Crowdfunding

Overview of crowd funding

Crowdfunding is the practice of using internet platforms, mail-order subscriptions, benefit events and other methods to find supporters and raise funds for a project or venture.

Crowdfunding is a rapidly evolving industry. This information represents our current view of the tax implications of crowdfunding arrangements. As the industry expands and new developments arise, we will review and update the information.

If you're involved in crowdfunding – regardless of your role – you need to be aware of the tax consequences. These vary depending on the nature of the arrangement, your role in it and your circumstances.

It's important to determine whether the money you receive through crowdfunding is income and whether you need to consider GST. If it is income, you will need to include it in your tax return and there may be deductions you can claim. We also explain the GST requirements if you are subject to GST on transactions.

Crowdfunding roles

There are usually 3 parties (or roles) in a crowdfunding arrangement:

• the initiator of the project or venture or the campaign creator (who may act in a personal capacity or use a company or organisation as the vehicle to progress the crowdfunding project or venture) known as the 'promoter'
• the organisation providing the crowdfunding website or platform, known as the 'intermediary'
• individuals or entities that contribute or pledge money, known as ‘contributors'.

Each party may have income tax and GST obligations, depending on their circumstances and the nature of the crowdfunding arrangement.

Types of crowdfunding

There are currently 4 main types (or models) of crowdfunding. Each uses a different strategy to attract funding, and each may have different tax consequences for the parties involved.

Donation-based crowdfunding

In donation-based crowdfunding, a contributor makes a payment (or 'donation') to the project or venture, without receiving anything in return. The contributor's 'donation' may simply be acknowledged – for example, on the crowdfunding website.

Reward-based crowdfunding

In reward-based crowdfunding, the promoter provides a reward (goods, services or rights) to contributors in return for their payment. For example, the contributor may receive merchandise or a discount. In many cases, there are different levels or types of reward, according to the level of contribution and whether the fundraising reaches the prescribed levels.

Equity-based crowdfunding

In equity-based crowdfunding, the contributor makes a payment in return for a share (or equity interest) in the company undertaking the project or venture. The share in the company will provide the contributor with certain rights including the right to participate in future profits (dividends), voting rights, and rights to returns of capital upon winding up.

The Government is currently consulting on the appropriate legislative framework for crowd-sourced equity funding by public companies, including whether the Corporations law should be changed to facilitate access to crowd-sourced equity funding by proprietary companies.

We will update this guidance for crowdfunding (including examples to assist promoters and contributors) once consultations conclude.

Debt-based crowdfunding

In debt-based crowdfunding, the contributor lends money to the promoter (or pool of promoters) who, in return, agrees to pay interest and repay principal on the loan.

For more information see:

• Facilitating crowd-source equity funding and reducing compliance costsExternal Link.

Crowdfunding and income tax

If you earn or receive any money through crowdfunding, some or all of it may be assessable (taxable) income, depending on the nature of the arrangement, your role in it and your circumstances. All assessable income needs to be declared on 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 deductions, providing you have the appropriate records to substantiate your claims.

The tax laws which apply to investment and financial activity undertaken in a conventional manner (for example, buying goods and services, buying shares, lending money) apply in the same way to investment and financial activity conducted under crowdfunding.

You must keep records explaining all transactions that relate to your tax affairs, including any crowdfunding arrangement. Generally, you need to keep records of most transactions, in English, for 5 years. The 5 years starts from when you prepared or obtained the records, or completed the transactions, whichever is the later.

For more information see:

• Income and deductions for business
• Record keeping for business

Assessable income – promoters

If you're the promoter in a crowdfunding arrangement, the funds you receive or earn may be assessable income, depending on the nature of the funds and the way in which you receive them.

Funds you receive or the profit you make through crowdfunding, particularly under a donation-based or a reward-based arrangement, are likely to be assessable income where you:

• use crowdfunding in the course of your employment
• enter into 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 loan is not).

Questions you need to consider include:

• Are you carrying on a business?
• Is it a profit-making scheme?

Are you carrying on a business?

Whether you are carrying on a business and when the business starts are important. For example, you must have made a decision to start your business and have done something about it. If you’re still setting up or preparing to go into business, you might not yet have started the business.

Not all promoters will be carrying on businesses when they launch, or even complete, crowdfunding projects. To carry on business as a promoter, you need to carry on your activity for commercial reasons and in a commercially viable way. You will undertake activities in a business-like manner including preparing a business plan, acquiring capital assets or inventory in line with the business plan, preparing accounting records, and marketing a business name or product. You have to intend to make a profit or genuinely believe you will make a profit, even if you are unlikely to do so in the short term. There’s usually repetition and regularity to your business activities, although one-off transactions can amount to a business in some cases.

