The ATO continues to remind Australians that it is paying close attention to undeclared income from secondary work, including the sharing or ‘gig’ economy this tax time. They have noticed some confusion about when these side hustles cross the line and become taxable.
Generally, you must report this income in your tax return when you provide your labour, skills, or goods for a fee. This applies regardless of whether you’re using a digital platform or more traditional means, such as word of mouth.”
The ATO is aware that lots of people have picked up a side hustle during the pandemic. This has included a wide range of activities such as freelancing, setting up a local market stall or receiving income from subscribers through platforms like Patreon, Twitch or OnlyFans.
It doesn’t matter whether you are an employee, independent contractor, carrying on a business, or none of these. The income needs to be reported when you receive payment for your services, even if it’s a one-off.
The Pay As You Go Instalment system helps you set aside tax payments throughout the year to avoid bill shock.
The ATO receives income information from various providers, including financial institutions, online marketplaces, ride-sourcing applications, and short-term rental websites. The data they receive is growing, which means the places to hide are shrinking.
If you declare side hustle income, the good news is you can also claim deductions for expenses if you have kept your receipts, and it directly relates to earning this side hustle income, which includes the cost of managing your tax affairs through a registered tax agent.
Importantly, you can only claim a deduction for the work-related part of your expenses. If you’re a food delivery rider, you can claim some of your bike costs, but you can’t claim your personal riding time and costs.
Don’t rely on what other people claim as a guide to what you can claim. Every job is different, and what is required to earn an income for one occupation may not qualify in another.
For instance, chefs can claim the knives, and hairdressers can claim the scissors they use for their job, but a train driver or a salesperson would have the same claims get knocked back.
If your side hustle becomes a side business, you may want to get advice from a registered tax agent. You will need to consider your additional tax obligations, including the need for an ABN, registering for GST, implementing a record-keeping system to track income and expenses. You will also need a plan for paying tax on your business income when you lodge your activity statements and annual tax returns.
The ATO has provided some much-needed guidance on this topic. Their concern is that undeclared foreign income is being disguised as gifts or loans – see Taxation Alert TA 2021/2. If you have (or are about to) received funds from overseas, you must have appropriate documentation to support this.
Genuine gifts or loans from related overseas entities (including family members and friends) are sometimes used to fund business structures or acquire income-producing assets.
In this context, a genuine gift or loan is one where all of the following are satisfied:
- the characterisation of the transaction as a gift or loan is supported by appropriate documentation
- the parties’ behaviour is consistent with that characterisation
- the monies provided are sourced from funds genuinely independent of you.
When you receive amounts that are genuine gifts or loans from related overseas entities (including family members and friends) to fund your business or to acquire income-producing assets, it’s important that you have appropriate documentation that shows the character of the amounts received. Good record-keeping practices are desirable should the Commissioner seek to verify whether the amount you have received is a genuine gift or loan.
Documenting genuine gifts from related overseas entities
Where a genuine gift (including an inheritance) is used to fund your business or to acquire income-producing assets, supporting documents can include:
- any contemporaneous declarations the donor has made in their country of residence about the nature of the amounts transferred
- an executed contemporaneous deed of gift prepared by the donor
- formal identification of the donor (such as a copy of their photo identification from their passport or identity card)
- a certified copy of the donor’s will or distribution statement for the estate
- a copy of the donor’s bank statements showing the gift and the donor’s wealth before they made the gift
- financial records reflecting the donor’s transfer to you.
Documenting genuine loans from related overseas entities
Where a genuine loan is used to fund your business or to acquire income-producing assets, supporting documents can include:
- a properly documented loan agreement that details
- the parties to the loan
- the date of entry
- its terms and relevant conditions, including
- the amount of the loan
- the interest rate payable
- the frequency of repayments and how they are calculated
- the term of the loan
- correspondence relating to the loan, including pre-contractual negotiations as to the terms and any variations made post-agreement
- documents about any security provided or guarantees that are given in support of the loan
- facility arrangements governing the drawdown and transmission of funds
- authorisation to access or drawdown loan amounts from the lender’s account
- financial records such as bank statements showing the advance of funds and subsequent repayments, including interest and principal payments over the loan term
- financial and accounting records that show how you used the loan amounts, such as
- ledger and journal entries
- bank statements
- credit card statements
- account statements or accounting records and ledgers reflecting
- the loan balance outstanding
- the financing costs incurred or paid
- any declarations the lender has made in their country of residence about the provision of the loan
- statements of assets and liabilities provided to a financial institution
- an extract from the lender’s financial and accounting records showing the loan balance outstanding
- foreign bank account statements reflecting the transactions relating to the loan and the lender’s ability to make the loan
- documents showing payment of withholding tax
- financial plans, cashflow forecasts, net assets position or budgets showing an intention or capacity to repay the loan.
