Are You Carrying on a Business?

IRD is consulting on a draft of interpretation statement PUB00478: INCOME TAX – BUSINESS ACTIVITY. Deadline for comment is 5 September 2025.

Background:

The interpretation statement gives guidance on whether a taxpayer is carrying on a business for income tax purposes. Knowing whether an activity is a business is crucial as that gives rise to income being taxable. However, not every income-earning activity is automatically a business. And sometimes, even without a business, income can still be taxable or expenses deductible

So, what makes an activity a business?

While the Act provides a general definition of business, its true meaning is shaped by case law, especially the leading New Zealand case Grieve v CIR. Two key elements are assessed:

The nature of the activity (objective test), including: The type and scale of activity, frequency and volume of transactions, time, effort, and money invested; whether there’s a pattern of activity and the financial performance over time
The taxpayer’s intention (subjective test): Specifically, whether they intended to make a profit, judged in a realistic and practical way.

Business vs Hobby or Passive Activity:
Not all income-producing activity is a business. For example:

Hobbies or side hustles may not qualify if there’s no real profit intention or if the scale is too small.
Passive investments (e.g. owning shares or renting out a single property) can be a business — but only if they meet the business criteria.
A single transaction doesn’t usually amount to a business, but it might in specific cases if it’s part of a broader commercial operation.

Even if someone has a full-time job, they may still be carrying on a separate business — but the amount of time and effort spent is a key factor. If the activity is minor or occasional, there’s usually a presumption against it being a business.

When does a business stop being a business?
A business is considered to have ceased when commercial activity winds down or there’s no longer an intent to keep going. ONE LAST THING — GST VS INCOME TAX
Just because you’re GST-registered doesn’t automatically mean you’re in business for income tax purposes. The definitions are similar, but not identical.

August 2025