This is a common question in New Zealand, especially for creatives with “side hustles” Distinguishing between a hobby and a business isn't just about mindset—it also involves compliance with Inland Revenue (IRD) rules.

Hobby:

• Purpose: A hobby is something you do for personal enjoyment rather than with the intention of making a profit. It’s a passion project that might bring in some income, but making money is not your primary focus.
• Frequency: Hobbies are typically pursued in your spare time without a formal schedule or business plan.
• Financial Impact: The income from a hobby might cover some costs, but it is not consistent or substantial enough to be considered a primary source of income. In most cases, you won’t need to register for GST (Goods and Services Tax) or pay business taxes.

Business:

• Purpose: A business is an activity you engage in to make a profit. In New Zealand, even if you enjoy your work, the IRD considers it a business if you have a clear intention to generate income.
• Frequency: Businesses involve regular, structured work. You may have a business plan, a set schedule, and a formal approach to managing your operations.
• Financial Impact: Profit-making is the ultimate goal of a business. If you are consistently earning money from your activities and intend to continue doing so, it’s likely that the IRD will consider it a business, and you may need to meet tax obligations like filing an IR3 tax return or registering for GST.

How to Determine if Your Activity is a Hobby or a Business in New Zealand

To understand whether your activity is classified as a hobby or a business by the IRD, consider the following factors:

1. Profit Motive and Intent

One of the main questions the IRD asks is whether you are doing the activity with a genuine intention to make a profit. If making money is your primary motivation and you have taken steps to promote or sell your products or services, it’s likely considered a business.

• Hobby Example: You enjoy knitting scarves as a pastime. Occasionally, you sell a few to friends or at local markets, but your goal is simply to share your craft and cover the cost of materials.
• Business Example: You set up an online store to sell your knitted scarves, create marketing campaigns on social media, and actively work to generate regular sales.

2. Regularity and Continuity

Businesses typically involve regular, ongoing activities. If you are consistently producing, promoting, or selling goods or services, the IRD may classify it as a business.

• Hobby Example: You bake specialty cakes on weekends for friends and family, occasionally selling a few during the holiday season.
• Business Example: You take cake orders throughout the year, advertise on social media, and work on new recipes to meet customer demand.

3. Record Keeping and Financial Management

In New Zealand, businesses are required to keep accurate records of income and expenses for tax purposes. This is essential for calculating income tax and determining whether you need to register for GST (Goods and Services Tax).

• Hobby Example: You don’t keep detailed records of your income or expenses, and any money you make goes back into purchasing more supplies for your hobby.
• Business Example: You track your income, expenses, and profits using accounting software or spreadsheets and issue invoices for sales.

4. Tax Obligations and GST Registration

If you are running a business in New Zealand, you need to be aware of your tax obligations. Businesses must file annual tax returns, and if your annual turnover exceeds $60,000, you need to register for GST. Hobbyists are not usually required to do this unless their activities shift toward consistent, income-generating work.

• Hobby Example: You earn a small amount of money from selling your handmade candles at craft fairs, but your annual turnover is well below the $60,000 threshold, and you have no intention of expanding.
• Business Example: Your candle-making venture has grown, and you are consistently earning over $60,000 per year. You register for GST, collect it on your sales, and file regular GST returns with the IRD.

5. Advertising and Professionalism

How you present yourself to the public can also impact whether the IRD views your activities as a hobby or a business. Creating a professional brand, advertising, and maintaining a website can suggest that you’re running a business.

• Hobby Example: You occasionally post photos of your pottery on your personal Instagram but don’t invest in advertising or branding.
• Business Example: You build a website, create a logo, and run digital marketing campaigns to attract customers and drive sales for your pottery.

Why Mindset Matters: Turning a Hobby into a Business

Transitioning from a hobbyist to a small business owner in New Zealand requires a shift in mindset. A business mindset means treating your passion project like a professional endeavor, with a focus on growth, profitability, and meeting legal requirements.

• Commitment: Business owners in New Zealand need to commit to regular record-keeping, staying up to date with tax obligations, and consistently working on their craft.
• Goal Setting: Setting clear business goals, such as increasing sales, reaching new markets, or improving product quality, can help you stay focused and plan for growth.
• Reinvestment: A common practice for businesses is reinvesting profits back into the venture, such as upgrading tools or expanding marketing efforts.

Tax Implications: What to Do If You Have a Business in NZ

If you determine that your activities qualify as a business in New Zealand, you need to meet certain tax obligations:

• File an IR3 Tax Return: As a sole trader or small business owner, you must file an IR3 tax return to declare your income and pay income tax on any profits earned.
• Register for GST: If your annual turnover is over $60,000, you must register for GST, charge it on your sales, and file regular GST returns. This is a legal requirement, and failure to comply can result in penalties.
• Keep Detailed Records: Maintain accurate records of your income, expenses, and business-related transactions. This includes receipts, invoices, and bank statements. Good record-keeping is essential for accurate tax returns and helps you track your business’s financial performance.

Final Thoughts: Is It a Hobby or a Small Business in New Zealand?

Ultimately, whether your activity is a hobby or a business comes down to your intent, frequency, and income. While it’s possible to enjoy a hobby that earns you some extra money, if your goal is to create a sustainable income stream, you need to think and act like a business owner.

Understanding the distinction between a hobby and a business can help you comply with New Zealand tax laws and set you up for success. If you realize that you are operating a business, take the necessary steps to register with the IRD, manage your taxes, and plan for growth.

Key Takeaways

• A hobby is an activity done for pleasure without the primary intention of making a profit.
• A business is an activity done with the intention of making money, and it requires regular work, marketing, and financial management.
• In New Zealand, factors such as profit motive, regularity, record-keeping, and GST registration help determine whether you have a hobby or a business.
• If you have a business, you need to file tax returns and register for GST if your turnover exceeds $60,000.

Keywords: small business, hobby, professional, mindset, New Zealand, IRD, GST, income tax, financial management