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Commencement & Cessation Of A Business A Tax Perspective

1779 words - 8 pages



The issue that the Inland Revenue Department (IRD) is disputing is whether Owen was considered to be in business during the years ended March 2008 and 2009. To determine this, we need to look at the definition of a business and compare the facts in Owen’s case to conclude whether a business exists. In considering this, we will need to determine the dates of commencement and cessation for the business (if it is in fact a business) to help us decide the period in which expenses can be claimed.


The Income Tax Act (ITA) 2007 defines business income as “An amount that a person derives from a business is income of that person” (Income ...view middle of the document...

His receipts were intended to do more than just defray his expenses, as was discussed in the case of Tax Review Authority (TRA) Case D54 (1980) 4 NZTC 60,825, where the taxpayer, who spent his weekends deer hunting and sold the carcasses from deer hunting to cover his costs, was not found to be in business.

Another issue we need to investigate is whether the business truly existed and not just ‘in the mind of the taxpayer’, Calkin v Commissioner of Inland Revenue (CIR) (1984) 6 NZTC 61,781 (CA) looks at this, where a taxpayer, who had advanced funds to an agent to invest in property for the profit of the taxpayer yet the agent had misappropriated the funds, was found not to be in business based on there being no business transactions. Owen’s case is quite distinct from this, in that he had been regularly purchasing stock and selling plants between the June 2007 to July 2009 period, this shows real transactions and that the business quite definitely existed in reality, not just in Owen’s mind.

Owen spent a number of years working on the business, totalling two years through both the development stage plus the growing and commercial stages. During the period June 2007 to late 2008 Owen had invested considerable time, money and effort into the business. He leased a glasshouse to contain his plants, installed irrigation, temperature control systems and had begun growing plants for sale. He had given up his work as a schoolteacher and had committed himself to the activity of the business; he had however needed to supplement the family income with money sourced from additional work at a local vineyard and weekend work at a hardware store. Secondary sources of income do not however deny his ‘plant work’ from being a business; as shown in TRA Case l57 (1989) 11 NZTC 1,326 where “the TRA held that the taxpayer was in the business as a farmer and an artist. The taxpayer was engaged in the business of an artist and had committed much time and effort to this endeavour” (Alley, et al., 2012)

The scale of operations and volume of transactions is another factor in considering whether an activity is a business. Owen’s business was small (it was only getting off the ground). However, a small scale operation doesn’t prevent it from being a business, as proven in TRA Case K73 (1988) 10 NZTC 585 “around 15 cattle were fattened on the land at any one time.... The TRA held there was a business (albeit a small one) on the land...there was sufficient evidence level of activity on which to base that intention, even though the activity may not have had much prospect of a true accounting net profit” (Alley, et al., 2012). Owen’s operations were sizable enough, two hundred a fortnight, to be classified as a business.

With regards to the pattern of activity and the financial results, whether Owen actually made a profit is irrelevant. His genuine intention to make a profit lends more to the point than his prospect of doing so (TRA) Case...

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