Side hustles can be an effective way to generate extra funds or explore a potential career change, but it's essential that you allocate sufficient time and set realistic earnings goals before diving in.
Some hobbies can result in tangible products, like woodworking, jewellery making and software projects - or even cosplaying (creating and wearing costumes based on existing creative properties). Others can simply supply recreational activity.
Do I need to report my side hustle earnings?
An extra source of income and faster completion of financial goals are both great benefits of taking up a side hustle, but it is crucial that you carefully consider which kind of side hustle will best meet these goals and your availability to dedicate the necessary time and energy towards its development.
The ATO is reminding Australians not to be caught out this tax season by undeclared secondary income from activities like sharing economy or gig economy work. Assistant Commissioner Tim Loh has warned Australians against being misled into declaring secondary income that does not require declaring. Essentially if an activity involves repeated activity that aims at turning a profit, which could show you are running a business.
Businesses have various obligations, such as registering for an Australian Business Number (ABN), setting up recording systems, lodging activity statements and annual tax returns, as well as possibly being required to register for GST. You should seek professional advice to understand your obligations.
How does the ATO define a business and a hobby?
Business activities involve commercial goals while hobby activities are conducted for leisure or recreational reasons. The ATO has identified certain indicators to help show whether your activities qualify as either business or hobby; for example, if they include intentions, purposes or potential profit motives; are regularly repeated; and operate like businesses. However, there are no fixed or definitive tests to decide if an activity is a business or a hobby.
What records do I keep for my hobby or side hustle?
An extra income source through side hustles can be an excellent way to add extra funds. It is important to consider how well this venture fits with your overall financial plan (for instance if your side hustle is intended as full-time income source it might be wiser to first test the waters before making major adjustments); etc.
The financial records that you will need to keep depend on what type of business you are running, but they generally consist of journal entries. These are entries that reflect various aspects of your business such as asset, expense, liability, equity and revenue accounts. Additionally, any income that you receive should be recorded in a separate bank account for your side hustle.
If you have a significant amount of money to save, or want to invest in your side hustle, it is also a clever idea to start a separate bank account specifically for your side gig. This will make it easier for you to watch your finances and will help you to stay organised.
How do I transition from a hobby to a business?
Making the leap from hobbyist to business can be challenging and often takes away from the enjoyment of activities like golf or yoga. If your hobby has started to transition into business, obtaining an ABN early is key to saving time and hassle during tax time. Furthermore, accounting software such as Xero or QuickBooks could help manage financials more effectively for your venture.
At Allomes Accounting we will help you transition from hobby to business. As well as accounting services we also offer business coaching and can walk with you in the establishment of your business and look at your goals to help set you on your way to success.
If you're uncertain whether your side hustle has potential, start small and gradually ramp up commitment levels until it reaches higher levels. This will give you a good sign of whether this business could replace your day job.
Reporting all money earnt from any source is important, especially if you are earning money online through a service such as Uber or Lyft, where your income can be taxed as income from a work-related activity. It's also a good idea to keep records of the income and expenditures from your business, including the cost of materials and utilities.
If you have questions book your appointment to see one of our accountants today. This can be easily done through our website.