Multiple jobs, side hustles and your tax return

Intro:
Welcome to CPA Australia's With Interest podcast. Bringing you this week's need-to-know information for businesses and accounting professionals.

Elinor Kasapidis:
Welcome to CPA Australia's With Interest podcast, bringing you this week's need to know information for business and accounting professionals. Hello, I'm Elinor Kasapidis, Senior Manager Tax Policy at CPA Australia. It's Monday the 27th of June and in our fourth and final episode in our Tax Time series, Assistant Commissioner, Tim Loh, from the ATO's Individuals and Intermediaries area is back to talk side hustles. Welcome back, Tim.

Tim Loh:
Thanks El, thanks for having me.

Elinor Kasapidis:
The way Australians work is changing, with many having multiple employers in a year or earning income on the side. As a result, their tax affairs can become more complicated. Tax is sometimes an afterthought. So Tim, what's the ATO's message to the casual ride-share driver, or the part-time jewellery maker selling through an online platform?

Tim Loh:
Look, we know lots of taxpayers have picked up a side hustle during the pandemic, El. This include a wide range of activities, such as freelancing, as you mentioned before, as a ride share driver, or a part-time jewellery maker. Whether it's setting up a local market store or receiving income from subscribers through online content they've created from platforms like YouTube, Patreon, Twitch, OnlyFans. And look, there's been some confusion about when income from these side hustles is taxable.

Tim Loh:
Now, if a client is carrying on a business, they need to report that income from that business in their tax return. Now, generally speaking, when your client provides their labour, skills, or rents out their property for a fee, they need to report this income in their tax return. So this applies, regardless of whether they're using a digital platform, or more traditional means such as word-of-mouth, or newspapers to advertise that particular service. Now, it doesn't matter whether your client is an employee, independent contractor, carrying on a business, or none of these. If they've received payment for these services, the income needs to be reported, even if it's a one off.

Tim Loh:
Now, if your client declares side hustle income, the good news is that they can also claim deductions for expenses they incur in earning it. So as long as they've kept their receipts and the expense is directly related to earning this side hustle income. This includes the cost of managing their tax affairs through a registered tax agent.

Tim Loh:
Importantly, your client can only claim a deduction for the work-related part of their expenses. So if they're a food delivery rider, they can claim some of their bike costs, but they can't claim any of their private use of those particular bike costs. Now every source of income is different, and the deductions your client can claim in relation to it depend on the type of income, and what is required to earn it.

Tim Loh:
So to claim a deduction, your clients must meet the three golden rules. They must have spent the money themselves and weren't reimbursed, it must be directly related to earning their income, and they must have a record to prove it, receipts are the best form of record. Now, depending on the nature and size of your client's side hustle, or how much they earn, they may need to also register and pay for GST.

Tim Loh:
Now, if your client provides ride-sourcing services, they needed to have an ABN number and be registered for GST from the day they start, regardless of how much they earn. So GST applies to every dollar earned as a ride-sourcing driver. You kind of also need to lodge business activity statements monthly or quarterly.

Tim Loh:
Now, if your client's side hustle is an enterprise, which includes a business, they may need to apply for an ABN and register for GST if the GST turnover for all the activities is $75,000 or more. Now this is the case if the side hustle is a more traditional business, such as a market store, or a new economy business conducted entirely online. Now, if your client isn't registered for GST, they need to check each month to see if they've reached the threshold, or are likely to exceed it as they'll need to register within 21 days of meeting the threshold.

Tim Loh:
And in addition to paying GST, your client must also lodge a business activity statement every month or quarter. And it's really important that your client understands how to issue an invoice to customers and clients to correctly account for the GST.

Tim Loh:
And now it's really important that your clients plan ahead for their income tax to keep a really healthy cash flow for their business. And it's really important to remember that the income that they earn from the sharing economy may not have any tax withheld. So it's really important that you plan ahead to make sure that you've got the right amount of money to pay for that tax bill at the end.

Tim Loh:
And one thing to note finally is to avoid or minimise a large tax bill, your client can use the Pay As You Go instalment system to set aside regular prepayments of the tax on the income throughout the year, to avoid a large tax bill.

Elinor Kasapidis:
Thanks, Tim. And the side hustle always starts small, doesn't it? And wouldn't it be many people's dreams to be able to reach $75,000 turnover from what starts really often as a hobby, or a talent, or something that they want to explore. But I really liked how you said, "Look, if you're earning income from it, that's really your starting point." That's probably going to say that there's a tax element to it. And then as a result, you're going to need to be keeping your records. And we always, like I said, the theme is record keeping.

Elinor Kasapidis:
Even before you're at that stage, it really is probably quite good when you're thinking about spending money on things. It's just a good financial habit, isn't it, to put the receipts aside just in case you hit the big time, or your YouTube channel, or your TikTok channel takes off. Because without the receipt, you can't claim that camera or you can't claim those inputs, so that's quite helpful.

Elinor Kasapidis:
Which goes to the basic question about whether someone is in business, and you did allude to it just before, but what are the types of things the ATO considers when looking at these types of situations? So I'm sort of on the cusp, I want to make a go of it, but I'm not quite there yet. Is there a thinking process, or what would you like to see tax agents talk to their clients about on this aspect?

Tim Loh:
Yeah, really good question, El. Look, as with tax and any of these questions around whether someone's operating a business, there's no single factor that determines whether your client's side hustle is a business. And you really need to consider the relevant factors as a whole before you can draw a conclusion on whether someone's in business.

