In Short
- Most freelancers need an ABN because they are running a business, not just doing a hobby.
- If you earn over $75,000 a year, you must also register for GST, which requires an ABN.
- Freelancers are responsible for their own tax and super, so it is important to understand the difference between being a contractor and an employee.
Tips for Businesses
If you plan to work as a freelancer, register for an ABN before you start offering services. Make sure you understand your tax and legal obligations, including managing superannuation and insurance. Keep good records and consider consulting a professional for advice on setting up your freelance business properly.
Table of Contents
- What is a Freelancer?
- What is an ABN?
- Do I Need an ABN as a Freelancer?
- Exceptions and Considerations for ABN Requirements
- How Do I Obtain an ABN?
- Contractor vs Employee: What Freelancers Need to Know
- Key Differences
- Recent Legislative Changes
- Implications for Freelancers
- Key Takeaways
- Frequently Asked Questions
If you have decided to work as a freelancer, you will usually have more flexible hours and control over your work. However, before you start offering your goods or services, you will need to consider your legal obligations, which includes using an Australian Business Number (ABN). This article discusses the key legal issues to consider when setting up as a freelancer, including whether all freelancers need an ABN.
What is a Freelancer?
A freelancer is someone who is self-employed and usually offers goods or services to multiple clients at once.
A typical example is a freelance writer who may work for multiple clients, including magazines and news websites. Another example of freelancers are those who perform small, one-off tasks through online platforms like Airtasker. Here, community members can complete everyday tasks outsourced by users (e.g. assembling furniture or mowing the lawn).
Accordingly, with the increasing number of online marketplaces and platforms, whether someone is actually a freelancer (as opposed to an employee) will not always be clear cut.
If you are not sure if you are a freelancer, you should consider whether you:
- have control over when, where, and how you complete your work;
- receive payment on a project-by-project basis;
- supply your own equipment and tools to complete the work; and
- do not receive paid holidays or sick leave.
If you meet these requirements, you are likely a freelancer.
What is an ABN?
An ABN is a unique 11-digit number that the Australian Business Register issues to all businesses. An ABN identifies your business to the community and government. It also identifies your business to the Australian Taxation Office (ATO) when dealing with your tax obligations, such as claiming deductions for business expenses incurred in the financial year.
Continue reading this article below the formDo I Need an ABN as a Freelancer?
The short answer is yes. If you are or will be paid for your goods or services, then you will need an ABN to legally operate. This is on the basis that you are an individual running a business, as opposed to a hobby.
Accordingly, when you apply for an ABN, you will need to acknowledge that you meet or will meet the key characteristics of a business, including that you:
- source your own clients;
- invoice for your work and set your rate of pay;
- have a separate business bank account; and
- have your own business insurance, such as public liability and WorkCover.
So, you will likely need an ABN when you are, for example, a:
- freelance writer;
- driver for Uber; or
- delivery rider for Deliveroo.
Additionally, if you do not quote an ABN when you provide a good or service to another business, then they can legally withhold up to 47% of your payment.
Exceptions and Considerations for ABN Requirements
1. Hobby vs Business
The distinction between a hobby and a business is crucial when determining whether you need an ABN. This differentiation can be complex, so let us break it down:
Characteristics of a Hobby
- activity is done for personal enjoyment;
- there is no intention to make a profit;
- work is irregular or infrequent; and
- there is limited or no commercial organisation or system.
Characteristics of a Business
- activity is carried out with the intention of making a profit;
- there is a pattern of regular and repeated activities;
- the work is planned, organized, and carried out in a businesslike manner; and
- there is a commercial scale or character to the activities.
Key Considerations
- your intention in conducting the activity is crucial. if you intend to make a profit, it is likely a business;
- regular, repeated activities that generate income are more likely to be considered a business; and
- if you are marketing your services, keeping business records, or have a business plan, these suggest a business rather than a hobby.
Examples
- a graphic designer who occasionally creates logos for friends without charging might be considered a hobbyist; and
- if they start regularly taking on paid projects and marketing their services, it likely becomes a business requiring an ABN.
2. Income Threshold
It is a common misconception that there is a specific income threshold that determines whether you need an ABN. In reality, there is no specific dollar amount that automatically requires you to get an ABN. The need for an ABN is based on the nature of your activities rather than the amount you earn.
How Do I Obtain an ABN?
You can obtain an ABN at no cost by applying online through the Australian Business Register. If your application is successful, you will receive your 11-digit ABN immediately.
Contractor vs Employee: What Freelancers Need to Know
For freelancers in Australia, understanding the distinction between contractors and employees is crucial. This classification can significantly impact your rights, obligations, and how you operate your business.
Key Differences
| Key Differences | Contractors | Employees |
| Control and Independence | Generally have more control over how, when, and where they | Work under the direction and control of their employer |
| Payment Structure | Usually paid per project or task, they often submit invoices for their work. | Receive regular wages and are entitled to. |
| Equipment and Tools | Typically provide their own equipment and tools. | Usually, use the equipment provided by the employer |
| Risk | Bear the financial risk for their work, including fixing mistakes at their own expense. | The employer bears the financial risk of the employee’s work. |
| Leave Entitlements | Do not receive paid leave. | They are entitled to annual leave, sick leave, and other types of leave. |
| Tax Arrangements | Responsible for their own tax arrangements, including GST if applicable. | Have tax withheld by their employer. |
Recent Legislative Changes
As of August 26, 2024, new rules apply for determining whether a worker is a contractor or an employee in constitutionally covered businesses:
- Whole of Relationship Test:
- This test looks at the entire working relationship, not just the contract terms. It considers how the work is performed in practice.
- Start of Relationship Test:
- This applies to arrangements that began before August 26, 2024, focusing on what was initially agreed upon.
Implications for Freelancers
- as a contractor, you gain more flexibility but lose some of the security that comes with employment;
- operating as a contractor often means running your own business, which includes responsibilities like having an abn and managing your own taxes;
- as a contractor, you are responsible for your own superannuation contributions;
- contractors can work for multiple clients simultaneously, which is often a key feature of freelancing; and
- be aware of situations where an employer might misclassify you as a contractor to avoid employment obligations. this is illegal and has been a focus of recent legislative changes.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
Key Takeaways
If you are or will be a freelancer, you will need an ABN to legally operate. Freelancers are self-employed and offer goods or services usually to multiple clients at once. An ABN is a unique 11-digit number that you will mostly use when dealing with your tax obligations with the ATO. You can register for an ABN online through the Australian Business Register.
If you are making more than $75,000 per annum, then you must also register for GST, which will require an ABN.
If you have any questions, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Yes, most freelancers need an ABN because they are running a business, not just engaging in a hobby. If you offer goods or services for payment, set your rates, and invoice clients, you are considered a business. Without an ABN, other businesses may withhold 47% of your payments.
You can apply for an ABN online through the Australian Business Register. The application is free and is usually processed immediately. Once you have an ABN, you must include it on your invoices and quotes. If you earn over $75,000 per year, you also need to register for GST.
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