Side Hustle Tax Guide: Keep More of What You Earn

Step 1: The Hobby Versus Business Distinction

The ATO does not consider every side activity a business, and this distinction has significant tax implications. If your activity is classified as a hobby, you do not need to declare the income, but you also cannot claim any deductions. However, if it is a business, you must declare all income but can claim legitimate business expenses.

The ATO uses several indicators to determine if your activity is a business:

• Profit intention: Are you genuinely trying to make a profit, or is it just for enjoyment?
• Repetition and regularity: Do you conduct the activity regularly, or is it occasional?
• Business-like manner: Do you keep records, have a business plan, or maintain a separate bank account?
• Size and scale: Is the activity significant enough to be considered a business?

Example: Sarah sells handmade jewellery at local markets, earning $12,000 per year. She keeps detailed records, has an ABN, and actively promotes her products. This is clearly a business. Her friend Tom occasionally sells vintage items from garage sales, earning about $800 per year. Tom's activity is likely a hobby.

The financial impact is significant. If Sarah has $4,000 in legitimate expenses, she only pays tax on $8,000 of profit. Without business status, she would owe tax on the full amount with no deduction relief.

Step 2: ABN and Registration Requirements

Once you have determined your side hustle is a business, you will likely need an Australian Business Number. An ABN is free to obtain and provides several benefits, but also comes with responsibilities.

When you need an ABN:

• You are carrying on an enterprise (business activity)
• Businesses or clients request your ABN for payment
• You want to register for GST (mandatory if turnover exceeds $75,000)

Critical point: If you provide services and do not quote an ABN, businesses must withhold 47 percent of your payment for tax purposes. This withholding rate makes having an ABN essential for most service-based side hustles.

Example: Marcus runs a weekend photography business earning $35,000 per year. Without an ABN, a corporate client paying him $1,000 would need to withhold $470 for tax. With his ABN, Marcus receives the full $1,000 and manages his own tax obligations.

Step 3: Home Office Deductions

If you run your side hustle from home, you can claim a portion of your home expenses. The ATO offers two main methods:

Fixed Rate Method (67 cents per hour): From 1 July 2022, you can claim 67 cents for each hour you work from home. This rate covers energy expenses, internet, phone, stationery, and computer consumables. You must keep a record of all hours worked from home.

Actual Cost Method: Calculate the actual work-related portion of your expenses including electricity and gas, internet and phone, office furniture depreciation, and computer equipment depreciation.

Real example: Jennifer runs an online tutoring side business from her spare bedroom, working 15 hours per week. Using the fixed rate method: 15 hours x 52 weeks x $0.67 = $522.30 per year. Additionally, she claims depreciation on her $1,500 laptop (approximately $500 per year) and her $600 desk ($120 per year). Total home office deductions: approximately $1,142 per year.

Step 4: Quarterly Tax Obligations (PAYG Instalments)

If your side business income is substantial, the ATO may require you to pay quarterly instalments toward your expected tax bill, known as Pay As You Go (PAYG) instalments.

You will typically be entered into the PAYG instalment system if your most recent tax return shows business or investment income that resulted in tax of $1,000 or more, and instalment income greater than $2,000.

Consider David, who earns $80,000 from his day job and $25,000 from his weekend web development business. His side hustle income pushed him into PAYG instalments. Instead of facing a $7,500 tax bill at year-end, he pays approximately $1,875 quarterly, preventing the shock of a large lump sum.

Step 5: Maximising Deductions

Beyond home office expenses, side hustlers can claim numerous deductions:

• Vehicle expenses: 85 cents per kilometre for business travel or logbook method
• Professional development: Courses, books, and subscriptions related to your side hustle
• Marketing: Website hosting, social media ads, business cards
• Professional services: Accountant fees, legal advice, software subscriptions
• Equipment: Items under $1,000 can be immediately deducted; larger items depreciate

Record-keeping tip: Use a separate bank account and credit card for your side hustle. This makes tracking dramatically easier and provides clear audit trails.