Tax Updates: 4 August 2025

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

When are you carrying on a ‘business?’

It’s an important question. Particularly, when you are considering issues like the application of certain land taxing provisions, where the carrying on of certain types of businesses will trigger potential tainting issues for you, whereas a one-off non-business activity will not.

Quite often, a client will say to me that they’re carrying on a business activity, and I’ll respond, “Really? Let’s have a closer look at that.”

Well, the Revenue (IR) has decided to take a closer look at it as well, illustrated by the recent release of their draft interpretation statement (IS), “Income tax – business activity,” referenced PUB00478.

The term ‘business’ is defined in the Income Tax Act 2007 (the Act). However, it is the developed case law over the years that has fine-tuned the meaning. The leading case in this regard is Grieve (Grieve v CIR (1984) 6 NZTC 61,682 (CA)), which suggests that a two-step inquiry is involved – what is the nature of the activities being carried on, and what was the taxpayer’s intent in engaging in those activities.

Concerning the first question, the following issues should be considered:

• the nature of the activity;

• the period over which the activity is engaged in;

• the scale of operations and volume of transactions;

• the commitment of time, money and effort;

• the pattern of activity; and,

• financial results.
  

Once you have weighed up these factors, then the taxpayer’s subjective intention (but viewed objectively) to make a profit should be considered.

A single transaction does not usually constitute a business, but this factor is not conclusive. Equally, where the person has a full-time occupation or is retired or unemployed, and they devote only a modest amount of time to the other activity, there is a presumption against a business.

If your client is deemed to be carrying on a business, then it is likely that any receipt they receive relating to that business will be income according to section CB 1 of the Act. Unless you can argue that the amount is a capital receipt. Equally, being able to reflect that a business exists, potentially widens the expense deductibility field, as you’ll now have the second limb of section DA 1(1) to rely on as well, when attempting to create the requisite nexus in relation to an expense or loss incurred by your client.

The draft IS also discusses another critical element of the ‘business’ definition: when is it deemed to have commenced or ceased. This is important because expenses incurred on either side of the business horizon are usually considered non-deductible.

The legislative definition of business contained in section YA 1 of the Act states that it includes any profession, trade, or undertaking carried on for profit. That’s it – not exactly crawling with more illustrative meanings. And that’s where the case law comes in to stamp its authority.

So in the Grieve case, Richardson J stated:

“… Underlying each of the words in the definition in sec 2 and the term ‘business’ itself when used in the context of a taxation statute is the fundamental notion of the exercise of an activity in an organised and coherent way and one which is directed to an end result. And the definition itself proceeds to identify its concern that the enterprise be one carried on “for pecuniary profit”. [Emphasis added]”

He then went on to make the point I alluded to earlier, about the two-step inquiry.

The draft IS spends a little time discussing the difference between a business and some other activities, providing some commentary on hobbies, holding companies, share investments, money lending, and property leasing, and when each of these activities may take on a business characterisation. It also addresses whether a single activity can give rise to a business. This can certainly be important when faced with considering a one-off land subdivision scheme being undertaken by your client. Useful to store in that brain of yours is the comment made by Hutchison J in Public Trustee v CIR:

“… A person who carries on a business of dealing in land of course buys land for the purpose of selling it at a profit, but it does not follow that, because he buys land for the purpose of selling it at a profit, he carries on a business of dealing in land. The land sold by Marshall was acquired by him in one purchase only. That is a factor to be considered, for an isolated transaction does not normally constitute a business, but it is not conclusive …”

The last few pages of the draft IS are dedicated to discussing life before and after a business. As I implied earlier, expenditure at these stages of the life cycle is usually considered non-deductible. Also, if your client is already carrying on a business and tries something new, is this simply an extension to the existing business, or is it a brand new business (where the commencement expenditure could be non-deductible)? Equally, if your client’s activity is going through a bad patch, could they be seen to have ceased the business, or perhaps just downscaled or undertaken a temporary cessation of the business?

Finally, remember that GST and income tax are quite different beasts, and therefore, while your client may be required to be GST registered, satisfying the taxable activity definition (which has no profit-making criteria), does not correlate to them carrying on a business for income tax purposes.

The document is a 46-page read, and should you wish to make a submission on its content, you need to do so before September 5^th.ng fee information provided directly to Inland Revenue (IR) by early child education providers.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.