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Chapter 1: What defines a hobby versus a business?
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You are listening to another episode of KeepTheChange.co.nz's Money Mail. I think we're up to week number 313, but honestly, I don't even know anymore. We just keep getting it done. Now, I was about to hit record. Well, actually, I had hit record, and something interesting happened. I'm wearing a quarter zip. Are they still fashionable? Are they going out of fashion? I don't know.
Someone will tell me in the comments real quickly. It's funny. I was thinking the other day, you're taught not to judge people. Or when you put yourself out there, you get fucking judged all the time, which is quite interesting. But anyway, you're then told you're still not supposed to judge people.
And you're like, okay, your whole life becomes being judged by people, but you're not allowed to judge people. Interesting dynamic there. Anyway, cord of zip mentality, baby. And the cord of the headphones starts rubbing on the cord of zip.
And I thought, okay, I need to stop and start again because I know that it frustrates me when I'm trying to record because I can hear that happening and sometimes the microphone can pick it up too. Why do I tell you that? These are the little things that you learn by doing shit and by doing the reps. And
The only way that you're going to get a whole heap of lessons that you will need later in your life and that you will look back on will be because of the reps that you choose to do. Now this is the value of experience and doing things and where I believe the money is going to flow to in the future. As much as people are worried about AI,
I believe that the people that have done things and that have experience doing things will continue to be highly valuable because people will confuse themselves with all this information and then go, shit, I don't know. I can't figure this out. I'm just going to ask a person who's actually done it.
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Chapter 2: Do you have to pay tax on income from a hobby?
And it's costing them more to be a mechanic than they're making. And so they're saying, well, if I make 140 grand a year of PAYE income and I'm paying tax on that, but I'm losing 10 grand of my hobby being a hobby mechanic, can I offset that income? So can I only pay tax on 130, not 140? Now,
just thinking through that fundamentally before even thinking about tax, why would you do a hobby where you're losing money? Maybe you're doing it as some sort of donation, but I guess if you were losing money doing it and you did have a potential to make a profit into the future and you're just not very good at doing that, you could potentially offset some of that income with that loss.
However, this is like silver bullet grabbing that people go to, right? There is no point blitzing a whole heap of time into running a non-profitable side hustle. Eventually, it won't work. Financially, and people will be like, why are you committing all this time to this, taking time away from other things and having an opportunity cost to do something that doesn't make money? Oh, it's all good.
I put that loss against my personal tax return and get a little bit of tax back. Probably not a smart, viable thing to do. And if the IOD dude go... Are you there? Hello? Like why are you adding in a loss against your tax return for this what's going on? You're going to have to explain yourself.
Again, this is why I say that all of the stuff is a little bit nuanced and there are many different avenues that you can go down.
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Chapter 3: What are the general rules for declaring income in New Zealand?
And I appreciate if I give so many examples like this too, you can probably get a little bit lost in it. So that's just to bring us back to the overall piece. Is it a business? Is it a hobby? Well, if you're going to the market and selling some flowers out of your garden once every month and making bugger all money, I'd be probably going to go, okay, you've got a hobby there, like whatever. But
I don't know for sure because someone at the ID could be like, no, no, it's more than six times. It's definitely regular. Therefore, you should have been paying tax on those profits. So it is a bit of a tricky area. However, a hobby, if it's truly a hobby, you don't have to pay tax. That's what the rules allow for.
But like I said, this is where it does get tricky because if we go back to the IRD's website, the example of a hobby says selling things you make occasionally at markets. Selling things that you make occasionally for enjoyment or fun to family and friends. So I'm creating my scarves and I'm selling them to my family and friends, making a bit of extra money, doing that occasionally. It's a hobby.
I don't have to pay tax. if I'm doing the same thing but down at the markets, still a hobby, don't have to pay tax. But what is the definition of occasionally? And I don't know. I'm not entirely sure How the IRD would determine occasionally is if I just did six speaking gigs in the year, would that be occasionally? Therefore, it's a bit of fun for me.
Yep, I get paid well to do it, but no, I'm not paying tax on it. I don't think they would let me away with that. But this is where many people are probably thinking that they're doing something as a running a business in the eyes of the IRD. And for most of us, this is on us to figure out.
Now, with all of that confusing background, here is what I see being the common example or trap that people fall into. And they find something that they're good at, And they sell that to the market. They go, shit, that was pretty cool and quite fun. Made a bit of money. I don't know. They're not like following you. Oh, actually, are they? Cameras everywhere these days. Free country.
Think what you want. Do what you want. Oh, everything's being watched. Blah, blah, blah. rabbit hole there, rabbit hole. You know what I mean. There is a trail of just about everything you do these days. So as much as you think, how would they even know? They probably don't and probably won't because they don't care because you're probably small fry. However, if they did look, they probably could
figure it out.
