Thanks to the internet, folks everywhere are working a day job while running a part-time biz on the side. If this is you, here are some tax traps to avoid.
Hobby or Business?
The sideline business is becoming a serious problem for the ATO, and is being closely monitored as a consequence. If you’re working full-time with a small business on the side, there’s often an issue relating to how you define your venture.
Are you a hobby or a business? The ATO gets annoyed if you apply for an ABN, register a business name and register for GST; then claim huge GST refunds when you’re simply a hobby.
If you’re going to do all of the above, be clear about why you consider yourself a business. If you’re going to class yourself as a hobby, then it’s best not to obtain an ABN or register a business name, but to advertise legally under your own name instead – or you will put yourself at risk of an audit.
Another common issue with the sideline business is asset protection. Often your business is so small that you don’t feel the need to set yourself up in any complex tax structures. The majority of small sideline businesses end up trading as a sole trader.
But have you considered the safety of your personal assets? Tax structures such as companies and trusts are designed to protect your assets more than they are to minimise tax. Have you thought about what your cake baking business would do to your financial assets if someone got food poisoning and sued? If you’re trading as a sole trader, your personal assets are fully exposed.
This advice goes for the hobbyist too. Your venture might be a hobby, but if you’re out there selling things or providing a service, you expose yourself to the risk of being sued.
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Income Protection Insurance
If you have cut back hours on your day job to run your business venture, consider income protection insurance. This is especially important if your sideline business involves a higher chance of workplace injury, such as trades like roof tile cleaning. The good news is that your income protection insurance will be a tax deduction.
If you’re running a small business while working at the same time, and you’re a sole trader, it may not be possible to claim superannuation contributions as a tax deduction. This is because you must pass what is known as the 10 percent rule.
The 10 percent rule states that to be able to claim superannuation contributions as a tax deduction, no more than 10 percent of your total taxable income can come from salary and wages. If you don’t pass the rule, then instead, consider salary sacrificing your superannuation through your day job.
Also, as you cut back on your working hours to run your side business, your employer super contributions will decrease accordingly. It’s important that you continue to contribute to superannuation by way of personal contributions so you can maintain your standard of living in retirement.
If you’re working whilst running a venture on the side, your available time is going to be precious. It’s likely that your yearly business turnover is less than $75,000, therefore if you voluntarily decide to register for GST, make sure you choose the option to lodge your Business Activity Statement once a year rather than quarterly.
While your business might be small, there are some really BIG issues to consider. When it comes to tax, if you set your small business up correctly, you will reap some solid rewards.
What are your experiences with having a sideline business?