David Walker - Shorewalker DMS
We call it “the sharing economy” – activities like Airbnb, Uber and Deliveroo, where people use an app or website to arrange some sort of service. It’s a dramatic change in the way business is done.
It’s also attracting large numbers of people. Australia is one of Airbnb’s biggest markets; as of January 2017, almost one in five Australians over age 18 have an Airbnb account, according to media reports. Uber reportedly has more than 50,000 drivers across the country.
And it’s also a little misnamed. For all the talk of “sharing”, many of these new services are simply delivering something desirable for a fee. They’re normal commercial activity, done a little differently from the services they replace, by people who are not employees.
The result: thousands of people are for the first time this financial year becoming small businesses with tax obligations.
Sharing brings new users to accounting
For accountants and bookkeepers, the influx of new small businesses in the sharing economy is both opportunity and challenge. Some of these people are former salaried workers who don’t always realise how small business works. Many think of sharing-economy services as “money on the side” without realising that tax rules still apply.
Chartered Accountants Australia and New Zealand (CAANZ) underlined this problem in a letter to a federal government task force in February. It suggested that education and “pushing information” might help to prevent people “inadvertently participating in the black economy – especially through the sharing economy”.
Many people understand there are tax implications to ride-sharing or home-sharing, but struggle to determine what they are. Australian forums for Airbnb and Uber feature a number of requests for tax guidance, including advice on finding accountants.
An additional complication, as CAANZ pointed out in its letter, is that sharing-economy services often convert what have been private-use assets – such as houses and cars – into assets with a mix of private and business uses. Not only does this present tax complications, but it can fog the picture of whether an activity like using the family vehicle for Uber driving actually makes any money in the long run.
Jess Murray is a CPA and Xero certified advisor who runs both a general tax practice, RocketTax, and a specialist tax service for Uber drivers called DriveTax. More and more Uber drivers are now realising they must pay tax, she says. But many of her clients have “tiny little businesses” with accounts on spreadsheets or simply a shoebox full of receipts. They often struggle with concepts like GST. “It’s a lot more complicated than what they probably thought they were getting into,” she says.
Murray sees many small business owners taking up Uber driving to supplement their existing business’s income. This group is the one most likely to use accounting software. However, Murray notes that their Uber driving can complicate their tax situation. Such drivers are required to register for GST – and that registration, she says, will cover their existing business as well as their Uber activity.
The ATO has signalled it understands these issues, but it also wants sharing-economy participants to pay their tax. “The sharing economy and online selling have changed the way we do a lot of things,” an ATO spokesperson told Xero, “but it hasn’t changed tax obligations.”
Accounting for all the costs
Careful accounting is particularly important because there are indications that many people new to the activity do not understand how little profit they may be making after expenses, depreciation and tax.
One property lobbying organisation, the NSW-based Our Strata Community, Our Choice, says its calculations show people who rent out their houses on Airbnb stand to make, on average, less than half of what they charge, after deducting costs such as cleaning, maintenance and repairs.
Uber drivers must cover any costs such as car loans or lease repayments, insurance, petrol, auto servicing, mobile phone, parking and any cleaning costs, as well as passenger extras such a bottled water.
Accommodation’s tax rules
The ATO has issued guidance on providing accommodation through platforms such as Airbnb or Stayz. It stresses the need for property owners to keep records of income and expenses just as with any rental property.
Most people making money from Airbnb are letting out their house while they’re absent, or renting out a couple of rooms. The ATO has said people renting out “commercial residential properties” have different income tax and GST obligations to the typical casual Airbnb home-sharer.
The ATO notes that GST isn’t payable on residential rent from typical home-sharing accommodation, and GST credits can’t be claimed.
Home-sharing property owners can claim the same income-tax deductions that would apply to a rental property, the ATO says, including fees and commissions charged by the platform, as well as properly calculated portions of utility payments, council rates, cleaning and maintenance costs, depreciation on furnishings and equipment, and mortgage interest.
Owners will need to keep records of when a room was rented in order to correctly claim expenses.
Finally, renting out part of a house will raise all the capital-gains tax issues raised by any home used to produce income. The ATO has noted that home-sharers may also need to pay capital gains tax when they sell the house or unit.
The ATO announced in late 2016 that it would be mounting a data-matching program to make sure ride-sharing drivers pay tax.
Ride-sharing’s tax rules
The ATO has ruled that all UberX drivers must register for GST, even those earning less than $75,000 per year. Uber challenged this ruling in Federal Court and lost. At the time of writing, Uber was still considering an appeal. In the interim, it has advised ride-sharing partners to remit GST to the ATO.
Since the Federal Court action, the ATO has said it believes ride-sharing “is taxi travel.” It says ride-sharing drivers must have an ABN, pay GST on fares, and lodge activity statements. They can also claim GST credits.
Many Uber drivers have been particularly upset to find that GST and income tax is payable on the full amount of the fare, says DriveTax’s Jess Murray. Uber deducts a fee before paying drivers, she says, and that fee is tax-deductible. But because Uber is a foreign company, drivers cannot claim a GST credit for the fee. “It’s really hard for a lot of them to get their heads around,” she says. Some feel that they are “paying Uber’s tax for them”.
When ride-sharing drivers pay income tax, deductions are likely to include the normal costs cited above, such as car loan or lease payments, insurance, petrol, car servicing, mobile phone costs, parking and any cleaning costs, as well as passenger extras. Some of these costs may require a diary or logbook, the ATO says.
The ATO also notes that as with home-sharing, ride-sharing drivers will need to keep records of expenses in order to claim them as deductions.
ATO’s Uber data-matching
The ATO announced in late 2016 that it would be mounting a data-matching program to make sure ride-sharing drivers pay tax. “It is estimated we will obtain records relating to up to 60,000 individuals,” the ATO said in a gazette notice. It said it would ask financial institutions for details of all payments made to drivers from the accounts of “a ride sourcing facilitator” – meaning Uber, Lyft and other ride-sharing firms.
The ATO has even detailed the data it expects to have: payee account names, BSBs and account numbers, and payment dates and amounts. It will match that data with “certain sections of ATO data holdings” to find out who may not be paying the taxes they owe.
The ATO says it will initially use the data-matching results “to identify and inform ride sourcing providers of their taxation obligations as part of an information and education campaign.” It also says it wants to understand how ride-sharing drivers comply (or don’t comply) with the tax law. But it adds that it “may also initiate compliance action based on the data we acquire”.
Both the 2016-17 and 2017-18 tax years will be targeted.
The rules may change again
There’s a real possibility that tax rules and other laws affecting these services could change soon. Uber has not announced an end to its legal battle with the ATO over GST. Meanwhile, policy debate continues over treatment of sharing-economy businesses. CAANZ suggested in February the federal government could set an earnings amount at which a business stopped being a hobby, and it also raised the idea of imposing withholding requirements on the overseas-based platform companies that run many sharing-economy services. A 2016 report from the Grattan Institute think-tank also suggested tightening tax rules on platform companies.
For more ideas on meeting end-of-financial-year challenges, visit www.xero.com/au/eofy