Starting a side hustle might be the worst financial decision you make in 2025. Not because it won’t make money, but because without proper tax planning, that extra income could cost you more than it’s worth.
Every year, thousands of Australians open their email to find a message from the ATO that makes their stomach drop. The subject line mentions something about a tax audit, and suddenly that cash-only side business doesn’t feel quite so clever. What these enterprising Aussies discover is that success can be expensive, especially when you haven’t planned for your side hustle’s tax obligations.
Side hustles have become the modern answer to stagnant wages and rising living costs. While the internet might suggest you need to wake up at 4 am, survive on protein shakes and Gary Vee quotes, and transform your garage into a drop-shipping warehouse to earn a consistent side income, the reality is far more reasonable.
The Reality of Starting a Side Hustle in 2025
A well-planned side business can provide extra income, professional development, and creative fulfilment—all without demanding your sanity or your social life as sacrifices.
Here’s the annoying part, though: earning extra cash is only half the equation. Without proper financial management, particularly around your tax obligations, your brilliant side hustle could turn into an administrative nightmare. The ATO tends to take a dim view of “experimental” accounting. While they appreciate creativity in business, they’re traditionalists when it comes to arithmetic.
That’s why we’ve created this comprehensive guide to keep you on the right side of the ledger. Below, we walk you through everything you need to know about the tax implications of your side hustle. We’ll cover:
- The distinction between hobbies and businesses
- Your side hustle tax obligations
- The best record-keeping practices
- Tax deductions you might be missing
- Smart financial management tips
- And when to consider bringing in professional help
By the time you finish reading, you’ll understand how to structure your side hustle for tax efficiency, maintain proper records without drowning in paperwork, and ensure your extra income actually stays extra.
Hobby or Business: What’s the Difference?
It starts innocently enough. A few design projects for friends. Some weekend consulting work. Maybe an online store selling your handmade creations. Before you know it, you’re running a legitimate business from your spare room—except your tax setup still looks like you’re dabbling in a hobby, and that’s where things can get complicated.
The Hobby Income Threshold
Many side hustlers ask about a specific income threshold that transforms a hobby into a business. The reality? There isn’t one. The ATO keeps these definitions fluid, focusing instead on the nature and intent of your activities rather than specific dollar amounts. This flexibility helps them assess each case on its merits, but it can also leave entrepreneurs in a grey area.
The ATO uses several indicators to determine whether your activity is a business. Here are some questions to ask that will help you figure out whether you meet their definition of a business or a hobby:
Business Structure and Operations
- Do you operate in a repeatable, organised way with records and processes?
- Do you plan your activity in a businesslike way, with budgets and forecasts?
- Do you run your venture similarly to other businesses in your industry?
- Do you operate from a business premises or dedicated space?
Financial Aspects
- Do you actively try to make a profit, rather than just doing it for pleasure?
- Do you make regular or repeated sales?
- Do you sell at market rates rather than just covering costs?
- Do you have an operation comparable in size to other businesses?
Professional Elements
- Do you advertise or promote your products/services?
- Do you use a registered business name and business-specific bank account?
- Do you have appropriate licenses, registrations, or insurance?
- Do you have inventory or assets related to the activity?
- Do you have the licenses, qualifications, or skills related to the activity?
You don’t need to answer ‘yes’ to all of these questions to be considered a business. However, the more times you say ‘yes’, the more likely it is that you’re operating a business rather than a hobby.
The toughest part is that these things can shift over time. You might start selling homemade jewellery as a creative outlet, but when you’re reinvesting profits, maintaining inventory, and developing marketing strategies, you’ve likely fallen into business territory.
The Real Hobby Threshold: What You Do, Not What You Earn
The ATO’s intentionally broad definition can create uncertainty, particularly when you’re in the transition phase between hobby and business. Given that the tax implications are significant—affecting everything from GST obligations to tax deduction options—this isn’t a decision to make lightly.
