February 1, 2016
Crowdfunding uses the internet and/or social media to find supporters and raise funds for different types of projects and ventures. It is rapidly evolving and gaining momentum with platforms such as Kickstarter and IndieGoGo providing access to a worldwide audience.
In many cases it is used by individuals and groups to raise money in the form of donations for various causes. It is also often used to prove a business idea. If funding is successful the business moves from prototype to production, already has cashflow, gains publicity and has a core group of customers for the business to build on.
The question of course is what are the income tax consequences of money raised by crowdfunding? The answer, as with all things involving tax, isn’t necessarily straightforward. The Australian Tax Office (ATO) has released a provisional guidance on the income tax treatment of money raised by crowdfunding. It is a good starting point for understanding the different types of crowdfunding which the ATO breaks down into three categories.
Donation Based Crowdfunding: a funder makes a payment (or ‘donation’) without receiving anything in return. It might be acknowledged on the crowdfunding website.
Reward Based Crowdfunding: funders receive a reward in return for their payment. For example the funder may receive merchandise or a discount.
Equity Based Crowdfunding: funders make a payment in return for an interest in the equity of the promoter.
According to the ATO funds you receive or the profit you make through crowdfunding, particularly under a donation based or reward based arrangement, are likely to be assessable income where you:
Use crowdfunding in the course of your employment
Enter into in a transaction or scheme with the intention or purpose of making a profit or gain
Receive money or property in the ordinary course of your business (money or property received in exchange for goods and services is income, but money received by way of a loan is not).
It is the ATO’s view that ‘A crowdfunding project will be a profit-making scheme if, viewed objectively, you launched the project with the intention of making a profit. It doesn’t matter if you are not already running a business, the project is not part of your usual business activities and you don’t have a clear idea of how you will make a profit.’
In relation to reward based crowdfunding there seems little doubt the funds received are assessable income assuming the hurdles of a legal obligation to supply goods is passed. However there is the question of whether the business has actually commenced. This of course is fact dependent and may lead to the funds not being classified as business income.
Perhaps more doubtful is the issue of donation based crowdfunding. Clearly a community interest type project, and the ATO uses the example of funds raised to put toward veterinary fees for a pet poodle and funds raised for the refurbishment of a surf lifesaving club, as long as these remain one off, with no profit motive or commercial character, the income raised in both cases is not considered assessable. However donation based crowdfunding is often used with reward based crowdfunding. Small amounts contributed may receive recognition with ‘perks’ such as a t-shirt or key ring while amounts over a certain value will receive the finished product. The question here is whether there is a sufficient nexus between the donations and the commencement of business activities. If there is, the funds will potentially form part of assessable income.
At this point we will not review Equity Based Crowdfunding in detail as the government has announced its intention to introduce legislation to ‘develop a crowd sourced equity funding model’ including whether changes to the Corporations law are required. However any money raised through issuing shares or equity will be capital in nature and therefore not constitute ordinary income.
Crowdfunding is evolving as a method for entrepreneurs in the new economy to raise funds for business ventures and governments around the world are grappling with the balance between encouraging investment in start ups and maintaining the tax base. No doubt further guidance will be provided but in the meantime be aware that if you crowdfund, depending on your situation, there may well be tax consequences of some description.