Where there is uncertainty about whether an amount (or amounts) you have received is a genuine loan (or loans), the Commissioner will form a view based on all the available evidence. In this regard, documentation from unrelated parties often provides the best evidence that an amount was received as a genuine loan.
For example, a statutory declaration provided by you or a family member to show that an amount was received as a genuine loan may not be accepted as conclusive evidence of the receipt having that character. In contrast, a personal statement of assets and liabilities provided to a financial institution listing the receipt as a loan is more likely to be accepted as strong evidence of such a characterisation.
The Commissioner may also make further inquiries to verify information or documents provided.
A taxpayer contacted the ATO to confirm that there is no problem claiming a tax deduction on interest charged on an existing home loan on their principal place of residence (PPR).
The loan currently has funds offset against it. These funds are used as deposits for investment property.
For those not familiar with this arrangement:
- an offset account is a transaction account linked to your home loan
- it could help reduce the amount of interest you pay on your loan and help you pay it off sooner
- the more money in your offset account, the less interest you’ll pay.
The existing loan amount is $500,000 (for PPR), with $450,000 offset against it. They are looking to use $360,000 as a deposit to purchase two investments properties (i.e., the loan has been paid down prior to this money being re-drawn and used for investment purposes).
In the future, the taxpayer would seek to claim interest charged on $360,000 (from the $500,000 loan) as a tax deduction due to this money being re-drawn and used for investment purposes.
The ATO informed that as the money is in an offset account, it’s regarded as savings. Any money you withdraw from an offset account cannot be claimed as a deduction.
However, if the taxpayer actually paid the money in their offset account directly into their loan to reduce the non-tax-deductible debt on the home loan; and then drew down on that amount to invest in an income-producing asset, then the interest would be deductible. Any amount used for private purposes in that home loan line of credit (LOC) is not deductible, and you would need to apportion the loan.
The take our here is that it is vital to get professional advice before refinancing. The option the taxpayer initially considered meant there would be no tax deduction on the private funds of $360k taken out of the offset account – this would have merely been a deposit on the two investment properties.
Drawing down on the available funds of, say… $360k, made available by the transfer of money out of the offset account on the line of credit secured over the private residence would enable a tax deduction to be claimed.
This is because the key test for deductibility of interest as consistently applied by the courts is the “use” test, i.e., the use to which the funds have been put.
It matters not which asset is used as security. In this case, it may be the private residence – the $360k in funds have been “used” to purchase an investment property. Here we see a careless decision could have cost the taxpayer a tax deduction of loan funds of $360k.
Consider an Uber Driver who needs to know if they can claim the following as a deduction expense:
- distance from their home to the first customer and last customer to home
- the car used is under the daughter’s name, and they live together.
The question is whether they can claim the following expenses as a deduction:
- repair & service
- loan interest
- rego, CTP, comprehensive insurance
- Spotify subscription for use in the car as customer comfort
You can only use the actual cost method when you use someone else’s car for work/business purposes.
However, if a private arrangement is in place, it is possible to use the logbook or cents per kilometre method.
If the business is home-based, the travel between home and the client is deductible since it is travel for work (as opposed to start work).
The music subscription can also be claimed, but remember, only the work-related use portion is deductible.
Note any actual costs incurred can be claimed.
In the event repairs and services, loan interest, registration, and insurance are paid by them. In that case, these would all be claimable.
Car depreciation won’t be claimable, as the car isn’t their business’ asset. They could, instead, claim the cost of how much the car “loan” payments are, like renting from an unrelated third party.
Sometimes taxpayers see this description on their MyGov account when they check the status of their tax refunds and wonder what it means.
Balancing accounts means that the ATO has the results of your return. They’re calculating your refund or bills based on your account balance. Your return may still take a few more days while the ATO reviews your accounts with them and other Australian Government agencies, like Centrelink or Child Support. For example, if you have a debt with Centrelink, any tax refund will go towards that debt first before going to you.
Many Australians are working remotely overseas for Australian companies. In some cases where Australians have a permanent dwelling and have applied for residency status in an overseas nation, they may be Australian non-residents.
It may well be that this income does not have to be declared in Australia. Because in general, the source of income is where the work is performed, so if it’s done overseas, it’s not Australian-sourced. But suppose Australia and the relevant nation has an agreement that is a tax treaty. In that case, it is ultimately what the tax treaty says that will determine where taxes need to be paid.
Your Australian employer will not need to pay Australian super for you because you’re a non-resident working outside of Australia. Also, an employer will not need to deduct PAYG for work done that does not have an Australian source.
Certainly, this issue is causing a lot of confusion, with some employers very unclear about their PAYG obligations.
