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Test of Business

Hamish Pryde • January 18, 2012

Test of Business

The word "business" for the purposes of the Income Tax Act 2007 includes any profession, trade, or undertaking carried on for profit.  Consequently, the fundamental notion of the concept of a business is the exercise of an activity in an organised and coherent way to attain the end result of a profit.

The question of whether a taxpayer is in business involves two aspects.  These are the nature of the activities, which must amount to a profession, trade, or undertaking, and the intention with which the taxpayer engages in those activities (the venture must be carried on for profit).  An intention to make a profit is sufficient, even though, when looked at realistically, there seems to be no real prospect that that goal can be attained.

Example:

Expenses were deductible where the evidence showed that the taxpayer intended to carry on a farming activity for pecuniary profit.  The fact that the profit expectation is not realised is not a ground for saying that the activity is a hobby, and not conducted for gaining assessable income.  Whether the venture is carried on with the required intention turns on the expressed intention of the person and an evaluation of the person's conduct.

Intention

Matters which may be considered in ascertaining a person's intention are:

  •   Statements by the person as to the person's intentions
  •   The nature of the activity
  •   The period over which the person engages in that activity
  •   The scale of operations and the volume of transactions
  •   The commitment of time, money and effort
  •   The pattern of activity
  •   The financial results, and
  •   Whether the operations involved are of the same kind and are carried on in the same way as those which are characteristic of ordinary trade in the line of business in which the venture was conducted.    (Grieve v C of IR (1984)).

Summary

Claiming losses from hobby operations can lead to the Inland Revenue Department denying losses in current and previous years, resulting in a short fall of tax.   A hobby will never likely turn a profit.   To claim losses as a result may "come back to bite".


By Hamish Pryde September 11, 2024
Paper is everywhere. We spend a lot of time and money moving paperwork around. But with today’s technology it is now possible to get rid of paper entirely. Digital documents are simpler, easier to store and send, more searchable and permanent. How long does it take to post a document to somebody via the ole stamp and envelope method, that is snail mail? It is more efficient and timelier to email the document. How many times do you go to print a document at home and find that your printer has run out of ink? Why do we still hold onto printing paper documents? Sometimes it’s just because that’s what we’ve always done and let’s face it change can be difficult at first. Paper alone is cheap. But when you start paying for printers, toner, servicing and maintenance, paper starts to look more expensive. Let alone the storage cost. Paper tax records for seven years can be quite a few boxes of paper. We have embraced some paperless technology as part of a modern business practice. This includes digital signatures, digital collaboration, paperless minutes of business improvement and coaching meetings, electronic work papers and my new digital notebook which I am enjoying. We send questionnaires via email to you to gather vital information to enable us to prepare your annual financial statements. This is a PDF document. Instead of printing the questionnaires you could save the document down into a folder of your choice then edit the PDF document and return to us. How do you edit a PDF document you ask? Once you have opened the document the Adobe online editor lets you do some things for free. The online editor works in any web browser and lets you add text, sticky notes and highlights. Click on the fill & sign button to the right of the document, then in the top toolbar click Iab text button. You can add text directly on the PDF document. Have a try next time you have a PDF document open. Xero and Farm Focus users can attach invoices directly to the transaction loaded into Xero. Then if you are looking at the rates expense in the profit and loss account or farm working account, you can drill down into the rates code and see the transactions. Then attached to each transaction is the rates invoice if you use this great functionality. All invoices can now be stored in the cloud. So why paperless? Productivity - electronic documents are instantly and simultaneously available to everyone who needs them. Reduce waiting times with less risk of loss or damage. Cost savings - you will save money on printing, postage and associated costs. You could pay less rent because you won’t need all that space for your files. Security - electronic documents are more secure than printed ones. Digital records can be password protected and rendered unreadable through encryption. Printed documents are only as secure as their proximity to a copy machine. Reduced Clutter - paperwork on desks and shelves are not only untidy it’s inefficient too. The organisation of digital files is simpler and your office will look much neater. That will help you clear your mind to focus on your business. Environmentally friendly - less printing means fewer trees cut down for pulp and less energy used to make and transport paper. Disaster recovery - if there is a fire or flood, recovery from the backup is much easier with digital storage them with paper. There are great help articles available in Xero or Farm Focus if you are not attaching invoices to payments already. To find out how click on the links below: If you would like to explore ways you can go paperless we can help.
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