From Side Gig to Smart Business: Your A-Z Guide to Tax

Making some extra cash on the side? Good on ya! In today’s economy, having a side hustle has gone from a nice little bonus to a game-changer for thousands of Aussies. Whether you’re selling crafts online, driving for a rideshare service, or doing a bit of freelance work, it’s a brilliant way to get ahead. But have you thought about what the taxman thinks about your new venture?

It’s easy to get excited about the extra income and forget that the Australian Taxation Office (ATO) is also pretty interested in it. The good news is, handling the tax side of things doesn’t have to be a nightmare. With a bit of know-how and some simple organisation, you can manage your obligations, stay out of trouble with the ATO, and even use your business expenses to legally reduce your tax bill. This guide will walk you through everything, step by step.

First Things First: Is It a Hobby or a Business?

This is the first and most important question you need to answer, because it changes everything from a tax perspective. If what you’re doing is just a hobby, you don’t need to declare the income or pay tax on it. But if the ATO considers it a business, that income is taxable. So, how do you tell the difference?

The ATO looks at a combination of factors to decide. It’s not just one thing, but the overall impression of your activities.

Feature	Hobby	Business (Sole Trader)
Need an ABN?	No	Yes
Can you claim deductions?	No	Yes
Do you declare the income?	No	Yes

When the ATO Sees It as a Hobby

A hobby is something you do for personal enjoyment or recreation. If you happen to make a bit of money from it, that’s just a bonus. For example, if you love knitting and you sell a few jumpers to friends each winter, or you sell some old furniture on Gumtree, that’s almost certainly a hobby.

When You’ve Officially Got a Business

Things tip over into being a business when your activities become more structured and commercial. The key signs the ATO looks for include:

• You intend to make a profit: You’re not just doing it for fun; you’re actively trying to make money.
• You do it regularly: The activity isn’t a one-off. There’s a pattern and repetition to what you do.
• It’s organised like a business: You have a business name, a separate bank account, you keep records, and you operate in a commercial way.

If this sounds like you, then congratulations—you’re a business owner! The next step is to make it official.

Getting Set Up the Right Way: Your ABN and Registrations

If you’re running a business, you’ll need an Australian Business Number (ABN). Think of it as a TFN for your business. It’s a unique 11-digit number that identifies you to the government and allows you to operate legally, claim deductions, and deal with other businesses more easily.

How to Apply for Your ABN (It’s Free!)

Getting an ABN is straightforward and, most importantly, free. The most common structure for a side hustle is a ‘sole trader’. This means you own and run the business yourself, and you’re legally responsible for everything. The process of sole trader registration and getting an ABN can be done online through the Australian Business Register (ABR) website.

What About GST and Your BAS?

GST (Goods and Services Tax) is a 10% tax on most goods and services sold in Australia. Now, you don’t need to worry about it straight away. You are only required to register for GST if your business turnover is $75,000 or more per year.

If you do cross this threshold (or choose to register voluntarily), you’ll need to lodge a Business Activity Statement (BAS) with the ATO, usually quarterly. This is where you report your GST collected and claim credits for the GST you’ve paid on business expenses.

The Best Part: Claiming Every Deduction You’re Entitled To

This is where having a business really pays off. As a sole trader, you can claim tax deductions for most expenses you incur while running your side hustle. This reduces your taxable income, which means you pay less tax. It’s that simple.

Golden Rule: If you spent the money to help you earn your side hustle income, you can probably claim it. Just be sure to keep the receipt!

Common Deductions for Aussie Side Hustlers

The exact deductions will depend on your side gig, but here are some of the most common ones:

• Home office expenses: A portion of your electricity, gas, and internet bills if you work from home.
• Vehicle expenses: If you use your car for your business, you can claim the running costs.
• Tools and equipment: The cost of a new laptop, camera, or tools for your trade.
• Phone expenses: The business-use portion of your mobile phone bill.
• Advertising and marketing: Costs for social media ads, flyers, or a website.
• Subscriptions and software: The cost of industry software like Adobe or Xero.
• Professional advice: The fee you pay to a small business accountant is 100% tax-deductible!

Let’s see it in action: Sarah has a photography side hustle. She earned $5,000. Her expenses were: $500 for Facebook ads, $300 for an editing software subscription, and $200 in car expenses driving to shoots. Total deductions: $1,000. She’ll only pay tax on her $4,000 profit, not the full $5,000 she invoiced. That’s the power of deductions!

