One of the most common questions we are asked is; “I’ve started doing [insert your brilliant side hustle] and I’ve started to make a little money. What do I do about that?”
Why have a side hustle?
Some people just want an extra bit of cash. The main question is; are you doing this simply because you enjoy the act of doing it? In which case, you’re probably not aiming to make a profit and it’s really just more of a hobby.
Or are you aiming to make cash? In which case your side hustle is probably a business and you need to put a strategy in place.
So you’re making some extra cash.. The next question is; do I need to declare that? Unfortunately it’s not a straightforward answer, it comes down to; how often are you doing your side hustle? How much are you earning?
With those factors in mind; if you said it’s probably less than $5000 a year, I don’t have a website, and it’s something I do on the weekends with friends and family – in this case it’s probably a hobby.
Let’s use an example..
Let’s say you make a wooden table and sell it for $100 on Gumtree. This is a one-off thing. That’s a hobby.
When your side hustle is not a hobby..
You subscribe to Handyman Monthly (great magazine), and you learn how to make a beautiful wooden table. It turns out so good, you decide to make 20 more of them. You then decide to launch a website showcasing your tables and you apply for accounts with suppliers for the materials.
You find antique stores to sell to, various other channels, you create a bank account specifically for this venture and you keep track of your expenses.
You’ve even worked out that a table takes around 20 hours to complete and $500 in materials. So you figure you need to sell your table for around $2500 to make a profit.
You’re running a business.
Now do you need to declare this on your tax return? Again it comes down to how much money you make. If you sell one table for $100 its probably not going to be an issue. But if you make $20,000 – you need to declare that income.
If you’ve made less than $20K in sales and run at a loss, the ATO is not worried whether you include it in your tax return or not.
However, if you made less than $20K in sales and made a profit, thats a business and you should include it in your other income.
The ATO considers some or all of the following factors as a business;
- You registered a business name
- You have a dedicated phone number for the venture
- You have an ABN
- You are licensed or qualified in the field
- You create a repeatable product on a regular basis
If you fulfil the most of the above criteria, you are most likely running a business and not a hobby.
So it’s a business.. what do I do now?
Based on a number of things;
- How much income am I expected to bring in?
- Are there other people in the business?
- Am I going to employ people?
- Whats my long term plan and vision?
Answering these questions will determine whether you are simply going to register as a sole trader or going to form a company. Also whether you are going to need an ABN.
You also need to consider;
- Do I need insurance?
- Will I have cash flow or do I need finance to start the business?
- Do I need to buy some equipment?
In most cases if you are working full time and start a side hustle, you just register for an ABN. You’re not expecting to earn hundreds of thousands of dollars.
The beauty of the side hustle is you can do something you enjoy and that gives you a creative outlet. You can make a bit of money, and potentially it could grow into a business. It could turn into something amazing and you could quit your job (or simply work less).
Ultimately ask yourself; is the side hustle something you want to keep low level and purely as something you enjoy, or do you want to grow it enough to change your lifestyle?
You should really want to be at either end of the spectrum and not hang in the middle.
If you’ve started a side hustle, and based on what you’ve read above, you feel you have some tax obligations, or need some advice in creating the correct business structure, get in touch with us today! We even have an obligation free Discovery Session where we can learn all about you, your business and your goals.
This blog post is a partial transcript from the Two Drunk Accountants Podcast. You can listen to the entire episode here.