual against their other sources of income.
These laws specify that losses an individual generates from a business operation will not be deductible in the income year in which it arises unless certain conditions are satisfied.
Before you even need to consider these tests, you must first be satisfied that:
your activity is a “business”; and
it is carried on in your own name (as a sole trader) rather than a company or trust; and
you have made a loss from the activity in the income year.
If the above is satisfied then you need to consider these rules, which are called the “non-commercial loss” rules.
If, however, the loss you generated is from a primary production business or a professional arts business activity, and your other assessable income is less than $40,000 (excluding any capital gain), these rules will not need to be applied. This means you can deduct the business loss against your other sources of income.
If this does not apply to you, the rules must be considered.
Your adjusted taxable income needs to be less than $250,000 (after adding back reportable fringe benefits, super contributions, net investment losses and excess deductions from non-commercial business activities that are caught by Division 35), and
One of the following tests is satisfied:
There is at least $20,000 of assessable income during the relevant year from the business activity; or
The business activity results in a tax profit during any three of the past five income years (including the current year); or
At least $500,000 worth of land and buildings (excluding any private dwelling) are used on a continuing basis in carrying on the business activity in that year; or
At least $100,000 of certain other assets (excluding cars, motorcycles) are used on a continuing basis in carrying on the business activity in that year.
Note that if you started your business part way through the year a reasonable estimate of the annual income can be made for the purpose of satisfying the $20,000 of income test.
If you do not pass the non-commercial loss rules, then you may apply to the Commissioner of taxation for discretion to be applied to allow the loss to be applied against other income. However, this discretion will only be applied in very limited circumstances if:
there are special circumstances outside your control that have prevented you passing one of the 4 tests, or
because of the nature of the business, there is a lead time before your business can pass one of the 4 tests or make a profit.
If all else fails though, all is not lost. The loss you made in the current tax year is carried forward and reported in your income tax return as such. The loss will be eligible to be deducted in the future against the income generated from that, or a similar business activity.
Let’s run through an example:
Example 2:
Jennifer has a salaried job, and she also carries on a business activity consisting of selling lingerie.
Jennifer starts that activity on 1 July 2021, and for the 2021-22 income year, the activity produces assessable income of $8,000 and deductions of $10,000. The activity does not pass any of the non-commercial loss tests and the discretion is not exercised by the Commissioner. So, the $2,000 excess is carried over to the next income year in which the activity is carried on.
For the 2022-23 income year, the activity produces assessable income of $9,000 and deductions of $10,000 (excluding the $2,000 excess from 2021-22). Again, no tests passed and no exercise of discretion.
$3,000 is carried over to the next income year (comprising the $1,000 excess for the current year, plus the previous year's $2,000 excess) when the activity is carried on.