Gold diggers and tax triggers: when hobbies start paying the bills

By Josh Hope & Graeme Fotheringham

Ongoing cost of living pressures in New Zealand have led some to explore additional sources of income.  A recent example highlighted in the media is the potential rise in amateur gold mining, as the price of gold now exceeds $7,000 per ounce. The media cited an individual who had given up his day job to pursue gold hunting full time, including creating related online content. 

This situation prompts an important income tax question: when does a generally non-taxable hobby become a taxable business?

When does a hobby become a business?

The distinction between hobby and business can be unclear and is a relevant consideration for people undertaking activities outside of their ordinary day jobs but which can generate additional income. This distinction is important as an amount a person derives from a business is income and taxable under s CB 1 of the Income Tax Act 2007 (ITA 2007).

A business is defined in the ITA 2007 as including any profession, trade or undertaking carried on for profit and there are two key elements that must be present. Firstly, there must be an appropriate level of organisation or structure, and a pattern of activity that constitutes an undertaking. Secondly, there must be an intention to generate a profit, even if there is little or no realistic prospect of actually achieving one.

On this basis, if a person decides to undertake an activity specifically in order to boost their income, there is a high likelihood that the resulting income will be taxable and potentially that they are carrying on a business because the activity is organised with an intention to make a profit.

Consider the example of a gold prospector who has a part-time day job and decides to invest the rest of their spare time into gold prospecting to support their income.  As part of this, they purchase more advanced equipment in order to extract more gold.  In this case, any income generated will be taxable as business income as there is both organised activity and an intention to profit.

Even if an activity falls short of being a “business” under s CB 1 for tax purposes, income can still potentially be taxable under s CB 3 if it is an “amount a person derives from carrying on an undertaking or scheme for the purpose of making a profit”. An undertaking or scheme requires less activity than that of a business and often can be for more one-off events or schemes.

Income under ordinary concepts

If amounts received are not business income or income from a profit-making undertaking or scheme, they may still be taxed if they are “income under ordinary concepts” under s CA 1.  The criteria for determining income under ordinary concepts have been established under common law:

• Income is something that comes in;
• Income imports some notion of periodicity, recurrence regularity; and
• It depends on its nature in the hands of the recipient.

Where an individual is undertaking activities outside of their ordinary jobs specifically to supplement their income even, even if the activity falls short of being a business, any amounts received are still likely to be taxable as income under ordinary concepts.

At the other end of the spectrum that there will be people with hobbies generating payments which are not income. Using our gold fossicking example again, an individual who searches for gold purely as a hobby for enjoyment in their spare time, using only basic tools like a shovel and gold pan, and recovers only small quantities of gold with minimal financial value, would not be considered to be operating a business.  Income resulting from this activity is unlikely to be taxable as the relevant criteria are not met.  In this case, the intention is not to profit but purely for enjoyment and the level of work undertaken is minimal. 

Other hobby examples include woodworkers or craftspeople who make goods purely for enjoyment and sell the goods to contribute to expenses or as a means of disposing of the items they make.

It will always be a factual assessment whether an amount received from a hobby is income.

Unintentional Income?

A grey area emerges when an individual has participated in a hobby over an extended period without any intention of making a profit, but the activity subsequently begins to generate significant income. A common example is found among content creators and social media influencers, who may experience rapid growth in followers or subscribers and, as a result, begin earning substantial income from what initially started as a hobby. Content creators often invest considerable time and effort into their activities, establishing a clear pattern of engagement.

There is an argument that, despite these developments, the content creator may not have originally intended to generate profit and that the resulting income is incidental. However, when the individual starts to receive larger and more regular amounts of income, this can indicate that the income falls within the ordinary concepts of assessable income.

Continuing with the example of a content creator, if an individual has been consistently posting regular online videos, initially receiving minimal returns but then experiences a sudden increase in advertising revenue and sponsorships, the established pattern of activity combined with the new financial rewards suggests that the amounts received are now income. These earnings are likely to be regarded as income for the individual, particularly as they become substantial enough to materially supplement their overall income. The nature of these payments is therefore significant, and the factors outlined carry an inference of an intention to make a profit from Inland Revenue’s perspective. Although the income may not be from a business, or a profit-making undertaking or scheme it is likely to be taxable as income under ordinary concepts. Regular payments have been established, and the amounts are now sufficient for the content creator to support their lifestyle and personal expenses. Inland Revenue has issued specific guidance for content creators to help them meet their income tax obligations.

Have you got a genuine business?

There is also a risk that taxpayers may claim deductions for activities that are, in substance, hobbies rather than genuine businesses. For instance, our small-scale gold prospector above working in their spare time with minimal gold extracted and consistently running at a loss that is used to offset profits from other business ventures. In such cases, the activity will not meet the criteria of a business, it is more accurately characterised as a hobby. Claiming deductions and utilising losses in this context is not appropriate.

Final thoughts

If you are undertaking a side hustle to ease the increase in the cost of living or simply for the love of the hobby you are engaging in, it is worth considering whether you could be deriving taxable income which needs to be returned.

If you have any questions about this, please contact your usual Deloitte advisor.