ATO Draft Ruling Sets Out When a Side Hustle Becomes a Business

If you earn money outside your job, the ATO has set out how it decides whether that activity is a business, a hobby or something in between. The answer decides whether you can claim the costs, and whether a loss can cut the tax on your salary.

Draft Taxation Ruling TR 2026/D2 was issued on 16 October, and the ATO is taking comments until 27 November. It lands as more people earn from more than one place: the ABS counted 1,049,100 people holding more than one job in the June quarter, up 11% in a year. That counts second jobs rather than side businesses, but it shows how common extra income has become.

Why the label matters

Income from a business is assessable and the costs of earning it are generally deductible. A genuine hobby's receipts are generally not assessable, and its costs are not deductible. In between sits income from activities that are not a business, such as some side hustles, which the ATO says is generally still taxable.

Where the ATO draws the line

The ruling weighs seven indicators drawn from court decisions, including a commercial purpose, a purpose and prospect of profit, a business-like and systematic approach, size and scale, and repetition and regularity. No single one decides it.

Its examples are the most useful part. On the business side sit an electrician who starts taking her own customers and makes a small first-year loss on tools, licences and advertising; a jeweller who makes six or seven engagement rings a year, keeps a waiting list and invoices her customers; and a Christmas pop-up shop run six days a week from mid-October to mid-January. A day job does not stop an activity being a business, and neither does enjoying it.

On the other side sit one batch of stock sold online over eight weeks before the store closes, and a coffee cart with a business plan and savings but no licence, equipment or sales. A profit from a one-off sale can still be taxable.

The ATO also has more to check against. Since 1 July 2024, online platforms have reported their reportable transactions to it twice a year under the Sharing Economy Reporting Regime, a year after ride-sourcing and short-term accommodation platforms started. The ATO says it uses that data to find people who are not meeting their registration or lodgment obligations.

What to do now

If your side business is running at a loss, being in business is only the first hurdle. To deduct that loss against your salary this year, your income must be under $250,000 and the activity must pass one of four tests: at least $20,000 of assessable income from it, a profit in three of the past five years, $500,000 of real property used in it, or $100,000 of other qualifying assets. Otherwise the loss usually has to be deferred until the activity makes a profit, unless the Commissioner exercises discretion, and it is effectively forfeited if the activity stops.

For most new side businesses, the $20,000 income test is the reachable one, so track turnover against it from the first sale. Use a separate account and keep records as you go: anyone carrying on a business must keep records that explain every transaction relevant to tax. If you are opening a Christmas stall or pop-up, start the records on day one.

The ATO proposes that the final ruling apply to periods before and after it is issued. If you have been claiming costs or losses for something that looks more like the ruling's hobby examples, check that position with your tax agent before you lodge. Until the ruling is final, relying on the draft reasonably and in good faith protects you from interest and penalties if it turns out to be wrong, although the correct tax is still payable. Content creators, resellers and anyone else in the grey zone can comment by 27 November.

This article is general information only and is not financial advice.