Best structure for my side projects

Hi all, I am so happy to discover this forum and hoping we can learn from each other.

I've been doing side projects in software/apps development and on the top of my salary I have between 10K - 20K annual income from my side projects. Currently I just add this to my tax return and got taxed as part of my income tax.

I am looking at the best structure that makes it the most tax effective to run my side project. Anyone has suggestion the best route I should take? Would I be better if I register a company? What are my options?

Thank you.

Hi @Paul - FS Concierge thank you for taking time to respond to my question.

What kind of consultant that is best suited for this type of inquiry? Not necessarily the one who helps us with tax return I suppose?

TBH it is sometimes overwhelming when trying to find an accountant who is good with reasonable rate and would be able to provide advice rather than just give us list of options.

So many problems with this advise. You don't want to pay a sharp price could result in crap service, you are better to pay a good price, and get good advise.

10 to 20K on side projects, firstly thats not a side hustle thats serious income, and deserves a quality accountant.

Get this wrong and it could end up costing you thousands, see a good accountant, not a cheap and nasty accountant. Why do you assume that the one who does your tax return is not the right one, have you asked them. Just think about it, they are the ones that should know your business inside and out, and if they don't then you have the wrong one.

At the end of the day, giving advise is giving you a list of options, but as long as the list of options gives you the pro's and con's that is fine.

A quick add on to the above comments... side jobs seeing 10-20k per year would likely be deemed a business by the ATO. If you're adding the revenue to your tax return it suggests that's your profit amount? I would think - and definitely speak to an accountant to confirm - this would fall into a business category not hobby, such that you perhaps should have at least had an ABN as a sole trader before now... which may have meant being able to claim other business expenses I would think?

Only an accountant that's familiar with all of your income (business and wages), expenses, personal assets etc can really advise best structure for tax effectiveness. Pty Ltd company tax may be less than your personal marginal tax rate on wages so there could be a tax saving BUT it's also more costly to run a company structure than sole trader in terms of registrations/annual returns etc so it has to be balanced against the tax saving.
James Millar is a member here and knows his stuff. Can't speak to his fees but would be well worth a chat in this situation - his website is at https://360partners.com.au/

Hi all, thank you for taking time to respond. I really appreciate your feedback.

@bb1 I didn't assume that a tax (return) accountant wouldn't be the one who could help me with this. I was just not sure if there are other type of accountant who is specialised in this kind of thing. When I see popup counter at shopping centre who offer to help with tax return I was just not sure if I could talk to them regarding business structure.

I have used accountant in the past but I noticed that I didn't get any added value compared to just prepare my tax return through eTax. So in the last few years I have done it myself online. I might need an accountant who will proactively try to understand my situation by asking me questions since I would not know what is ir/relevant for my tax return. But even then my situation usually doesn't change from year to year.

What reasonable fee that I should expect to pay for an accountant to help me establishing a structure to run my side hustle?

@JacquiPryor thank you for recommending 360 partners. I'll get in touch with them.

So it seems it is highly recommended to talk to an accountant to find out what structure is the best for my situation instead of just registering for a company myself.

Actually, is there anyone could recommend a book that discusses all different type of business entities and their own pros and cons? Thank you.

Here's some counter advice.

Get a book on managing your own (small) business in Australia and read it. They will often have an introductory section on business structures (ie. sole proprietor vs company vs trust etc.). Knowing some of this background information will help you decide how to find out more.

Many years ago, I read 'Managing a Small Business in Australia' by John English (which looks like it got replaced by 'How to Organise & Operate a Small Business in Australia', still by the same author).

As an example, you could try finding this in your local library or bookstore and browsing the books adjacent to it on the shelf.

(I dunno if this is still the most relevant book, or maybe there are other more recently-published books.)

Hope this helps!