If you’re unsure where your side hustle falls, consider consulting a tax professional. While it might seem like an unnecessary expense when you’re just starting out, it’s considerably less costly than having to retroactively correct your tax status.
Think your side hustle is too small for the ATO to notice? The rise of digital payments and automated reporting systems means even the smallest ventures are now visible to tax authorities. In 2025, slipping under the radar has jumped from risky to practically impossible.
A qualified accountant can assess your specific situation, help you understand your obligations, and ensure you’re set up correctly from the start. They can also advise on when and how to transition your tax arrangements as your venture grows.
Side Hustle Tax Obligations
If you’ve established that your side hustle qualifies as a business, several tax obligations will kick in. While this probably isn’t the most exciting news you’ve heard all day, there is a silver lining. We’ll get to that after we cover all the essentials you’ll need to add to your to-do list.
Australian Business Number (ABN)
The first step to nailing side hustles taxes is to get an ABN. This 11-digit number becomes your business identifier for all dealings with other businesses and the government. Without one, other businesses must withhold the top tax rate for all payments made to you. Ouch.
Thankfully, applying for an ABN is nice and easy. You can do so online via the Australian Business Register (ABR). If you’re confused about what business structure to use or have any other questions about your ABN application, we recommend speaking with your accountant. ITP’s accountants offer free year-round tax advice to our clients, and we’re always happy to help with matters like this.
Income Tax
That extra income from your side hustle? It needs to be declared on your personal tax return. The ATO combines it with your regular salary, and this could push you into a higher tax bracket.
A common rookie mistake is not setting aside money from side hustle earnings to cover taxes. Make this mistake, and you may end up with an unwelcome surprise come tax time. However, if you calculate your estimated taxes and set money aside from your earnings, you’ll be all set to cover what you owe.
Goods and Services Tax (GST)
GST registration becomes mandatory once your business turnover reaches $75,000 in a 12-month period. Even if you’re below this threshold, voluntary registration might make sense if you deal primarily with other businesses.
Again, if you’re unsure what you should do here, it’s a good idea to speak to a certified practising accountant.
Record Keeping
The ATO expects you to maintain records of:
- All income and expenses
- Bank statements
- Tax invoices for business-related purchases
- Contracts and agreements
- Details of any assets purchased or sold
You must keep these records for five years from whichever comes last: when you created them, when you received them, or when you completed the transactions they relate to.
Deductions: The Silver Lining
Though getting bumped up from a hobby to a side hustle does come with extra tax rules to follow and obligations to fulfil, you do get some benefits. Along with higher profits, tax deductions are probably the juiciest.
Many of the expenses relating to your side hustle will be tax-deductible. If you like the idea of reducing your overall tax burden, here are the expense categories you’ll need to pay close attention to:
Home Office Expenses
Working from home? You might be able to claim:
- A portion of your electricity and internet bills
- Home office equipment and furniture
- Phone expenses related to business calls
- Decline in value (depreciation) of office equipment
The ATO offers two methods for calculating home office expenses.
The fixed rate method allows you to claim 67 cents per work hour for things like heating, cooling, lighting, and furniture decline in value.
The actual cost method, as the name suggests, involves claiming the precise expenses incurred.
If you’re struggling to figure out which method would be best for you, or if the mere thought of doing all these calculations gives you heart palpitations, we’re here to help. ITP’s accountants love figuring out the most tax-efficient methods for each client. Give us a call or book an appointment online to get the ball rolling.