Become a Record-Keeping Pro (It’s Easier Than You Think)

Knowing you can claim deductions is one thing; being able to prove them to the ATO is another. Excellent record-keeping is the superpower of every successful side hustler. Don’t leave it until June 30th to sort through a shoebox of faded receipts.

Here are some simple ways to stay on top of your records:

• Use the ATO’s myDeductions app: It’s free, designed for this exact purpose, and makes tracking expenses on the go a breeze. Just snap a photo of the receipt and log the details.
• Set up a simple spreadsheet: All you need are columns for the date, a description of the expense, the amount, and the business-use percentage.
• Create a dedicated email folder: As soon as a digital invoice hits your inbox, move it to a “Business Receipts” folder. Simple.
• Consider cloud software: As you grow, tools like Xero, MYOB or Wave can automate a lot of this and save you a heap of time.

The Smart Move: Putting Money Aside to Avoid a Tax Shock

This is probably the single most important piece of advice for any side hustler. When you’re an employee, your boss withholds tax from your pay. When you’re a sole trader, nobody is doing that for you. That income lands in your bank account, but it’s not all yours to keep.

Expert Tip: Open a separate bank account just for your side hustle. It makes tracking income and expenses a thousand times easier and helps you clearly see how much you need to save for tax.

A good rule of thumb is to put aside 25-30% of your side hustle income. As your business grows, you might consider professional tax planning services or entering the ATO’s Pay As You Go (PAYG) instalment system, which helps you pre-pay your tax bill throughout the year.

Common Tax Traps for Side Hustlers (and How to Dodge Them)

Getting ahead means knowing what to do, but also what *not* to do. Here are a few common traps new side hustlers fall into.

Trap #1: Forgetting About Superannuation

As a sole trader, you are your own boss. That means you’re also responsible for your own retirement savings. It’s crucial to make personal contributions to a super fund to ensure you’re not left short down the track. Even better, these contributions are generally tax-deductible!

Trap #2: Mixing Business and Pleasure (Financially)

We mentioned a separate bank account, but it’s worth saying again. Mixing your business and personal finances is a recipe for a tax-time nightmare. It makes it incredibly difficult to track expenses accurately and is a red flag for the ATO. Keep it clean, keep it separate.

Trap #3: Not Understanding Personal Services Income (PSI)

This is a slightly more complex one, mainly for freelancers, consultants, and contractors who are earning income from their personal skills or effort. The PSI rules can limit the deductions you can claim. If more than 50% of your income for a contract is for your labour, it’s worth looking up “PSI” on the ATO website to see if the rules apply to you.

Your Side Hustle Action Plan

Feeling motivated? Righto, let’s turn this knowledge into action. Here’s what you can do this week to get started on the right foot:

1. Make the Call: Hobby or Business? Be honest with yourself about your intentions and the way you operate. This decision guides everything else.
2. Get Your ABN (If it’s a Business): Head to the ABR website. It’s a 15-minute job that makes your hustle official.
3. Open a Separate Bank Account: Do it today. It’s the best organisational decision you’ll make. Transfer a bit of seed money in to get it started.
4. Choose Your Record-Keeping System: Will it be the ATO app, a spreadsheet, or software? Decide now and commit to using it from day one.
5. Start Saving for Tax: From the very next dollar you earn, transfer a percentage (start with 25%) into your new savings account. You’ll thank yourself later.

If your side gig takes off and things start to get more complex, don’t be afraid to get some help. Chatting with a qualified small business accountant isn’t a cost; it’s an investment in your peace of mind and financial success.

Frequently Asked Questions (FAQ)

1. What happens if my side hustle makes a loss? Can I claim that against my main job’s income?

In most cases, yes. If your business makes a loss, you can usually offset that loss against your other income (like your salary from your main job), which can result in a larger tax refund. However, there are some specific “non-commercial loss rules” that may apply, so it’s a good idea to get advice if this is your situation.

2. Do I really need a separate bank account for a small side job?

While it’s not legally required, it is highly recommended. It makes record-keeping so much easier, preventing you from having to sort through personal and business transactions at the end of the year. It gives you a much clearer picture of your business’s financial health.

3. How much money should I actually set aside for tax from my side hustle income?

A safe bet is to start with around 25% of your gross income. The exact amount will depend on your total income from all sources. You can use the ATO’s simple tax calculator to get a rough idea of your marginal tax rate, which will give you a more accurate percentage to save.