Hobby or business? When do you actually need to file a tax return?

Maybe you’ve started selling a few things online. You’re making cakes for friends (who are now actually paying you). You’ve picked up some freelance work on the side. Or that hobby you started for fun is suddenly bringing in a bit of money.

At what point does Inland Revenue consider it a business? And when do you actually need to file a tax return and pay tax?

Unfortunately, there isn’t a magic dollar amount where a hobby suddenly becomes a business. It comes down to what you’re doing, why you’re doing it, and how you’re operating.

First up: when do you need to file an IR3 tax return?

If you’re an employee and your only income is things like salary or wages, NZ interest and dividends, you generally don’t need to file an IR3 yourself. Inland Revenue already receives this information and will usually automatically assess your income tax position.

But if you start earning income that Inland Revenue doesn’t already know about, you may need to file an IR3.

Common examples include:

• self-employed or business income

• rental income

• overseas income

• partnership, trust or estate income

• cash jobs

• freelance or contracting income

• income from a side hustle

• other income that hasn’t already been reported to Inland Revenue.

There is a $200 threshold for certain types of other income that Inland Revenue doesn’t already know about. If you receive more than $200 of this income during the year, you will generally need to file an IR3.

One important point: the $200 threshold doesn’t mean the first $200 is tax-free. It’s a filing threshold, not a tax-free allowance.

But what if it’s “just a hobby”?

This is where things get a little more interesting.

Simply calling something a hobby doesn’t necessarily make the money you earn from it tax-free.

When deciding whether an activity has become a business, Inland Revenue looks at the overall picture.

Some of the things that can point towards a business include:

• you’re actively trying to make a profit

• you sell regularly rather than occasionally

• you’re advertising or actively looking for customers

• you’ve invested significant time or money into it

• you have systems, records or separate accounts

• you’re buying stock or equipment specifically to generate income

• the activity is growing in size or becoming more organised

• you’re pricing what you sell commercially.

There’s no single factor that determines the answer.

For example, selling a few handmade items because you enjoy making them is quite different from setting up an Instagram page, advertising, taking regular orders, buying stock in bulk and pricing your products with the intention of making money.

The second example is starting to look a lot more like a business — even if you still think of it as your hobby.

“But I’m not making a profit yet”

Making a loss doesn’t automatically mean you don’t have a business.

Lots of genuine businesses make losses when they’re getting started.

What matters is whether there is a genuine intention to make a profit and whether the way you’re operating supports that.

If you’re consistently spending far more than you earn, have no plan to change that, and primarily do the activity because you enjoy it, it may be harder to argue that you’re genuinely carrying on a business.

On the other hand, if you’re building customers, setting commercial prices, monitoring your costs and working towards profitability, the fact you haven’t made money yet doesn’t necessarily stop it from being a business.

Why does it matter whether it’s a hobby or business?

Because the tax treatment can be quite different.

If you’re carrying on a business, your income will generally be taxable — but you can also claim legitimate business expenses against that income.

That could include things like materials, software, advertising, merchant fees and other costs directly related to earning your business income.

If it’s genuinely a private hobby and the money you receive isn’t taxable income, you generally can’t claim your hobby costs as tax deductions either.

There is one extra wrinkle here: an activity doesn't necessarily have to be a “business” for a particular amount you receive to be taxable.

So if you’re regularly receiving money from something you do, don’t assume you can simply call it a hobby and ignore it for tax purposes.

What about GST?

GST is another test altogether.

Being a business for income tax purposes and needing to register for GST are not the same thing.

If you’re carrying on a taxable activity and your taxable turnover reaches (or you expect it to reach) the GST registration threshold, you may need to register for GST.

So don’t wait until the end of the year to think about this if your side hustle is growing quickly.

When should you get an accountant involved?

If your hobby is starting to turn into a business, our advice is to talk to an accountant sooner rather than later.

That doesn't necessarily mean you're signing yourself up for a big accounting bill from day one. At Prosper, we don't necessarily charge new businesses upfront — depending on your circumstances, we can get you set up correctly and structure your accounting fees so they start later as your business gets going.

Getting advice early can save a lot of headaches later. We can help make sure you're using the right structure, keeping the right records, using your accounting software properly and — probably most importantly — putting enough money aside for tax.

One of the worst situations is seeing a new business doing really well, only for the owner to realise they haven't allowed for income tax (and potentially provisional tax) and suddenly have a tax bill they weren't expecting.

Can you just do it yourself?

If you're earning a relatively small amount, your business is very simple and you're reasonably accounting-minded, you may be perfectly comfortable keeping your own records and filing your own tax return initially.

There are also services such as Hnry that can suit some very small or straightforward sole traders who want help managing their tax obligations without engaging a traditional accountant.

But there's a point where we think having an accountant in your corner becomes really valuable.

If you're building a genuine business — particularly once you're earning somewhere around $20,000+ a year from it — we'd generally recommend talking to an accountant rather than choosing your accounting support based purely on the cheapest way to file a tax return.

A good accountant should be helping you think beyond the return itself: Are you structured correctly? Are you claiming everything you're entitled to? Are you putting enough aside for tax? Is GST going to become relevant? What happens when provisional tax kicks in? And, ultimately, are you actually making money?

The earlier you get those foundations right, the easier it is to grow your business without tax and accounting becoming something you have to untangle later.

A few examples

Selling your old clothes on Trade Me or Facebook Marketplace

You’re clearing out your wardrobe and selling your own second-hand clothes. This is generally very different from operating a business.

Buying clothes specifically to resell

You’re sourcing items cheaply, regularly listing them for sale and trying to make a margin. That starts looking much more like a business.

Baking cakes occasionally for friends

You love baking and every now and then someone gives you some money to make a birthday cake. Depending on the circumstances, this may still be a hobby.

Taking cake orders every week

You have a price list, advertise on social media, buy ingredients specifically for orders and are trying to make a profit. You’re much more likely to be operating a business.

Photography on the weekends

You love photography and occasionally take photos for friends. Compare that with advertising packages, taking bookings, buying equipment for paid shoots and regularly charging clients. Again, the second scenario looks much more like a business.

The bottom line

There isn't a set amount of money you need to earn before your hobby becomes a business.

Instead, think about the bigger picture:

Are you doing this mainly for enjoyment, or are you genuinely trying to make money from it?

And importantly, what does the way you’re actually operating show?

If your side hustle is becoming regular, organised and profit-focused, it’s worth getting tax advice early. It’s much easier to get things set up correctly from the start than to discover a couple of years down the track that you should have been declaring the income all along.

And if you’re somewhere in that grey area between hobby and business, get in touch with us. We can help you work through where you sit and what, if anything, you need to be doing for tax.