Tax treatment for income earned
Scenario:
I work full-time in sales. For the past three years, I have pursued my hobby on weekends as a make-up artist for weddings and other special occasions. Generally, I receive tips and gifts of champagne and flowers for my services provided but do not include any income or deductions relating to my make-up activities in my tax return.
At the same time, I have had over 200,000 followers on YouTube where I post videos about make-up tutorials and tips on my channel. I now earn about $2,000 each month from YouTube. I am now ready to leave my day job and work full-time as a YouTuber.
Could you advise me on the tax treatment for the income I earned through my YouTube channel?
Explanation:
To determine whether the revenue you received from your channel is income received from carrying on a business or income from a hobby is important, because the income received from pursuing a hobby is not considered assessable income.
There are no statutory rules or case law for determining whether your social media activities amount to the carrying on of a business. However, the courts have however developed a series of indicators that can be applied (Taxation Ruling TR 97/11) and these should apply regardless of the type of business being conducted:
- whether the activity has a significant commercial purpose or character
- whether the taxpayer has more than just an intention to engage in business
- whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity.
- whether there are regularity and repetition of the activity
- whether the activity is of the same kind, and carried on in a similar manner, to that of ordinary trade in that line of business
- whether the activity is planned, organised and carried on in businesslike manner such that it is described as making a profit, the size, scale and permanency of the activity, and
- whether the activity is better described as a hobby, a form of recreation or sporting activity.
No one indicator is decisive in determining whether a business exists (Evans FC of T 89 ATC 4540). The indicators must be considered in combination and as a whole.
Based on the nature of your channel and video posting, you could be considered carrying on a business as a professional artist (Taxation Ruling TR 2005/1). A professional artist is a person who carries on activities of "professional arts business” (ITAA97 s 35-10(5)) as either:
- (a) an author of a literary, dramatic, musical or artistic work
- (b) a performing artist, or
- (c) a production associate
TR 2005/1 states that the nature of art activity means that arts businesses typically have different characteristics to those found in other businesses. A large part of being in business as a professional artist may involve activities directed towards reputation building and audience/market creation This would appear to be relevant when considering many online social media type revenue streams.
The usual indicators described above still apply to these artistic businesses. However, with the high risk associated with arts businesses, profit may not be an appropriate factor (TR 2005/1) and other indicators may need to be considered such as Repetition, activities of the same kind, and size and scale.
When you started receiving monthly payments from YouTube would be the point in time when you had the business indicators of repetition, size, scale, and business records. It would be at the time that your activities transgressed from being a hobby and become a business. At this juncture, you would be required to include the money from your YouTube activities as assessable income in your tax return.
Once you are carrying on a business, the earnings or proceeds from your business are to be included in your assessable income, and deductions will be allowable for all expenses of a revenue nature incurred in the course of deriving that income. If the online business is going well, then you must include the taxable income from the business in your tax return along with your salary and wages from your original job.