Very quick story, I had a mate many moons ago who was selling products on Trade Me and we couldn't believe it, we were like this is awesome bro, you're like getting this stuff, putting it on Trade Me and making money and he scaled it up and just keep doing it, we're like oh that's good for you bro, you've figured out how to make some money, this is wild and I'll come back to that story because this is again the common trap.
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Chapter 4: How does the IRD determine if your activity is a business?
that once I go past $60,000 in a 12-month period, in a 12-month period, very clear rules there, not just from January to December, it's are you expected to do over $60,000 in a 12-month period? If yes, then you probably need to be GST registered. So let's say I do some accounting work and it's 50 grand worth, I don't need to be GST registered.
So I don't need to charge GST on my invoices or pay it to the IRD. GST is very separate and different from income tax. Then into the next year, I get a few clients because Fanny, Danny, Manny and Kenny are all getting in touch going, can you do this for us? All of a sudden, I'm up around 70 grand worth of income. Shit, I am obligated to be charging GST.
So when I send Fanny an invoice, I've got to whack on an extra 15% on top once I'm registered and they've got to pay that. And then I've got to put that GST aside and give it to the IRD. I can claim some of the costs that I had. I was running some subscriptions that might have GST. I paid for a couple of coffee meetings. I got a new abacus in my accounting practice. Those all had GST on them.
That can offset my GST bill to a degree.
but most businesses that are profitable and that are selling in new zealand they're paying gst to the ird because they're not spending more than they are selling and one of the biggest costs in new zealand in a business is wages and wages don't have gst on them so most businesses in new zealand are paying gst every time they have to do a gst return the lesson for you here is that
Just because someone told you that none of this shit matters until you do over $60,000 worth of sales, that's not true. Someone's confused GST and applied that to everything else. Now if you have to be GST registered and then you don't increase your pricing by 15% to factor in that GST, once you're GST registered, you're going to take a pay cut as well.
because you have to now return 15% of your sales to the IRD. If you haven't increased your prices, where's that money going to come from? Out of your pocket. So your margin is going to decrease. So if you're teetering around 60,000, you need to get some tax advice.
You're probably going to be looking at Henry, H-E-N-R-Y, or reaching out to an accounting friend that can help you and saying, how does this shit work? I need to understand it better. So GST is different from tax. And to reiterate, you must charge customers and return the GST to the IRD when your sales exceed $60,000 in a 12-month period. That's when GST registration becomes mandatory.
Now Luke, when he starts his accounting practice and is only going to do 50 grand with his sales, he still can register voluntarily if he wants for GST. Again, this is where you're like, holy shit, why do we learn none of this? You know, if this is all new to you, hopefully I'm bringing it to you in like a fun, informative way. You're probably overwhelmed by the state.
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Chapter 5: What examples illustrate the difference between hobby and business income?
Second trap, I don't do over $60,000 worth of sales, therefore I don't have a business. GST rules are completely separate from income tax rules. Now, with all of this said, I don't want to put you off making a bit of extra cheddar, okay? But we are all obligated to play by the rules.
And I'm just trying to educate you a little bit as to how some of this stuff works and a lot of us don't get taught about it. So the final question, if you're still tuning in, learning about this and thinking, okay, does this apply to me? Have a think about this and be careful where you document this. Are you trying to make money? Are you doing that consistently?
And are you trying to improve that over time? If yes, you're probably already in business because you've got an intention there to make money. You're doing it consistently and you're improving it over time. You're probably in business and need to be paying tax on the profits, not the sales, the profits.
If Luke goes out there on the weekends and decides, I've got all this shit going on, but it's kind of fun to train some people to be better at football. and charges a little bit of money, does it four times a year, makes a few grand, I might not have to pay tax. I might be able to argue with the idea, that's a hobby. That's a hobby. Look at all this other shit that I'm doing. That's just a hobby.
And I'm good at it, so people want to pay me for it. I can tell you, people aren't paying me that money to teach them how to play football. But if an actual football coach is going out there trying to make money doing it consistently, doing weekly trainings, even monthly, improving it over time and building in some consistency doing it, they're probably in business.
Again, with all of this stuff, will the IRD know? Probably not. Can they figure it out if they go looking? Probably. Now, is it still your responsibility to tell them anyway? Yes. Just like it is for crypto profits, interest income, dividend income, Airbnb profits, cash jobs that you're doing, drug deals, freelance work, rental income, the list goes on. It's still our responsibility.
I included interest and dividend income in that list to give you a good example that, remember, the banks with the interest that they pay you, they feed that data to the IRD and how much tax was withheld and went straight to the IRD. Many years ago, that data didn't just go straight across.
So people would receive that interest income and the banks would send out and they still actually send these certificates out like, hey, here's how much interest we paid you this year. Part of it is because they're going, well, because it's your responsibility to put that into your tax return. Whether people do or don't, You know, that is up to them.
But the IRD's probably gone, hey, with technology and data, just give us that data so it goes automatically into your tax return these days from the likes of shares as well, from your interest from the banks. That stuff is all going to go straight to the IRD. Now, the reason that they don't have your side hustle income is because they don't know.
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