Is your Sidegig a Hobby or Business

Do you have a ‘sidegig’?

If you have a sidegig, you are not alone.
Nine News states that more than 760000 people in Australia work a second job. The advocation of earning extra income by the likes of Scott Pape, David Kosh and Fiona Lippey have bought an increase of small home based industries. Think about how many people you know doing Uber, Uber eats, Deliveroo, ebay, or even selling something from their house.

The need to supplement income as the cost of living rises often drives the second job economy. The stories we hear of rags to riches add fuel to the desire to create a side hustle.

We do need to think about whether we are doing the sidegig as a hobby or as a business. It is important to understand the difference for tax, insurance and legal purposes.

Is your Sidegig a Business or a Hobby?

hobby is a pastime or leisure activity conducted in your spare time for recreation or pleasure.

You’re in business, if your activity, as a whole, is commercial with an aim to make a profit.

What is a hobby?

A hobby is characterised by personal pleasure. Selling your products for cost and doing the activity around other commitments of life. Hobbies do not have the reporting obligations of a business. Some examples of a hobby include

  • Selling your excess clothing or used goods for cost or below cost.
  • Selling your loved ones estate.
    If you have no intention of buying more goods to sell, it is not a business.
  • Making soap and selling for cost or giving it away.
  • Designing websites for family and friends and only charging for expenses.

What is a Business?

If your intention is to make a profit, you are in business. Even if you make a loss, but the future plan is to make a profit, you are likely to be in business.

A hobby can be turned into a business if you make a profit from the activities.

Business’ do have reporting responsibilities to the ATO. You may need to register for an ABN and GST and report income in your Tax return.

Business’ also have the advantage of claiming expenses against the business income, and claiming GST credits for any GST paid.

Business loss may be carried forward to the next tax period to offset against future business income, but is unable to offset any income earned from employment.

Example of a hobby and a business

Mary has been making soap, she enjoys the process and loves using it herself, she sometimes gives the soap to friends and family. As Mary works full time in retail, she does this on the weekends. Mary’s soap making is a hobby. Mary does not have to declare anything to the ATO as she has not made any profit.

In May, Mary decides she wants to turn her hobby into a business as people have told her they would pay $5 a bar of soap. Mary buys a big mixing machine and 100 moulds so she can bulk produce the soap. Mary does well at the markets and sells a lot of soap and in a few months is making a profit.

However, Mary’s income from her new business at the end of June, is at a loss. This is because of the expensive mixer and moulds that she bought in May. Mary is unable to claim her business loss against her PAYG payment summary income, but Mary is able to carry the loss forward to the next financial year. Next financial year Mary will have made a profit, and she can claim the expense of the mixer and moulds to reduce her taxable income for her business.

Sole trader reporting requirements

A sole trader is the simplest form of business structure. As a sole trader you retain complete control of your business. You can employ people and make all the decisions for the business.

Sole traders are not considered employees of the business and therefor do not need to pay payroll tax, superannuation or workers compensation on income you obtain from the business.

Sole traders can use their own name and are not required to register a business name. If you do want to use a name other than your own name, you will have to register with ASIC.

You will need to register for an Australian Business Number at the Australian Business Register, if you carry on a business.

Tax requirements

Sole traders are taxed as individuals and pay income tax on personal rates. You may be eligible for a small business tax offset (you will need to see a tax accountant about this)

If turnover is more than $75000 you will need to register for GST and submit a BAS every quarter or month.

The ATO has alot of information for Sole traders and small business. It is important to consult with a tax professional as the rules change each year.

Record Keeping

Together with reporting requirements, you have a legal obligation to keep business records. Records need to be kept for at least 5 years and may be stored electronically, ie, no more shoe boxes of receipts. A good little app I use is CS Scanner.

Some of the records that small business owners have to keep are:

  • income tax and GST
    • sales records
    • purchase/expense records
    • year-end income tax records
  • banking records
  • payments to employees and contractors
  • PAYG withholding for business payments
  • fuel tax credits.

If you use your car for your business you will want to keep a record of the trips you do for business. An associated article to read is vehicle expenses for small business.

Sharon Law 
SL Accounting Services
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