Suppose Australians working overseas can establish Australian non-residency for tax purposes. In that case, it is imperative they get proper advice and follow the laws of the relevant tax jurisdiction where they reside.
Work practises changed markedly since the advent of Covid-19. In general, the ATO views that rent payments being occupancy costs are generally outgoings “of a private or domestic nature” and not deductible. This even applies where part of the rented home is used as a home office.
However, in some limited circumstances, a rent deduction may be claimed if a part of the home is used exclusively for income-producing activities and there is no alternative place of business provided by the taxpayer’s employer.
The extensive lockdowns many Australians have been subjected to raises the question of whether anyone working from home can now claim a tax deduction for paying their rent?
With office accommodation explicitly prohibited by some State public health orders, many workers have had no choice but to use their primary residence as an office. There have been cases where people have moved from the inner city to a larger residence in the suburbs to expand their home office!
We know that a taxpayer cannot deduct a loss or outgoing under this principle if “it is a loss or outgoing of a private or domestic nature“.
Due to this principle, the ATO has formed a general distinction between two broad categories of costs associated with running a home office. They are:
- Occupancy expenses: expenses relating to the ownership or use of a home (e.g. rent, mortgage interest, home insurance premiums) which are not affected by the taxpayer’s income-earning activities; and
- Running expenses: expenses relating to using facilities running the home (e.g., electricity, cleaning costs and furniture).
The ATO views are expressed in Taxation ruling TR 93/30, which sets out three requirements.
TR 93/30 states that running expenses for any home office can be deductible for the home area used as a “place of business”. For the portion of time, that area is used as a place of business. However, occupancy expenses are only deductible for an area of a home that “has the character of a place of business”- otherwise, occupancy expenses are of a “private or domestic nature” and are not deductible.
The ATO has published fact sheets on working from home during COVID-19, including the short-cut methods and running expenses alternatives. Still, there has been little guidance on occupancy expenses. Whether you are an employer, contractor or own a business, no two cases are the same. There may well be the possibility of a percentage of rent being deductible, and professional advice should be taken.
These are the highlights from the four most frequent claim types amongst accounting firms offering Audit Shield being insurance to cover the cost of tax audits in Australia:
1: BAS Audits and Reviews (Pre & Post Assessment)
The Accountancy Insurance Claims team noted a more than 10% increase in BAS Audits and Reviews (Pre & Post Assessment) over the 2020-2021 financial year, placing BAS Audits and Reviews into the number one position of all audit categories over the last 12 months.
The spike was attributed to cash flow boost payment activity statement audits and reviews.
Whilst the cash flow boost program drew to a close with the lodgement of 30 September 2020 activity statements, expect to see audit activity throughout 2021, especially where employers are declaring unusual variations in W1 and W2 amounts in 2021 vs 2020 activity statements.
2: Employer Obligations Audits and Reviews (PAYG/SG/FBT)
Throughout 2020 and into 2021, many Australian businesses will not have kept up to date with their superannuation guarantee (SG) obligations because of COVID-19 business cash flow pressures. This has been receiving a lot of attention from the ATO.
With Single Touch Payroll (STP), the ATO can easily identify and flag underpayments of SG and STP reporting has been a big driver of ATO SG audit activity in 2021.
Claim proportion (frequency) 2020-2021: Employer Obligations Audits and Reviews (PAYG/SG/FBT) accounted for 14.87% of all Accountancy Insurance claims.
3: Payroll Tax Investigations (All States)
Payroll Tax Investigations (All States) continues to be a major focus area by all State Revenue Offices around the country.
Issues identified in Payroll Tax Investigations include:
- Grouping of related employer entities
- Employees based in other states (requiring registration in other states)
- Employers not being registered when data (e.g., STP) shows they are over the Payroll Tax registration threshold
- Data sharing with other government authorities (ATO, WorkSafe, icare, etc.) is also a key contributing factor in identifying employers to target for payroll tax investigation.
4: Income Tax (Full/General/Combined) Audits and Reviews
Following closely behind Payroll Tax in claim frequency is Income Tax- which covers a vast array of different types of ATO audit activity that can be linked back to taxpayers’ lodged income tax returns. What kept this category high on the list were key ATO audit focus areas such as the Next 5,000 Streamlined Assurance Review program that commenced in October 2020.
5: Covid-19 JobKeeper Payment Audits and Reviews
Despite Covid-19 JobKeeper Payment Audits and Reviews being a new category, it still made it into the top five most frequent claim types in the 2020-2021 financial year.
The ATO has historically been very active in reviewing government benefit schemes. With so many Australian employers previously enrolled in JobKeeper, it is very likely that ATO audit activity will continue throughout 2021-22.
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