On the other hand, the ‘business losses’ you’re claiming could actually be from a hobby, and don’t belong in your tax return.
This is the core determination as to whether you simply have a hobby, selling items from time to time, or whether you’re a business subject to income tax and possibly GST.
A taxable activity is:
- Any activity which is carried on continuously or regularly by any person, and
- Whether or not for a pecuniary profit, and
- Involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration; and
- Includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association, or club.
In most instances, figuring out if you have a taxable activity is straight-forward. However, there could be grey areas.
- If your hobby becomes a business – from which date does the business start?
- If your activities cease due to being unable to operate, are you still a business if the activities aren’t carried on continuously?
- If your activities are purely seasonal with no income in the off-season, is it still a business?
If you’re carrying out a taxable activity as defined in the section further above, you have a business for income tax purposes. Should sales exceed $60,000, the business must be registered for GST.
Put simply, if you’re not conducting a taxable activity, what you’re doing is a hobby.
It’s usually something you do in your spare time. You may be working (contractor, employment or as a caregiver), so your hobby is not your main source of income. You don’t really expect to make a profit from it and sometimes do a swap or barter instead of receiving cash.
There are no strict examples of what constitutes a hobby, however, if you do not meet all the requirements for a taxable activity (see previous section), you’re a hobbyist.
However, it’s possible that what was once only a hobby, could in fact become a business over time. You may as well make a living while doing something you love!
Trading in crypto-currency is always considered to be a business and subject to tax, rather than a hobby. Find out more in our blog on crypto-currency.
Here are some comparisons between operating as a business or undertaking a hobby.
This is guidance only and will depend on your specific circumstances. Meeting a couple of descriptions for ‘business’ doesn’t necessarily mean that you’re a business for tax purposes. Many factors are considered – either separately or on a combined basis.
Numerous transactions with customers, or large transactions with a couple of customers.
Sometimes sell items to friends, in a market or TradeMe, but not on a regular or substantive basis.
It’s the type of customer (not necessarily the number) that’s important, as a business can be run with one or two major customers.
Could be large in scale – you may store items in storage facility or in your garage, have a bricks-and-mortar shop for sales, or set up a website for online sales. You may decide to perform your activities under the umbrella of a company.
Not very large at all. You may be using a separate room for making the product, but it’s not uncommon for you to work from the living room or kitchen, rather than having a dedicated space.
Just because you have a company, doesn’t mean you’re a business. And not using a company doesn’t mean you have a hobby.
You’re buying and selling to make a profit because that’s the bulk of your income. Perhaps you make a loss when starting up, or during difficult periods, but it’s not intended. If you don’t make a profit, you don’t eat.
A profit would be nice, even a small one, but it’s not expected. The money you spend on materials (which you’re probably purchasing retail, not wholesale), and the value of your time isn’t sufficient for you to rely on profit for income.
Whether or not an actual profit is made is not the important factor – it’s the intention to make a profit.
The work is undertaken for most of the day and on a regular basis. You’re unlikely to have a separate full-time job.
You spend time when you have it, so it’s sporadic. It could be during breaks in your working day (including as a stay-at-home carer), in the evening, or during the weekend.
Having to comply with rules and regulations in order to operate takes time (making sure you have appropriate internal processes in place) and money (paying subscriptions to professional organisations, or fees to government organisations. It’s unlikely you’d make this effort for a hobby.
You wouldn’t be paying fees or be governed by anybody other than yourself. If you make chocolate brownies to sell now and then*, you won’t want to be subject to the rules of the Ministry for Primary Industries, or want to comply with the Food Act 2014! Also important is that the people buying your brownies don’t expect you to follow those laws.
* Whatever you end up not eating yourself!
Researching the industry before you start, preparing budgets and forecasts, going to the bank for a loan, all indicate that you’re operating a business.
You enjoy the limited time you spend on your activities. You don’t bother with a budget and generally confine your spending to what the household can comfortably afford. If you don’t have enough money for materials, or your time is limited, you’ll wait.
The main benefit of classifying your hobby as a business is being able to deduct (any) losses from your taxable income.
Not many ‘hobbyists’ would voluntarily declare profit and add to taxable income.
If you don’t expect or intend to make a profit, it’s highly likely your operations are a hobby and not to be included in your tax return.
It sounds harsh, but if you’re a business but making losses, it may be time to think of doing something else or change your business model.
Making consistent business losses is going to force you deeper into debt (to pay your household bills) and will be extremely stressful. Have a chat with family, friends, and business advisers to consider your options.