What You Need To Know About Side Hustles, ABNs & Loss Provisions

Starting a Side Hustle in Australia: What You Need to Know About Business Classification, ABNs, and Commercial Loss Provisions

In Australia, the idea of starting a side hustle has never been more appealing. Whether it’s turning a passion into profit or exploring new income streams, a side hustle can offer both financial and personal rewards. However, before diving into your entrepreneurial venture, it's crucial to understand the regulatory landscape surrounding side hustles, particularly regarding business classification, the need for an Australian Business Number (ABN), and the commercial loss provisions that could affect your tax situation.

Understanding What Constitutes a Business

One of the first things to consider when starting a side hustle is whether your activities are classified as a business under Australian law. The Australian Taxation Office (ATO) defines a business as an activity carried out with the intention of making a profit. It involves a degree of regularity and commerciality, and often includes some form of business structure or organization.

Here’s why you might need an ABN:

• Invoicing and Tax: Having an ABN allows you to issue tax invoices, claim GST credits (if registered for GST), and makes your business transactions more professional.
• Business Recognition: It also helps in establishing your business credibility and differentiates you from personal activities.
• Legal Requirements: Operating without an ABN when one is required can result in penalties and complications with tax compliance.

You can apply for an ABN through the Australian Business Register website, and it’s a straightforward process. Ensure you have all necessary details about your business structure and activities before applying.

The Commercial Loss Provision

One important tax consideration for side hustlers is the commercial loss provision, which is outlined in Section 35-10 of the Income Tax Assessment Act 1997. This provision restricts the ability to offset business losses against your ordinary income, such as salary or wages, under certain conditions.

Key points about the commercial loss provision:

• Eligibility Criteria: To claim a deduction for a business loss against your ordinary income, your business activity must meet one of the four criteria set by the ATO:
  1. Profit Test: Your business activity must have made a profit in at least three out of the past five years, including the current year.
  2. Real Property Test: Your business must hold real property (e.g., land or buildings) worth at least $500,000.
  3. Other Assets Test: The value of other assets used in your business must be at least $100,000.
  4. Other Criteria: You might meet other conditions set by the ATO for businesses considered to be ‘genuine’.
• Purpose: This provision aims to prevent individuals from claiming significant tax benefits from side hustles that are primarily hobby-like or speculative in nature.

Impact: If you don’t meet these criteria, your side hustle’s losses cannot be used to reduce your taxable income from other sources. Instead, losses are carried forward and can only be offset against future business income.

Final Thoughts

Starting a side hustle in Australia offers exciting opportunities, but it’s essential to navigate the regulatory environment correctly. Understanding whether your activities qualify as a business, securing an ABN if required, and being aware of the commercial loss provisions can help you manage your side hustle effectively and ensure compliance with Australian tax laws.

Before launching your side hustle, it’s a good idea to consult with a financial planner or accountant. They can provide tailored advice based on your specific circumstances and help you set up your business in a way that maximises your financial and operational efficiency.

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