Crowdfunding uses internet-based platforms and other forms of social media to raise funds for projects or business ventures.
Generally, the party trying to raise the funds (the promoter) will engage an intermediary (the platform) to collect funds from contributors.
There are different ways this can be done and how the crowdfunding is raised will determine the tax treatment of any funds received:
- Donation-based: the contributor does not receive anything in return other than an acknowledgement
- Reward-based: the promoter provides something in return for the payment (e.g., goods, services, rights, discounts, etc)
- Equity-based: the contribution is made in return for shares in a company
- Debt-based: the contribution is made in the form of a loan with the promoter making interest and principal payments
A Bill that has just passed Parliament seeks to create a regulatory framework for crowdfunding.
The popularity of crowdfunding as an alternative to mainstream finance has increased dramatically and at present, the Government has no viable way of protecting investors or regulating how crowdfunding is raised.
These new rules bring crowdfunding under the Corporations Act while attempting to avoid onerous regulatory commitments that will stifle the flow of funds.
Despite simplified reporting obligations, the changes will invariably add a layer of complexity for promoters and platforms. The rules also restrict how much Mum and Dad investors (retail clients) can invest in a single company in any one year to $10,000, and provide a cooling off period of five days.
Expect changes to start coming into effect this year.
From a tax perspective, funds from crowdfunding are treated like any other form of income, where the funds are likely to be taxable if:
- The crowdfunding relates to employment activities (e.g. raising money to fund a project that is linked to existing employment duties)
- The promoter enters into the arrangement with the intention of making a profit or gain and the project is operated in a business-like way, or
- The funds are received in the ordinary course of a business
If funds are received for a personal project where there is no intention of making a profit (e.g. the project relates to a hobby), these funds are generally not taxable for the promoter.
When funds are received under an equity-based crowdfunding model the funds would generally form part of the share capital of the company that is undertaking the project. If so, the funds should not be included in the assessable income of the company. If payments are made by the company to contributors then these would generally be treated as either dividends (it may be possible to attach franking credits to the dividends) or a return of share capital.
Likewise, when funds are received under a debt-based crowdfunding model the funds would not be assessable to the company as they would simply be treated as a loan. When payments are made by the promoter to contributors the interest component might be deductible in some circumstances.