Thanks @bengtan for your recommendation.

i am not an accountant, but my understanding is that a company will NOT save you any money in taxes, even if the company tax rate is lower than your marginal rate.

https://www.ato.gov.au/Business/Personal-services-income/

• You can receive PSI even if you're not a sole trader. If you're producing PSI through a company, partnership or trust and the PSI rules apply, the income will be treated as your individual income for tax purposes.

​

For what it's worth, my side business is a Pty Ltd company and that structure works very well for me. It makes around 20K profit per year. I was a sole trader initially but set up the company when it started making (decent) money.

The Pty Ltd structure allows me very good control over my personal income which I really like. That's because I can leave the profits in the company until it suits my personal tax situation. Note that my company doesn't earn personal service income (PSI), because my revenue is from the sale of products, not personal services. As I understand it, PSI negates the tax/timing benefits I enjoy.

When I want to get my profits out of the company I can either pay myself a salary (deducting tax and paying super) or I can distribute a dividend to myself.

The overall amount of tax that gets paid per dollar is the same, but the company structure gives me more choices about when the tax is paid. If I quit my day job next year, for example, and my personal income drops to a low tax bracket, I can pay myself a salary from the company's savings and, if it is a small salary, then my personal tax bill will be small (income also small!).

The other benefit is that if something goes wrong with customers or products my personal assets will be (more) protected from litigation than if I were a sole trader.

Every situation is different so my setup might not be best for you, but perhaps that helps a little.

Thanks for this tips!

ok here are some pointers for you

1. With the extra income of $10k to $20k, it's likely going to be hard to justify establishing a company for the purposes of producing lower tax. It depends on your personal tax rate and whether you need access to the money (assume yes)

2. At that level any tax benefit will likely be consumed by the compliance costs (accounting fees) for the company. They would range from a super cheap HR block type service with no hand-holding, no advice, and questionable quality probably starting at $1000 pa to a professional grade firm that provides the best expertise and includes a dedicated mid year proactive tax planning solution as standard - normally between $2500 to $4000 for relatively simple operations depending on what assistance is needed.

3. As mentioned - PSI may impact any tax benefit if applicable.

4. Asset protection is an issue with any product or service. If there is a defect that causes someone loss then as a sole trader your assets might be exposed. Companies can help here but of course it comes at a cost and depends on the risk and the insurance you have.

Simple PAYG employee tax returns are a commodity and I would only recommend using an accounting firm for these if (a) you really don't want to DIY because you have no knowledge at all (b) you have something other than a payment summary (rental property, business, cap gain etc) to complicate it.

Companies and trusts are a completely different story. The body of law and opportunities and potential issues are significantly different. Not to mention that if you ever go for a home loan the banks are required to do an ASIC director search and you will need to provide up-to-date "Accountants" financial reports for each company to demonstrate they are solvent. Internal management reports from Xero etc are not accepted for this (either are tax returns).

We don't focus on price. We focus on identifying what problems you have and what solutions you need. If you can't afford to pay for them that's a separate issue (and frankly your problem to overcome). When someone asks me for a 10% discount I tell them sure - will can do 90% of the job for you. No problem.

I'm not an accountant or a financial planner so this sort of information has to be general.
James points out some very relevant things that you need to think about.
I'm a sole trader (soon to incorporate into a Company) but for now I keep my personal expenses and business separate in different bank accounts.
The business one is in my Registered Business name but the income is personal. Invoices are generated by the Business Name and gst is paid on that income. (get some advice on whether you earn enough to claim and pay gst)
All my business expenses come out of the business account.
I have a book-keeper who looks after this on a monthly basis and because it's relatively simple it's less than a cup of coffee per day.
There are options like superannuation to reduce tax but that's a discussion between you and a financial adviser that has specialist knowledge in advising businesses. That could be an accountant or a financial planner.
I hope this helps. I have many accountants, book-keepers and financial planners in my network and a few that advocate for because I trust them.
I'd suggest you find similar and get to know, like and trust them and then you can go to them instead of a bunch of Randoms.
Good luck