Side hustles, moonlighting or polyjobbing is not a new trend. There is much reported about what the law says about side hustles and moonlighting in South Africa. While the information from these deep dives into the labour legislation surrounding side hustles are well worth noting, there is more to consider than just what your employer might say, such as your side hustle and tax implications.
SARS and your Side Hustle
Taxpayers should be aware that side hustles do have a tax implication. Just because the income does not form part of your normal remuneration as employee, does not mean that it is exempt from tax.
The definition of gross income, as contained in Section 1 of the Income Tax Act, 1962 (“ITAct”) is very specific about what constitutes income. Running your side hustle from your home has an impact on your ability to claim allowances and deductions when disposing of your primary residence. It is not just all bad news though, there are allowances and deductions you can claim – if it is in the production of income.
Let’s create a scenario: Ms J is the financial manager of Books Limited – a chain of stationery shops. Ms J is also an avid baker with dreams of entering the Great South African Bake-off. But while Ms J is practicing her craft, she needs to sell the cakes that she bakes. Ms J decided to trade in her own name, and most of her transactions are cash. She also rents small commercial kitchen space where she can do her baking away from her hungry family.
In this scenario, Ms J is both an employee and sole proprietor. And while her employer is deducting PAYE and declaring her income (through an IRP5) to SARS, SARS has no knowledge of her side hustle. This means that Ms J should declare her baking income (and related expenses) to SARS. This is usually done in the form of financial statements. And while Ms J might contend that it is not a true business (she is just practicing for the competition), it still falls under the definition of trade in the ITAct. Ms J will, however, be allowed to claim special deductions and allowances (where applicable) which, along with her normal expenses, have a big impact on how much tax she should actually pay. This would also mean that Ms J might fall under the definition of a provisional taxpayer, and if the definition has been met, will require Ms J to submit and pay provisional tax to SARS.
The same would apply to the architect that runs a side hustle as family photographer, or even the pensioner selling their home made jams and wooden toys at the flea market on Sundays.
These taxpayers have the option to register for turnover tax in line with the 6th Schedule of the ITAct – it is an easier option if admin isn’t your strong suite as you then only need to account for your turnover (income). But, turnover tax also has its drawbacks – no losses are accounted for, and no expenses or allowances can be claimed as deductions.
Side hustles and CGT
Side hustles done from your primary residence do have an impact your ability to claim allowances and deductions when you sell your home. These costs and allowances now must be apportioned, and if a taxpayer is not careful, this might trip them up!
But how will SARS know?
This is a very common question that taxpayers ask themselves. “How would SARS know? There’s no reporting of an IRP5, or financial statements – unless I submit the information”.
Well, that is true to some extent – but it is not just unethical and illegal – it has a ripple effect on society at large. And also, let’s be honest – there is a good chance you will get caught.
Chapter 5 of the Tax Administration Act, 2011 (“TAAct”), grants SARS broad powers to gather information about taxpayers to ensure the various tax Laws are complied with. Many taxpayers have seen some of these powers in action when SARS started questioning deposits in their bank accounts that did not tie up to the other data SARS had on hand. SARS is also expected to further increase their information gathering as data becomes the biggest commodity for the revenue service.
When your employer approves your side hustle, your obligations don’t end. Trying to hide from SARS will not end well for non-compliant taxpayers. The best approach taxpayers can have in this regard is to meet with a suitably qualified financial and tax professional. These professionals are well trained, mentored and guided to ensure that the advice they give their clients is of the highest standard.
