Question

Question 1: Income under ordinary concepts

Hemi is a design student and a well-known Wellington street artist. In 2015, he started a “vlog”, commenting on videos of himself painting murals around the city. Fashion stores often sent Hemi clothes and sport shoes in the hope that he would wear them in his videos. Occasionally, Hemi received limited edition sneakers which he sold on Trade Me. After he was charged with criminal graffiti in early 2016, Hemi receives a great deal of publicity, and the number of people viewing his vlog soars.

SkateWorld starts sending Hemi a new pair of limited edition sneakers every month. (Each pair is worth at least $500.) Hemi was approached by MediaMega, a firm which specialises in obtaining advertising for websites. He entered into an agreement with MediaMega to place particular products in his videos, and receives a micro-payment for each person who views his vlog. In December 2016, MediaMega paid Hemi for $10,000 for videos-viewed. This met the costs of hosting his webpage ($1,000) that year and gave him some spare money for his fourth year at university. He was looking forward to a bigger cheque from MediaMega in December 2017 as his blog attracted yet more readers.

Required: Explain whether the sneakers Hemi received from SkateWorld and the money he received from MediaMega in December 2016 would be income under section CA 1(2) of the Income Tax Act 2007 (income under ordinary concepts).

Answer 1

Facts of the Case

Yes, Vlog video receipts will be taxable. This may be because the receipts are from a business. However, you do not need to be carrying on a business to be taxable on YouTube receipts. Two other provisions in the Act tax YouTube receipts if they are income under ordinary concepts, or from a profit-making undertaking or scheme.

Vlog receipts (or receipts from similar online sources, such as Vimeo or Twitch) are no different from any other type of receipt. There are no separate provisions within the income tax laws that deal specifically with receipts from online or web-based activities. Where relevant, current tax laws and interpretations apply.

New Zealand tax residents are taxable on their worldwide income. Despite the online origin of YouTube receipts, a resident will be taxable if those receipts are “assessable income” as defined in the Act.

There are various types of YouTube receipts, including: Advertising revenue (AdSense income from Google). Affiliate income (earning a commission by promoting other people’s or companies’ merchandise on your YouTube channel via external annotation links). Paid content (fee received for purchase/rent of a video or subscription to a YouTube channel). Sponsorship (fee earned from product placements or endorsements).

YouTube receipts are often passively earned, in that once the video has been created and monetised, the creator can earn revenue without doing anything more. There may be a perception that passive YouTube receipts are more akin to income from a hobby or pastime (ie, not a business) and are therefore not taxable. However, a business is not necessary for YouTube receipts to be taxable. For instance, YouTube receipts may also be taxable as income under ordinary concepts or as income from a profit-making undertaking or scheme.

Exemptions & Deductions from above income

Windfall gains are excluded from being income under ordinary concepts. A windfall gain would include gifts and gratuitous receipts (eg, an inheritance or bequest), as well as winnings from games of chance (eg, lottery winnings). The key point is the random nature of these types of receipts, which precludes them from being classified as income under ordinary concepts.

You should be aware that even if you are not conducting a business of earning income from YouTube videos, your receipts may still be taxable as income from a profit-making undertaking or scheme, or as income under ordinary concepts. Each case needs to be considered on its own facts.

The costs related to gaining or producing your YouTube income may be deductible for tax purposes. This is subject to: The capital limitation: expenditure of a capital nature is not deductible. The cost of capital items may, however, be depreciated. The private limitation: expenditure for any private benefit is not deductible. Your expenditure may need to be apportioned if it is partly for private purposes (with the private portion not being deductible).

Relation to the given Case

In the light of above provisions mentioned, Yes the sneakers Hemi received from SkateWorld and the money he received from MediaMega in December 2016 would be income under section CA 1(2) of the Income Tax Act 2007 (income under ordinary concepts).

We cant consider the sneakers received from Skateworld as windfall gain since it is being given to take advantage of advertising gains and in return Hemi sell out the sneakers to generate cash.

However, Hemi can claim the deduction of capital expenditure for e.g. hosting of website etc while computing the taxable income.

Summary

If you receive YouTube/Vlog receipts, they may be assessable income, depending on the circumstances. The assessable income needs to be declared in your tax return.

Similarly, if any amount is assessable income, then some of the costs related to gaining or producing that income may be allowable as a deduction (subject to the capital and private limitations).

You must retain records sufficient to calculate your income and expenses. Generally, those records should be kept for seven years from the end of the income year to which they relate.