There may be additional indications that a business is being carried on. For example, promoters who seek to claim the R&D tax incentive must be carrying on a business in order to be eligible for the incentive.

Money received (or property given) prior to a business being carried on is not generally assessable income. Likewise, you can't claim deductions incurred prior to the business being carried on.

For more information see:

• Are you in business?

Is it a profit-making scheme?

A crowdfunding project will be a profit-making scheme if you launched the project with the intention of making a profit, and the project was entered into and the profit made while carrying out a business operation or commercial transaction.

It doesn’t matter if:

• you are not already running a business
• the project is not part of your usual business activities
• you don’t have a clear idea of how you will make the profit.

If you expect to make a profit when you launch a project, and you run the project in a businesslike way, any funds raised by the project will be taken into account in determining your profit.

Other tax consequences

There may also be other income tax consequences – for example, assessable recoupment, capital gains tax (CGT) or trading stock may be relevant to your circumstances.

For more information see:

• Capital gains tax
• Simplified trading stock rules
• Small business entity concessions

Assessable income – intermediaries

Typically, promoters make use of crowdfunding websites (or platforms) which provide a way of marketing the project or venture, connecting to potential funders and receiving pledges of support or payments from funders.

The crowdfunding platform is usually provided by a third party (or intermediary) who typically charges the promoter a flat fee or a percentage of the total funds received.

If you're the intermediary in a crowdfunding arrangement, the fees you charge and some or all of the total funding may be assessable income.

Assessable income – contributors

If you contribute funds to a crowdfunding venture or project, any promised return to you may be assessable income.

More examples are currently being developed to assist contributors.

Examples for promoters

The following examples describe various crowdfunding scenarios and explain whether the money earned or received is assessable income. The examples cover a range of promoter circumstances.

In the examples, it is assumed that the intermediary carries on a business in Australia and all promoters are Australian residents.

Personal or private arrangements

The following example describes a crowdfunding arrangement that is purely personal or private in nature, with no commercial or businesslike activities and no intention to make a profit.

In Example 1, the crowdfunded amount is not part of Debbie’s assessable income because:

• her actions don't constitute carrying on a business or profit-making scheme
• she is not receiving any regular or recurring payments, and doesn't supply anything of value to funders
• there are no commercial or businesslike operations.

An alternative analysis might be that Debbie’s crowdfunding project is similar to receiving a gift. A gift is generally not income, and in these circumstances, the funding is based on generosity and goodwill.

Either analysis is reasonable in Debbie’s circumstances.

If Debbie later decides to continue with her blog and make a profit from the traffic on her blog, the tax consequences for the amount generated from advertising will depend on her circumstances at that time.

Activity might become a business in future

The following example describes a crowdfunding arrangement that currently has no commercial or businesslike characteristics and there is no intention to make a profit. While there may be plans to commercialise the operation in future, there is currently no indication of this.

In Example 2, the funds raised by Aaron, Stephen, Cissie and Wendy are not assessable income because:

• it is a one-off transaction outside the ordinary course of business
• there is no indication of a profit-making scheme or that the transaction is commercial in character
• the group’s actions are not of a businesslike nature.

While there may be plans to commercialise the operation in future; we can't draw this conclusion. The current operations and intentions demonstrate an undertaking built on community values and responsibility.

Too early to be in business

The following example describes a crowdfunding arrangement where the activity may either be a hobby or in the very early stages of establishing a business but is not yet operating as a business.

In Example 3, the money Georgina receives through crowdfunding is not assessable income because:

• her employer is not contributing to the crowdfunding project, and it is entirely unrelated to her employment
• Georgina doesn't show an intention to profit from the film
• she hasn't previously profited from her films and the project is not a commercial transaction or business operation
• her actions don't constitute carrying on a business or businesslike operation
• she's either in the preparatory stages of establishing a new business or filmmaking is merely a hobby.

If Georgina makes plans in the future to sell DVDs, the tax consequences for the money she receives from the sale of the DVDs will depend on her circumstances at that time.

Starting a business

The following example describes an activity that is being conducted in a businesslike manner with the intention to make a profit.

In Example 4, the $750,000 received from the crowdfunding project is assessable income of Boiliz Pty Ltd. Based on Liz’s actions, it's reasonable to conclude that Boiliz Pty Ltd is carrying on a business and it's not just an intention to engage in business:

• the scale of the business increased from a mere prototype to a commercial production line
• the activities are conducted in a businesslike manner – that is, in a systematic and organised way through an incorporated entity.

