Contents
- Pet-sitting a hobby or a business?
- What do I do if I have a pet-sitting business?
- Taxable income vs tax loss
- How do tax deductions work?
- What tax deductions can be claimed for a pet-sitting business?
As a pet sitter in Australia, you need to be aware of any income tax obligations you might have.
The first issue you should consider is whether your pet sitting is a hobby or a business. If it’s a hobby, then you won’t have any tax payment or reporting obligations whatsoever.
Pet-sitting a hobby or a business?
There is no single factor that determines if you’re in business, but according to the ATO, some of the factors you need to consider include whether:
- you’ve decided to start a business and have done something about it to operate in a businesslike manner, such as registering a business name or obtaining an Australian Business Number (ABN)
- you intend to make a profit – or genuinely believe you will make a profit from the activity – even if you are unlikely to do so in the short term
- you repeat similar types of activities
- the size or scale of your activity is consistent with other businesses in your industry
- your activity is planned, organised and carried out in a businesslike manner. This may include keeping business records and account books, having a separate business bank account, operating from business premises, having licenses or qualifications, or having a registered business name
Many people find this guidance confusing. The ATO admits the factors listed are not a complete list.
What other factors could apply then? What if some of the listed factors apply, but not all? For example:
- what if you get an ABN but don’t carry out your activities in a businesslike manner?
- how do you determine whether the size or scale of your activity is consistent with other businesses in your industry when there is no official information publicly available?
You can try calling the ATO for clarification, but often they will essentially repeat the guidelines on their website. Or you can end up with multiple opinions from different ATO staff if you phone them multiple times.
If you’re unsure whether your pet sitting is a hobby or a business, it’s best to seek the advice of a tax accountant that is experienced in this area.
Remember, if your pet sitting can be classed as a hobby, then you won’t have any tax payment or reporting obligations whatsoever – enjoy your tax-free income!
I have a pet-setting business: What do i do next?
If you have a pet sitting business, you need to:
- apply for an ABN if you don’t already have one
- lodge an income tax return to report your pet-sitting income and expenses for the financial year (1 July to 30 June)
It’s not likely you’ll need to register for Goods and Services Tax (GST). You’re only required to register for GST if your pet-sitting income exceeds $75,000 per year. Other income you may have such as wages/salary, investment income, and even other business income is not included with your pet-sitting income in determining whether you’ve exceeded the $75,000 threshold.
You can still register for GST if your pet-sitting income is less than $75,000, but you’ll usually be worse off. Although you can claim GST on expenses if you’re GST registered, you’ll have to charge GST on your invoices. Since your income will normally exceed your expenses, you would end up paying more GST than you claim back.
Pet setting business: Taxable income vs tax loss
Taxable income
You may pay tax on any taxable income, which is the amount by which your pet-sitting income exceeds your tax-deductible pet-sitting expenses. How much tax you pay depends on how much (if any) income you have from other sources, such as salary/wages or investments.
Although the tax-free threshold is currently $18,200, the effective tax-free threshold is $20,542. This is because a low-income tax offset effectively increases the threshold.
If your total taxable income (including your pet-sitting net income) is less than $20,542, you won’t pay any tax. If your total taxable income exceeds $20,542, you’ll pay tax at these income tax rates (but you should add 2% to these tax rates as they don’t include the Medicare levy of 2%, which is effectively a tax).
If you qualify for the seniors and pensioners tax offset, your effective tax-free threshold is currently $32,279 if you are single, or $28,974 each as a couple.
Taxable loss
If your pet-sitting expenses exceed your pet-sitting income, the result is a tax loss. You may be able to use this loss as a tax deduction to reduce your tax payable on income from other sources, such as salary/wages or investments. To do so, you must satisfy one of the non commercial loss tests.
The most common non commercial loss test is the assessable income test. To pass the assessable income test, your pet-sitting income for the financial year must be at least $20,000.
The second most common test is the profits test. Your pet-sitting business will pass the profits test if it has made a taxable profit in three out of the past five years (including the current financial year).
If you don’t pass any of the non commercial loss tests, you can defer your loss for use in a later year. If your pet-sitting business makes a profit in the following year, you can offset some or all of the deferred loss against this profit, up to the amount of your profit. There is no time limit on how long you can defer your losses.
How do tax deductions work?
It’s important to understand that you don’t get back the whole amount of a tax deduction as a tax refund. You will only get back a percentage, which equals your marginal tax rate times the deduction.
