How Can You Tell When Having A Hobby Turns Into Running A Business?

You might be thinking about starting, or perhaps you already have started, some sort of side hustle – from selling handmade clothing or refurbishing old furniture, to selling drawings, paintings and even performing the occasional gig. It’s something you love doing anyway, so why not earn a bit of extra cash doing it? 

But when do you cross the line from having a hobby to operating and running your own business? 

Unfortunately, it’s not as simple as ABC. There is no single element that differentiates a hobby from a business. Rather, it is often based on the consideration of several factors, in the context of your individual circumstances. 

While this may sound confusing, don’t worry! This article will guide you through the differences between having a hobby and running a business, and how to determine which category your operation falls into.

Being clear on what you are doing is crucial to ensuring that you are meeting your obligations in terms of the law, tax, and insurance.

What Is A Hobby?

The easiest place to start when it comes to distinguishing between two activities is to understand what each of them entails.

Let’s begin with hobbies.

A hobby is typically an activity you do in your spare time for personal enjoyment or satisfaction. You’re in complete control. You can choose to keep your hobby private, gift your creations, or even sell them at cost. The good news is, when your activity is a hobby, you don’t need to worry about reporting obligations, such as declaring income, to Inland Revenue as part of your tax return in New Zealand.

However, income-earning hobbies can evolve into a business – and this is where it can become complex! It’s beneficial to monitor any changes in income or practice. Keeping abreast of these changes ensures you’re ready to meet any obligations you may incur and avoid penalties.

Tip: Some hobbies and activities may require a licence or permit if you wish to operate as a business in New Zealand. Check if this applies to you by visiting the New Zealand Business Number (NZBN) website here.

What Is A Business?

Now that we understand what a hobby is, let’s explore what constitutes a business.

A key indicator of operating a business is engaging in an activity with the intention of making a profit. 

If you answer ‘yes’ to at least two of the following questions, it’s reasonable to assume that you’re running a business:

• Are you undertaking the activity for commercial reasons?
• Is your primary intention to make a profit?
• Do you carry out the activity regularly?
• Is your approach to the activity planned, organised, and business-like?

Why Would You Want To Operate A Business?

You might wonder why you should start a business if you can earn extra money from your hobby. After all, hobbies don’t come with the headache of compliance with reporting obligations.

However, consider the benefits of being in business and what they mean for you.

One of the biggest advantages of operating a business is that you can apply for a New Zealand Business Number (NZBN) – a unique identifier for your business. An NZBN can assist in business dealings, from ordering materials to invoicing customers. For those looking to establish an online presence, having an NZBN enables you to apply for a New Zealand “.co.nz” domain name.

Additionally, running a business with an NZBN grants you access to government information, services, and potentially, small business concessions. Depending on your turnover, you could be eligible for various tax concessions.

You can find out more about these concessions on the Inland Revenue website here.

What Are My Obligations If I Decide To Run A Business?

As the saying goes, with great power comes great responsibility. This is true for reporting obligations when running a business.

Once you’re operating a business, you’ll need to comply with certain reporting requirements to meet your legal, tax, and other obligations. Although these processes may seem tedious, they can be used to make informed business decisions. 

Good record-keeping helps you to:

• Manage your business’ cash flow
• Present your financial position to investors and lenders
• Access an overview of your business to make sound decisions

Reporting Obligations For Tax And Superannuation

You must keep records of all tax transactions related to your business, along with supporting documents.

The specific records you need to keep will depend on your business structure (such as sole trader, partnership, company, or trust), as well as your particular tax obligations.

In New Zealand, the Inland Revenue sets out several requirements:

1. Records must be accurate and stored in a way that prevents them from being altered or damaged.
2. Generally, you must keep records for seven years.
3. If requested, you must be able to produce your records.
4. Records must be in English or easily translated into English.

While not required, it’s advisable to use electronic record-keeping. Electronic systems are often more convenient and environmentally friendly. Inland Revenue encourages electronic reporting for tax obligations, so setting up an electronic system prepares you for this transition.

If you convert paper records to digital files, ensure they are true and clear reproductions of the originals and meet record-keeping requirements.

It’s recommended to store records securely and back them up regularly. To comply with reporting obligations, you must have access to the device where records are stored, control the information processed, and ensure records are backed up in case of device failure.

Tip: For sole traders, Inland Revenue offers tools to record business income and expenses, which can be helpful when completing your tax return.

Using A Business Name

If you’re considering operating under a business name rather than your own, there are several factors to consider.

Firstly, check if the business name is available by searching the New Zealand Companies Office register. Also, ensure your proposed business name doesn’t infringe on any existing trademarks by checking the Intellectual Property Office of New Zealand (IPONZ).

After choosing a business name, you can register it for one or three years. Remember to renew your registration before it expires to avoid cancellation. You can find current registration fees on the Companies Office website.

Notify the Companies Office within 20 working days if you change your business name details or wish to cancel your registration. If you or someone involved in your business becomes disqualified from holding a business name, you must also inform the Companies Office.

Fair Trading Obligations

In New Zealand, it’s essential to understand and comply with fair trading laws to protect your business, yourself, and your customers from unfair practices. These laws include the Fair Trading Act 1986 and the Consumer Guarantees Act 1993.

Fair trading laws ensure businesses operate in a fair and competitive manner while protecting consumers. The Commerce Commission administers these laws, covering areas such as:

• Unfair market practices
• Product safety and labelling
• Consumer rights and guarantees
• Industry codes and regulations

Key Factors

Is There Money Involved?

If you sell your work publicly and make a profit, it may suggest you’re running a business. Conversely, if you don’t charge for your work, it’s likely a hobby.

There are instances where you might charge for your work even as a hobby, such as covering material costs or a small amount to offset other expenses.

Why Do You Advertise Your Work?

Promoting your work to increase sales likely indicates you’re in business.

However, sharing your work for reputation or following could be indicative of either a hobby or a business.

Do You Keep Financial Records?

Businesses typically maintain records to manage finances and track expenses and sales.

With a hobby, you might not keep records or only do so to understand personal costs.

Tip: business.govt.nz has a helpful tool to help determine if your activity is a hobby or a business. This is a guide only and should be revisited if your circumstances change.

Private Ruling From Inland Revenue

You may have heard about obtaining a private ruling from Inland Revenue.

A private ruling provides binding advice on how tax laws apply to your specific situation. It protects you against tax shortfalls if you rely on it, even if the ruling is incorrect. However, it only applies to the described circumstances. If there’s a material difference between the description and actual activity, the ruling cannot protect you.

Still Not Sure Whether You Have A Hobby Or Are Running A Business?

The distinction between a hobby and a business can be unclear, and it’s often difficult to define which category you fall into.

It’s wise to seek advice tailored to your circumstances, especially when determining if you have a hobby or a business, as it depends on an evaluation of actual activities and context.

We are here to help! Reach out to our team of friendly and experienced lawyers for a free, no-obligations chat at [email protected] or 0800 002 184.

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