It is reasonable to conclude that Boiliz Pty Ltd is carrying on a business.

Expanding an existing business

The following example describes a crowdfunding project directly related to expanding an existing business.

In Example 5, the amounts Anita received through the crowdfunding project are assessable income because:

• the project was entered into as an ordinary part of carrying on a business
• she is in the business of selling yarns and the project is directly related to expanding a product line within that business.

Factors such as advertising to actively seek contributors, the use of contributions for expansion, the provision of yarns to contributors in return for their contributions and an intention to increase the number of alpacas all point to commercial purpose of production and sale of alpaca yarns as part of a business of selling yarns.

Income tax implications of different crowdfunding models

The following commentary of the 4 crowdfunding models assumes that the promoter is carrying on a business or has a profit making intention or purpose. If the promoter is not carrying on a business and does not have a profit-making intention or purpose, then the following commentary is not applicable.

Reward-based crowdfunding model

Under this crowdfunding model, contributors provide money to the promoter in return for the supply of goods or services.

The exact nature of the legal obligation of the promoter to supply the goods or services to the contributor may vary significantly under this model. Generally speaking, the promoter will be legally bound to any promise or commitment they have made to contributors.

Are contributions received by the promoter income?

Where the promoter is carrying on a business, the reward-based crowdfunding model can be characterised as the ordinary business of making sales to customers with an obligation to deliver goods or services. Since the supply of the goods or services is the business of the promoter, the funds are received in the ordinary course of business and are ordinary income.

Recognition or timing of the income depends on whether the promoter accounts for the income on a cash (receipts) or accruals (earnings) basis.

Under cash accounting, income is usually derived when it is received (either actually or constructively). However, cash accounting may not give a true indication of the promoter’s income and depending on the promoter’s circumstances, it may not be appropriate.

Under accruals accounting, income is derived when it is earned (that is, a recoverable debt is created). In certain scenarios, this may not occur until the goods or services are provided to the contributors. In the case of crowdfunding, this may require a certain fundraising target being met. If the goods and services are not provided and the funds are refunded (for example, see Kickstarter terms), no income would have been earned.

For more information see:

• Income and deductions for business
• Concept of ordinary income: Income Tax Assessment Act 1997, section 6-5
• Taxation Ruling TR 98/1: Determination of income
• Accounting methods

The cost of goods or services provided by the promoter to the contributor, and other associated expenses, may be deductible for the promoter provided the general tax deductibility rules are satisfied (for example, deductions may be claimed for the cost of goods sold). The deduction arises when the expense is incurred (that is, when a current legal obligation arises to pay for the required inputs to provide the goods or services to the contributor), subject to the operation of the trading stock rulesExternal Link.

Tax consequences for the contributor

The tax consequences for each contributor will depend on that contributor’s circumstances and the purpose for acquiring the goods or services. For many, the acquisition of the goods or services will be purely private in nature and not deductible. However, for some contributors the goods or services may be acquired as part of an ongoing business and the cost may be a deductible business expense, subject to satisfying the general deductibility rules.

For more information see:

• Income and deductions for business
• General deductibility rules: section 8-1
• Timing of deductions: Taxation Ruling TR 97/7
• When an expense is incurredExternal Link

Donation-based crowdfunding model

Under the donation-based crowdfunding model (and promoters are carrying on a business or have a profit-making intention), promoters do not commit to provide anything of material value to contributors. Instead, the promoter may simply acknowledge the contributions made, often in the form of a list of contributors on its website and use the money for the purpose stated in the crowdfunding campaign.

Are the contributions received by the promoter income?

Whether the receipt of a voluntary payment is assessable income will often need to be determined on a case by case basis. The courts have established a number of principles for deciding whether voluntary payments are assessable income.

The most decisive principle is whether it is connected enough for the funds to be considered a product of the income-producing activities of the promoter.

In many cases it will be possible to identify a common understanding between a promoter and a contributor. A typical crowdfunding campaign will often state a broad purpose funds will be used for (for example, to fund production). Likewise, the contributor will often commit to a production timeline, including milestones such as full production and first shipments.

In other words, the common understanding is that the funds will be received to further the business of the promoter, indicating the funds are a product of the income-producing activities of the promoter.

Similar to the reward-based crowdfunding model, recognition or timing of the income depends on whether the promoter:

• accounts for the income on a cash (receipts) or accruals (earnings) basis
• is under an legal or practical obligation to refund the donations (including as damages).

Tax consequences for the contributor

Funds contributed by an individual who is not carrying on a business are not deductible. Donations made to deductible gift recipients may be deductible. However, funds contributed in the course of carrying on a business may be deductible as ordinary business expenses (for example, sponsorship and marketing) if they satisfy the requirements of section 8-1 of the ITAA 1997.