For example, let’s say your marginal tax rate (including Medicare levy) is 34.5%. If you earn $1,000 from your pet-sitting business and have no tax deductions, you will pay 34.5% x $1,000, which results in $345 tax payable.
If you have $200 worth of tax deductions, your net taxable income will be $1,000 – $200 = $800. Your tax payable would then be 34.5% x $800, which is $276.
Before deductions, you had $345 tax payable. After deductions, you have $276 tax payable. $345 – $276 = a $69 reduction in tax.
So essentially, you are no longer paying 34.5% tax ($69) on this $200, because your taxable income has been reduced by $200.
What tax deductions can be claimed for a pet-sitting business?
Some of the most common expenses you may be able to claim are listed below. Note – if you use items partly for your pet-sitting business and partly for other purposes, you should apportion your claim on a reasonable basis.
Supplies and equipment
You can claim things like grooming equipment, dog and cat food, squeaky toys, leashes, kitty litter and the role of plastic dog litter bags you use for your client’s pets. If your service includes dog-walking, you may be able to claim some or all of what you spend on non-slip or protective footwear, as well as rain gear such as umbrellas and raincoats.
Car
Offering a pick-up and drop-off service for pets may be part of the services you offer as a pet sitter. If so, keep a note of the kilometres you travel. If you use your car to shop for pet supplies and the equipment necessary for running your pet-sitting business, this travel is also claimable.
There are two ways of claiming car expenses – the cents per kilometre method or the logbook method.
Cents per kilometre method
Under this method:
- the tax deduction is cents per kilometre
- you can claim a maximum of 5,000 business kilometres per car
- you don’t need written evidence, but in the event of an ATO audit, you need to be able to show how you worked out your business kilometres
Logbook method
Under this method:
- your claim is based on the business use % (vs private use %) of the expenses for your car
- expenses include running costs such as fuel, maintenance, insurance, depreciation on the cost of the car, and the interest expense on any car finance
- to work out your business-use percentage, you need to keep a logbook of all your car travel for a minimum continuous period of 12 weeks
- you need written evidence for all other expenses for your car
Which method is best?
If your pet-sitting business travel is less than 5,000 kilometres a year (which is the case for most pet sitters) then usually the cents per kilometre method works out best.
For more detailed information about car expenses, see our Car Tax Deductions article.
Home expenses
You may be able to claim a portion of your household bills, such as gas, water, electricity, mowing the lawn, or rent. Your claim must be calculated on a reasonable basis. If you’re unsure what is a reasonable amount to claim, you can check our Work From Home article and discuss it with a tax accountant. They’ll help you work out how much you might be able to claim.
Advertising
Expenditure to promote your pet-sitting business is claimable. This can include business cards, flyers, online or newspaper ads, or even clothing with your business logo on it.
Internet and phone bills
You can claim a business-related portion of your internet and phone costs. According to the ATO, you need to keep records for a four-week representative period in each income year to claim a deduction of more than $50. These records may include diary entries, electronic records and bills.
Essentially your phone business use % is based on the number of business calls made vs other calls made during these four weeks. You then multiply your business use % by your total yearly expenditure to calculate the amount you can claim as a tax deduction. For the internet, you could use hours worked for business use vs private use to calculate your business use %.
Computer/phone/tablet
A computer or tablet device (or even a phone handset purchased outright) can be deducted or depreciated according to its business use %. See our depreciation article for further details on tax depreciation.
Courses and training
If you attend any pet-care seminars or conferences, you may be able to claim a deduction for the cost of the seminar plus travel expenses (such as flights and accommodation). Subscriptions to pet-care magazines or websites may also be deductible. Remember (as with many tax deductions) that if the expenses are not solely related to your pet-sitting business, you’ll need to adjust your claim for any private use. See our Self Education Expenses article for further information.
Bookkeeping and tax
Keeping good business records will save you time and hassle in the long run. It will also help you to avoid forgetting tax deductions you may be eligible to claim. If you use an accountant, normally they’ll charge you less if your records are well organised.
Using cloud-based accounting software such as Xero, MYOB or QuickBooks can make life easier (not always though – sometimes it can make record-keeping more complicated than it needs to be). If you do use online accounting software, the cost of the monthly subscription is tax-deductible. If you engage an accountant to complete your tax return, their fee is also tax-deductible.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.