Vehicle Expenses
Using your car for your side business? Keep a logbook for 12 weeks to establish your business use percentage. You can then claim things like:
- Fuel and oil
- Registration and insurance
- Repairs and servicing
- Decline in value
- Lease payments (if applicable)
Other Common Deductions
The list of potential deductions stretches further than your average Bunnings receipt. You could claim:
- Professional development and training costs
- Marketing and advertising expenses
- Business insurance
- Professional memberships and subscriptions
- Bank fees on business accounts
- Software subscriptions and tools
Digital Platforms and the Sharing Economy
Side hustles conducted through platforms like Uber, Airtasker, or Airbnb require special attention. These platforms often provide annual tax summaries, but you’re responsible for:
- Keeping track of expenses
- Understanding what income is reportable
- Managing GST obligations (particularly relevant for ride-share services)
- Maintaining records of all transactions
Pro tax tip: The ATO receives data directly from many of these platforms, so accuracy in reporting is crucial.
Smart Financial Management
Running a profitable side hustle takes a careful blend of financial discipline, strategic planning, and efficient systems. Want to know how to keep your financial management sharp without letting it consume your weekends?
Consider implementing the following:
Separate Bank Accounts
This separation of funds does double duty: it curbs the urge to dip into business money for personal purchases, and it creates the kind of pristine financial records that make tax audits straightforward. Plus, your accountant won’t develop a mysterious eye twitch when reviewing your records.
Consider opening both a business transaction account and a dedicated tax savings account. Transfer a percentage of each payment received into your tax account based on your expected tax rate. That way, the ATO’s quarterly visits to your bank account won’t trigger mild panic attacks.
Payment Systems
Modern payment systems have evolved well beyond the basic EFTPOS terminal. Look for platforms that offer:
- Automated reconciliation with your accounting software
- Customer payment tracking and receipt management
- Integration with major e-commerce platforms
- Detailed transaction analytics and reporting
- Multi-currency support for international clients (especially helpful for digital nomads)
- Subscription and recurring payment capabilities
The right payment system can upgrade your cash flow management from a monthly ordeal into a background process that practically runs itself.
Accounting Software
Spreadsheets are great for tracking your spending habits. But proper accounting software is a seriously good idea if you’ve just discovered your side hustle hobby is more of a side hustle business.
The best platforms offer sophisticated features that can save you from drowning in administrative tasks. Here are some of our favourite features to look out for when you’re comparing software:
Core Features
- Automatic bank feeds that sync transactions daily
- Smart invoice generation with customisable templates
- Real-time expense tracking with receipt capture
- Automated GST calculation and reporting
- Basic financial reporting and forecasting
Advanced Capabilities
- Project time tracking and billing
- Inventory management
- Payroll processing if you hire contractors
- Multi-currency accounting
- Budget tracking and variance analysis
- Cash flow forecasting
- Tax payment scheduling
- Custom financial dashboards
Integration Benefits
- Connection with payment platforms
- E-commerce platform sync
- Bank feed automation
- Tax lodgment preparation
- Mobile app access for on-the-go management
Of course, you probably won’t need all these features. A freelance graphic designer will need different functions than someone running an e-commerce store. So compare a few options and select software that matches your business type.
The goal is to automate the routine accounting tasks that drag you down while still maintaining your personal visibility over your financial position.
Professional Help: When to Get It
Investing in professional advice might seem like overkill if you’re running a small side hustle. But it can save you a whole lot of money and stress in the long run. Consider consulting an accountant when:
- Your turnover approaches the GST threshold
- You’re unsure about whether you qualify for certain deductions
- Your business structure needs review
- You employ others (including freelancers and contractors) in your business
- You’re planning significant business investments
Finding Side Hustle Success in 2025 and Beyond
The 2025 side hustle scene is filled with exciting possibilities, but success requires more than just a great idea. One of the smartest things you can do as your side hustle grows is to stay informed about your changing tax obligations.
What worked three years ago might not fly now, and what got you by when operating a small hobby business might need revision as your venture expands. These administrative aspects might seem daunting, but they’re far easier to handle when addressed early and systematically.The ATO website offers thorough resources and detailed guidance for small businesses. But if you want specific advice about your situation, you can’t beat the personalised guidance of a registered tax professional. Get the fundamentals right, and you can build a successful side hustle without sacrificing your garage space, your sleep, or your sanity.