Tim Loh:
Now, some of the key factors you need to include and consider to determine whether a client side hustle is a business include, whether the person intends to carry on a business, but this is not the essential factor. It's just something that you determine objectively from the facts. Whether the activity has a profit making purpose, and a prospect of profit, even if they may be unprofitable in the short term, it could still be considered to be a business. Whether the activities are repeated and regular, organised in a businesslike manner. Whether the activity has a significant commercial purpose or character, or is better described as a hobby or recreation activity. And the size and scale of the activities, although it's possible that an activity can be a business despite being small in scale.

Tim Loh:
So, remember just because your clients have other sources of income, doesn't necessarily mean that their side hustle isn't a business. So if your client isn't in a business yet, it's also important that they keep these factors in mind because as their activities change or grow you can reassess this from time to time, and particularly when there's a significant increase or change in the nature of activities. So it goes back to the point you made before, El, that it's really good to keep good records from the start, and that way you've got those records in play to make sure that you claim the deductions that you're entitled to for your side hustle.

Elinor Kasapidis:
And I like how you emphasise the client conversations. So same with work related expenses, what's your working situation like? How is it different from last year? It's the same with these side hustles. Has it grown? Has it changed? How are you going? Do you need to register for GST?

Elinor Kasapidis:
But let's say I run my own side hustle. I don't because tax is all consuming, but let's say I did. I'm waking up in the morning and I'm just trying to see if I've made a sale or got my likes. I'm not necessarily thinking, oh, what are my tax compliance obligations? So in this new type of economy where people can participate and earn income in lots of different ways, what challenges do these new types of economic activity pose for tax administration and compliance? And what can taxpayers and tax agents do to work better with the ATO to get it right?

Tim Loh:
Yeah, good question. Now look, in the emerging sharing economy that we all live in now, having a side hustle is something that people are accumulating on a day-to-day basis, but one thing we're really keen on ensuring is that we've got a level playing field for all types of businesses. So from our perspective at educating sellers on these platforms to understand and assess if they're carrying out a business, as well as increasing transparency of sellers sharing economy income, will be key factors for us in terms of ensuring compliance, but also making sure we've got that level playing field for all businesses.

Tim Loh:
If your client's side hustle becomes a side business, they'll have those additional tax obligations, as I mentioned before, which include the need for an ABN, registering for GST, and implementing a really good record keeping system to track income and expenses. It's really important to also make sure they're managing their cash flow, as I mentioned before. So making sure they've got a plan for paying tax on their business income when they lodge their activity statements and annual tax returns.

Elinor Kasapidis:
And I think as well, because the future is digital, both in Australia and New Zealand is also having the conversation administrations around the world. It's more as a general comment, but just how, in interacting with the digital ecosystem, running your businesses online, does that make it easier? How can you actually record things so that your tax time isn't so onerous, or your other obligations aren't so difficult? So in that digital sense, do you have any tips to make sure that individuals are correctly reporting and recording their taxes?

Tim Loh:
Yeah, look, from our perspective, when it comes to record keeping, it's really important that they've got the records there. Taking advantage of those kind of digital ecosystems in order to make sure they've documented those deductions and the income perspective as well.

Tim Loh:
Now, I guess from a record keeping perspective, it's really important that you calculate the accessible income, and entitlement deductions, and other concessions. So from a record keeping perspective, most business records need to be kept for five years, and as most CPA practitioners will know, you've got to be aware it's your client's responsibility to ensure that the information in the tax return is correct before lodging. And if your client is running that side hustle business, they should start to consider using commercially available software packages. They can actually help meet their record keeping and reporting obligations much more easier than the old spreadsheet to do that.

Tim Loh:
So it's really important to emphasise that your clients can only claim deductions they're entitled to, nothing more, nothing less. And I'm going to sound like a broken record, but the three golden rules equally apply when someone's running a side hustle business as well.

Elinor Kasapidis:
Becoming digital native, I think there's a real opportunity for future businesses that are designed to work in that ecosystem. You can see, you mentioned the commercially available software. There is a way to make it efficient. Tax, I don't think the way the system is at the moment, it can't necessarily be simple or easy, but it can be simpler and easier by getting the fundamentals right.

Elinor Kasapidis:
And of course, if your side hustle is turning into a business, tax is only one thing to worry about. So it is good, I think, you mentioned cash flow before. Preparing for instalments, registering for GST, maybe getting an ABN, a trading name. So there are all these other things that if you do have a side hustle that is going quite well, it might be a good time to see a tax agent or to see a business advisor to find out what to do next, and get it right.

Elinor Kasapidis:
So thank you so much, Tim. You've been with us for four weeks. You've shared your insights and expertise with us and our listeners. Tax time is always a great opportunity to remind everybody about what they need to do to claim their expenses properly, for tax agents and our members to hear from you about what's on your radar. And our theme of course is record keeping. So in fact, while we're talking about 2022, I think one of our key messages today is about from the 1st of July, 2023, get your records in order to make your next year's tax return really seamless.

Elinor Kasapidis:
So thank you so much, Tim. And we really appreciate having you back again this year.

Tim Loh:
Thanks so much, Eleanor, appreciate the opportunity.

Elinor Kasapidis:
If you've got a question about anything that we've discussed during our full Tax Time podcast, or you have a suggestion for a topic you'd like us to explore, email us at [email protected]. Once again, a huge thanks to Tim, and thanks to you, our listeners for joining us today. If you've enjoyed what you've heard, please tune in again next week and tell your friends. From all of us here at CPA Australia, thanks for listening.

Outro:
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