Introduction:
Social media marketing has been on the rise, and brands are eager to partner with influencers to promote their products - not only to a massive audience but to the right audience. The collaboration is a mutually beneficial scenario: influencers receive compensation (e.g. gifts, vouchers, and sometimes, all-expenses-paid vacations), and brands boost their sales and market their products to a large-scale audience. However, is everything influencers receive free? Even an all-expense-paid vacation?
The short answer is: Not really
Even if it is not monetary compensation, as long as it is considered an income, is taxable. Any income or profit generated from social media needs to be reported to the tax authorities when filing the individual tax return according to the Australian Tax Office (ATO).
Since the start of 2023, the ATO has placed influencers in the spotlight because many have surpassed their obligations of income generated from content creation or even going to the extent of spreading misleading tax information on TikTok.
Understanding the ATO's Concerns
The ATO started to target influencers because they often generate income through sponsorships, brand deals, and more, which is often difficult to keep track of. Not declaring taxes from the income you generate can lead to tax evasion because influencers might not know which obligations they have or, even worse, intentionally scam the ATO. Not declaring income for tax purposes can result in tax evasion, especially if influencers are unaware of their obligations or, worse yet, intentionally scamming the ATO.
Influencer marketing is a multi-billion-dollar industry, driving business growth and creating income opportunities for people who have dreamed of making money through social media. It boosts sales for businesses, stimulates economic activity, and leads to job creation in various sectors for everyone.
For influencers, this is a gray area, and sometimes get lost in the tax jungle, especially if they are earning small sums. However, this does not necessarily mean they have no tax obligations. According to the ATO, influencers are required to pay tax on income from sponsored content, affiliate marketing, ad revenue, product gifting, merchandise sales, and prize winnings.
Tax Obligations for Influencers
As mentioned above, influencers have specific tax obligations they need to be aware of. These include paying taxes on income from sponsored content, affiliate marketing, ad revenue, product gifting, merchandise sales, etc. Influencers also need to be aware of when their hobby activity cannot be considered a hobby anymore. As soon as their hobby starts becoming a business, it becomes crucial to maintain accurate financial records and if needed, seek professional tax advice to ensure compliance with tax regulations.
Hobby Income vs. Business Income
The ATO differentiates hobby income and business income based on how influencers are conducting their activity. Hobby income is generated from activities pursued for personal enjoyment and is typically not taxed if it has no intentions of generating profit or does not exceed a certain amount, which is usually quite low (around 600 AUD). In contrast, business income, which includes income earned by influencers, is subject to taxation. The ATO assesses various factors (e.g. the intent to generate profit and the regularity of income-generating activities), to determine whether income should be categorized as business income.
Keeping Financial Records, Receipts, and Gifts
Once you are considered to have a business income, engage in regular activity, and generate substantial income from your social media, the importance of keeping clear and correct financial records rises. This includes receipts, invoices, and records of all gifts, whether products or monetary. Proper record-keeping is essential for tracking income and expenses, ensuring accurate tax reporting, and complying with tax laws. It also provides evidence in the case of an audit and helps manage finances effectively. In contrast, not doing so, or even worse, listening to misleading advice from TikTok influencers, may lead to trouble with the ATO.
The TikTok scam
In early 2021, when TikTok was gaining worldwide popularity, there was misleading tax information spread from Australian influencers to their audience. The misleading information led to a large scale of individuals following this “tax advice”, which later resulted in a billion-dollar tax scam.
In early 2022, the ATO discovered taxpayers submitting fictitious business activity statements to claim false GST refunds. It was named “The TikTok scam” and involved influencers promoting deceptive investment schemes. The misinformation spread led to the billion-dollar tax fraud scheme where almost 60,000 people fraudulently claimed refunds for goods and services they never paid for. The scheme exploited the ease of obtaining an Australian Business Number (ABN) and the self-assessment system, which relies on taxpayers' honesty. Fraudsters created fake businesses, obtained ABNs, submitted fake expense reports, and claimed false refunds, resulting in over AUD 1.2 billion in fraudulent refunds.
This incident highlights how financial misinformation can be easily spread on social media platforms and the importance of influencers knowing their tax obligations before they start conducting such activities. This also emphasizes the importance of tax authorities, private businesses, and regulators in overseeing their domestic and international strategies to combat fraudulent tax activities and the spread of false information.
To help influencers mitigate the risk of misunderstanding the taxation of their activity, tax authorities could for instance publish more guidelines regarding income generated from social media and influencer marketing. The ATO has done this by publishing an article on tips for social media influencers, which can be found here.
Best Practices
While the life of an influencer may seem glamorous, there are important considerations they should be aware of before they start conducting their activity, such as registering for an ABN, keeping financial records, and if needed, seeking professional advice.
One of the initial steps an aspiring Australian influencer should take is to contact the ATO and discuss whether their business should be required to register for an ABN. An ABN is a unique identifier for a business, and it's a critical requirement for engaging in commercial activities within and outside the country. Registering for an ABN is a straightforward process that can be done online through the Australian Business Register (ABR) website. In an interview with the Australian News, ATO Assistant Commissioner Tim Loh explained that “sometimes it may be hard to distinguish if you are in a business or not and the ATO does not recognize all side income to be considered a business”. Therefore, it might be good to contact ATO and to check if an activity is considered to be a business and needs registration. It is also crucial for businesses to know the registered activity of the creators they are collaborating with. At Gigapay, we have made a guide on how to pay influencers in Australia.
Another important practice for influencers is to keep track of financial records (income and expenses) when they are working with companies. It is essential for any business, and being an influencer is no exception. It is also done to claim refunds on GST, legally, on actual purchases. This includes tracking revenue earned from collaborations, sponsorships, affiliate marketing, and any other sources of income. Similarly, expenses related to influencer activities, such as equipment, marketing costs, and professional development, should be documented.
What can we learn from this?
The recent spotlight on ATO's pursuit of influencers for potential tax fraud serves as a crucial reminder of the need for influencers to understand and follow their tax obligations. This is part of the increasing trend among global tax authorities seeking greater control and access to information on influencer income, which is exemplified by the rise of e-invoicing requirements in various markets. The collaborations between influencers and brands are thriving, and the ATO has illustrated how the complexities surrounding the taxation of influencer income have become the main focal point for tax authorities.
Influencers must be aware of their responsibilities, which include reporting income from various sources, such as sponsored content, affiliate marketing, ad revenue, merchandise sales as well as gifts and free travel. A crucial component in ensuring accurate taxation is distinguishing whether their influencer activities are considered a hobby or a business endeavor, and also to keep clear financial records. This is also important for influencers running businesses to know whether or not they can claim back GST, instead of following financial TikTok advice on social media, which can get them in trouble.
Staying informed before starting, engaging with tax authorities, and seeking professional advice when needed are critical steps to ensure their continued success as influencers while adhering to the law. The ATO's vigilance highlights the need for influencers to be proactive and informed in their financial practices, which ultimately builds trust and integrity between influencer marketing and taxation.
