Have you ever wondered if your side hustle, investment activity, or even your hobby could be considered a business for tax purposes? Whether you're also holding down a full-time job, making a loss, or simply participating in a passive activity, it's crucial to understand what constitutes a "business" under the law and how it impacts your taxes.

A recent Inland Revenue draft statement sheds light on these complexities and may help you answer the question: Are you really carrying on a business for tax purposes?

Why it matters

Determining whether you are carrying on a business isn't just a theoretical question. It directly affects whether the income you derive from that activity is taxable and the related expenses you incur are deductible.  Although this sounds straightforward, in practice, it can be difficult to draw clear lines between personal or preparatory activities and business operations.

What the law says

There is a specific definition of ‘business’ in the income tax legislation.  Of relevance to most is the first part of the definition which states a business “includes any profession, trade, or undertaking carried on for profit.”

Overlaying this statutory definition is case law.  It has long been decided (and accepted) that determining whether a business is being carried on involves a two-step test.  

Step 1 – what is the nature of the activity being carried on?

Step 2 – what is the taxpayer’s intention in engaging in those activities?

Nature of activity

There are a number of criteria often used to assess the nature of the activity carried on, such as the scale of operations; volume of transactions; period over which the activity is engaged in; commitment of time, money and effort.  Individually, none of these are determinative; nor is one necessarily given more weight than another.  The relevance of each criterion will depend on the situation being considered. 

The draft statement helpfully includes a table summarising these factors contrasting what each may look like if a business exists or does not exist.

Also, of relevance here is consideration of whether the activity is more in the line of a hobby or interest.  Generally, a hobby is not a business.

Taxpayer’s intention

The second step in the analysis requires an objective assessment of the taxpayer’s subjective intention.  Often the focus here is on the taxpayer’s intention to make a profit and whether the intention is genuine.  An immediate profit from the activity is not necessarily required to satisfy this criterion.  However, the intention to profit must be real in the sense it is more than a vague hope.  The outcome will depend on the facts and circumstances of each case.

The draft statement illustrates this step with an example involving a competitive (but not professional) sportsperson with a full-time job.  In this example, the individual has competed in hammer throwing at a high level nationally and internationally for more than five years.  Despite receiving some prize money and earning money from a sponsorship deal and from social media accounts, the individual does not rank high enough to make a profit from hammer throwing.  It is not realistic the individual would achieve the level required to do so.  On these facts, the example concludes the individual is not in business as the genuine intention to make a profit cannot be supported objectively.

Other matters

Helpfully, the draft statement also considers whether there is a business in these situations:

• Activities of a holding company
• Investing in shares
• Lending money
• Leasing property
• A single transaction
• Multiple activities.

There is also discussion about:

The scope of a business (this can affect the amount of taxable income and deductible expenditure)

• When a business commences (this will determine when income will be taxable and expenditure deductible)
• When a business has ceased (this will confirm when income will no longer be taxable and expenditure no longer deductible)
• The difference between a business and a GST taxable activity.

Submissions on the draft statement close on 5 September 2025.