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09 Jul 2012
Appeal Status
Not appealed

Rental property partnership a business

2012 case note – rental properties a business therefore losses unable to be offset against other income for Working for Families Tax Credits purposes.

[2012] NZTRA 02


The disputant owned several rental properties in a partnership, which was operating at a net loss. The losses were offset against other income, which increased her entitlement to Working for Families Tax Credits (WfFTC). Despite the losses, the rental properties were found to be a business because they were an undertaking for making a pecuniary profit. The losses could not therefore be offset against other income for WfFTC purposes.

Impact of decision

The decision follows the Court of Appeal decision in Grieve v CIR [1984] 1 NZLR 101 (CA) that pecuniary profit is more than a revenue (taxable) profit. It is the character and circumstances of the individual venture which are crucial in establishing whether or not there is an intention to make a pecuniary profit.


The dispute relates to amendments made by the Commissioner to the disputant's amended WfFTC assessments and consequential income tax assessments for the periods ended 31 March 2006 to 31 March 2008 inclusive.

The disputant is married with five children and is the principal caregiver for WfFTC purposes. During the period concerned, the disputant and her husband owned a number of rental properties in partnership together. The rental properties were incurring losses. The disputant and her husband offset the losses against their income. Because of the resulting decrease in income, the disputant claimed extra WfFTC.

The Commissioner re-assessed the disputant on the basis that the rental properties were a "business" for WfFTC purposes and accordingly the disputant could not deduct the rental losses from her income.


Judge Barber stated that where there is a "business" and the business incurs net losses, the business is deemed not to have been carried out (and therefore no loss incurred) when calculating "net income" for WfFTC purposes. "Business" is defined in section OB1 of the ITA 2004 as: "(f) includes any profession, trade, manufacture, or undertaking carried on for pecuniary profit".

Judge Barber referred to Grieve v CIR [1984] 1 NZLR 101 (CA) as the leading authority on the concept of "business". He held that there must be a two-fold enquiry as to: the nature of the activities; and the intention of the taxpayer in engaging in those activities. At [42], Judge Barber stated:

In the end, the character and circumstances of the particular venture are crucial. The objective evidence shows that the disputant commenced and now carries on a commercial undertaking in an organised and sustained way, and in my view the overall effect of that is to obtain, now and in the future, pecuniary profit.

Judge Barber considered the following factors (from Grieve) at [43]-[53]:

  • the nature of the activity;
  • the period over which it is engaged in;
  • the scale of operations and volumes of transactions;
  • the commitment of time, money and effort;
  • the pattern of activity; and
  • the financial results.

Judge Barber agreed with the Commissioner that after taking into account all of these factors, the disputant was operating a business. At [55], he held that: "to seek money's worth by capital gain in property value is to seek 'pecuniary profit'".

Judge Barber also held that the definition of "pecuniary profit" is not limited to revenue (taxable) profit. He agreed that the disputant's activity fell squarely within the concept of an "intention to make a pecuniary profit".

Judge Barber found that the disputant was undertaking a property owning and letting business at all material times. Accordingly, the disputant's rental losses for the relevant tax years were business losses and must be excluded from the WfFTC entitlement calculation.

Income Tax Act 2004