The Tax Status of Hobbies and Other Loss-Making Activities in New Zealand

Abstract

A feature of New Zealand’s income tax regime is that it imposes tax on a “gross-global” basis which was clarified with the enactment of revised core provisions in 1994. A consequence imposing income tax on a “gross” basis is that whether a receipt is liable to income tax is done so in isolation without any consideration as to whether there is a resultant net income or loss produced. The “global” basis of imposing income tax means that any such losses can be offset against any other income the taxpayer has from other sources. For several decades the Commissioner of Inland Revenue regularly reviewed tax losses reported by taxpayers with the aim of denying offset of those losses against other income where there was little prospect of the taxpayer’s activity becoming profitable. However, after the decision of the 1985 Court of Appeal in Grieve v. CIR 6 NZTC 61,682 and the enactment of revised core provisions in 1994, his scope for doing so is not as broad as was prior to these events.This paper examines the issue of whether an offset should be allowed for losses arising from activities which have poor prospects of future profitability. In particular arguments can be made for clarifying the tax status of hobby or recreational activities which are not primarily carried on with the objective of earning income but may produce gross income from time to time. A further advantage of having a specific provision to deal with these activities is that is a prescribed treatment could be offered for any past losses should that hobby metamorphose into a profitable business. Another area would be where such a rule could be applied is in the area of rental property where excessive outgoings may be incurred by a taxpayer relative to its rental generation capacity, which will ultimately be recovered by the property’s disposal at a capital gain. Consideration of the recent reforms to “mixed-use” assets will also be made as well as the non-commercial loss rules in the Australian tax regime.