Tax on Your Side Hustle: Hobby or Business?

Sally Preston

Side hustles are increasingly common. A person may earn income from online content, consulting, rideshare driving, short-stay accommodation, online marketplaces, creative work or a small business started outside their main job. But for tax purposes, the important question is not whether the activity is casual or part-time. The question is whether it is a hobby or a business.

This article answers two practical questions: first, whether income from your side hustle needs to be declared; and second, if the activity makes a loss, whether that loss can reduce your salary, wages or other income.

Key message: The tax treatment depends on whether the activity is a hobby or a business. If it is a business, income is generally taxable and related expenses may be deductible. If it makes a loss, the loss may be claimable now or may need to be deferred under the non-commercial loss rules.

Hobby or business?

An activity is more likely to be a business where it is carried out commercially, regularly and with a genuine purpose and prospect of profit. No single factor is decisive.

If the activity is a genuine hobby, the income is generally not assessable and the expenses are not deductible. If the activity is a business, the income generally needs to be declared and business expenses may be deductible, subject to the ordinary deduction rules and any specific limitations.

Indicators of a business

·       A profit-making purpose and realistic prospect of profit

·       Repetition, regularity and continuity

·       Business-like records and systems

·       Marketing or advertising

·       Use of business assets, stock or equipment

·       Commercial scale or growth plan

·       Registration, invoicing and separate bank accounts

The overall impression matters. A small activity can still be a business if it is commercial, organised and carried on with a profit-making purpose. Equally, receiving small amounts of money from an occasional or recreational activity does not automatically mean a business has started.

Examples

A person selling a few second-hand personal items online is likely to be different from a person who buys stock, advertises, maintains inventory and sells regularly at a profit. A content creator who monetises videos, follows a production schedule, records expenses and actively grows a channel may be carrying on a business.

ABN and GST issues

A hobbyist is not entitled to an ABN and cannot register for GST for that hobby, because private recreational pursuits are not an enterprise. If the activity is a business, an ABN may be required and GST registration should be monitored. In most cases, GST registration is required once GST turnover reaches the registration threshold, although some activities have special rules.

What if the activity makes a loss?

If a side activity makes a loss, the first step is to confirm that the activity is actually a business, that it is carried on by you as an individual sole trader or as an individual partner in a partnership, and that the activity has made a tax loss for the income year. If those conditions are met, the non-commercial loss rules may determine whether the loss can reduce salary, wages or other income in the current year.

Broadly, you generally need to satisfy the income requirement — which uses adjusted taxable income and is commonly referred to as the $250,000 threshold — and pass one of the four objective tests, unless an exception or the Commissioner’s discretion applies. The four tests are the assessable income test, profits test, real property test and other assets test. If the rules are not satisfied, the loss is usually deferred rather than lost, and may be used against future profits from the same or a similar business activity.

There are limited exceptions, including for certain primary production and professional arts activities where the relevant income conditions are met. A discretion may also be available in limited circumstances, such as where special circumstances outside your control affected the activity, or where the nature of the business means it needs a lead time before it can satisfy a test or make a profit.

Practical checklist

☐ Identify whether the activity is a hobby or a business

☐ Keep records of all income and expenses

☐ Consider whether the activity is a business and whether you are entitled to, or required to have, an ABN

☐ Monitor GST turnover and registration obligations

☐ Separate personal and business bank transactions

☐ Review whether losses can be claimed or must be deferred

☐ Do not assume platform income is invisible to the ATO

Need help?

Smart Solutions Tax Advisory can help determine whether your side activity is a business, whether losses are deductible and what records you should keep.

 Disclaimer: This article contains general information only and should not be relied on as tax or legal advice.

References / Useful links

ATO Non-commercial losses: What is a non-commercial loss? | Australian Taxation Office