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Tax tips for budding startup businesses

Tax planning

Back in our parents’ day, working two jobs meant an around-the-clock commitment.

These days, it’s become a lot easier to juggle multiple engagements. You can have a day job in the office to guarantee a regular flow of income, and have a side business.

However, as easy as it might be now to juggle a full-time job and work as a small business owner in your spare time, you may not have considered the tax implications – a mistake that can leave you out of pocket for several thousands of dollars when your tax bill comes in.

Side business as a hobby

Generally, income you earn from a hobby isn’t taxable. The trick is figuring out whether what you’re doing is a hobby or a business.

The Australian Taxation Office defines a hobby as a past-time or leisure activity conducted in your spare time for recreation or pleasure, and it’s possible to receive money for an activity and still have it classed as a hobby.

It comes down to what your intentions are when performing that activity. If you run a small business and happen to earn a bit of money through Google ads, it’s probably safe to call it a hobby. But if your making larger amounts of money, those are not hobby type activities and strongly suggest that you’re running a business.

If you’re aiming to sustain or increase your income from an activity, and this is reflected in your actions, then that also suggests a business rather than a hobby.

Let’s say you didn’t declare the $2,000 income from your startup in your first year. Next year, you make $5,000 from your startup. What could happen is that the ATO audits the publisher and discovers the unclaimed $2,000 invoice. The ATO then decides to audit you, at which point you’ll have a hard time arguing that the $2,000 was from a hobby when you continued to generate income from the same activity the following year. The resulting ATO assessment could see you paying back tax money from previous years on top of an unpleasant ATO penalty.

If you’re not sure, your best course of action is disclosing the income and being above board with the ATO. It’s better to focus your energy on growing a legitimate business for yourself than losing sleep over a possible ATO audit.

How to plan ahead for your tax bill

In the first year of operating an income-earning side business, you won’t be set up to pay quarterly tax instalments, which means you’ll most likely have tax owing after the ATO calculates the tax payable on your total income.

The ATO adds the income from your main salary and side business (not to mention any other revenue earning streams like investment properties and shares) to determine the applicable tax rate, and if the latter pushes you into a higher tax bracket, you’ll also be taxed at a higher percentage rate.

To avoid a nasty bill shock at the end of the financial year, we recommend you plan in advance and set aside the right amount of money every month to cover your tax bill.

To figure out how much tax you should set aside, you’ll need to estimate how much money you’ll earn for the year from both jobs. This will tell you which income tax rates apply, and you can work backwards to find out how much money to set aside. A qualified accountant can help you with this if you’re not confident in your projections.

If you earned $80,000 from your full-time job, you will have had roughly $19,200 withheld as tax by your employer. This works out to be a tax percentage of about 24 per cent.

If you also earned $40,000 from your startup and paid no tax on that income during the year, then your total income for the year would be $120,000, which pushes you into a higher tax bracket.

This means that not only will you have tax owing for your second business, but you’ll also have to pay additional taxes for your full-time job.

The total tax you’d owe for the year would be $34,747, which means you’ll need to pay an extra $15,547 in tax for the year. To plan for this debt in advance, you’ll need to set aside 38.9 per cent of any money you earn from the side business.

The good news is that you won’t have to deal with an annual tax bill from your second year of owning a startup. That’s because the ATO will have become aware that you’re earning additional taxable income, and it will start sending you quarterly tax instalments. The bad news is that you’ll still have to get into the habit of setting aside money every month to pay that quarterly tax bill.

Tax deductions for your startup

Have you already been lumped with a huge tax bill due to your secondary income? Make sure that you’ve claimed all of the tax deductions that are relevant to either job.

Generally, any expenses you incur that are directly related to earning your income can be claimed as a tax deduction. For startups, this includes meals and travel, work tools (computer, monitor, keyboard, etc) and home office costs.

However, some of these expenses – such as electricity, Internet and your computer – might be both work-related and for private/domestic use. For these sorts of expenses, you can only claim a tax deduction for the work-related portion.

If you’re using your own car for both domestic and startup use, you can claim the business portion of their car expenses (based on logbook records of the car’s usage), which can include “extra” costs like vehicle depreciation, fuel, servicing, insurance and registration.

About the Author:

Liz Russell is a senior tax agent with, Australia’s number one online tax return service. Specialising in online taxes since 1998, enables most individuals to complete their tax return in under 15 minutes. Each tax return is checked twice by qualified accountants for accuracy and extra deductions prior to lodgment, offering a higher level of support and expertise than at most tax agent offices plus the time-saving convenience of a 100% online service.