For more information see:

• Tax-deductible gifts

Equity-based crowdfunding model

Although equity-based funding is only available in limited circumstances in Australia, certain proposed regulatory changes may facilitate increased use of this model.

Under the equity-based crowdfunding model, contributors provide money to the promoter in return for a share or other equity interest in the company undertaking the project or venture.

Are the contributions received by the promoter income?

In contrast to reward-based funding and donation-based crowdfunding funding models funds received by the promoter will not be income in their hands. Instead, they will form part of the share capital of the company undertaking the project or venture.

Providing a share or equity interest in the promoter may confer certain rights to the contributor, including dividend rights, voting rights, and rights to returns of capital upon winding up.

Dividends paid to contributors holding shares or other equity interests will be non-deductible for the promoter, but they may be able to frank those distributions. The promoter will need to consider whether withholding tax applies to distributions made to overseas shareholdings.

Tax consequences for the contributor

For contributors, the funds they contribute to promoters are not deductible.

Dividends paid to contributors will be assessable income in their hands, while returns of capital are not assessable but generally reduce the cost base of the share or equity interest. The subsequent disposal of shares in a company may also trigger CGT consequences.

Contributors may be able to claim a deduction for interest charged on money borrowed for the crowdfunding investment, which produces assessable dividend income. However, only interest expenses incurred for an income-producing purpose are deductible. If the money borrowed is used for both private and income-producing purposes, the interest expense needs to be apportioned between each purpose.

For more information see:

• Dividends
• Investment Income
• You and your sharesExternal Link
• Shares and units – CGT
• Non-assessable payments from a company

Debt-based crowdfunding model

Debt-based crowdfunding involves a loan by a contributor to a promoter, who in return agrees to pay interest to the contributor and repay the principal.

Are the contributions received by the promoter income?

Where a contributor lends funds to a crowdfunding promoter, the promoter will not be assessed on receipt of those funds.

The interest expense incurred by the promoter will be deductible if they satisfy the tax deductibility rules in section 8-1 or Division 230 of the ITAA 1997. If the interest is paid to non-resident contributors, the promoter will need to consider whether relevant withholding tax applies.

Tax consequences for the contributor

The interest income derived by the contributor will be assessable income. The income will generally be derived when received, although certain contributors may be required to recognise the income on an accruals basis.

Contributors may be able to claim a deduction for certain fees and other costs (such as borrowing costs) for managing their loans.

For more information see:

• Interest, dividend and other investment income deductions
• Income and Deductions for BusinessExternal Link
• Taxation Ruling TR 2004/4 - deductions for interest

Tax incentives for early stage investors

Parliament has passed measures which will give concessional tax treatment to investors promoting investment in innovative, high-growth potential start-up companies.

The incentive applies to interests issued by an early stage innovation company (ESIC), which is an Australian-incorporated company that is:

• at an early stage of its development; and
• developing new or significantly improved innovations for the purpose of commercialising and generating an economic return.

An investor in an ESIC may be eligible for the following incentives if they don't hold a more than 30% interest in the ESIC:

• a 20% non-refundable carry-forward tax offset (based on the value of the investment), capped at $200,000 per investor per year (retail investors are subject to an investment limit of $50,000 per investor per year); and
• a 10 year exemption on CGT, provided investments are held for 12 months or more.

The tax offset will be available upon investment, not when the funds are used by the ESIC, and any sale of the shares will be taxed on a 'deemed capital account' basis.

These incentives apply to the 2016–17 and subsequent income years.

For more information see:

• Tax incentives for early stage investors
• Subdivision 360-A of the Income Tax Assessment Act 1997

Crowdfunding and GST

Crowdfunding transactions may be subject to GST, depending on the type and nature of the arrangement.

For more information see:

• GST and Crowdfunding

Crowdfunding and disaster assistance

Some crowdfunding platform appeals seek funds to assist businesses, including primary producers affected by severe drought conditions or natural disasters such as bushfires or floods.

How these campaigns affect your assessable income depends on whether you are a promoter or intermediary of these platforms, or if you contribute to a campaign run on these platforms.

Businesses who receive assistance from crowdfunding platforms must consider how these payments affect their tax.

Tax consequences for recipients of drought or disaster assistance

If you or your business receive assistance payments from private funds, charitable groups or crowdfunding platforms the effect on your tax depends on how you use the funds.

Where the payments are intended to be used for business expenses they must be declared as assessable income. However, you may also be able to claim the associated business expenses as tax deductions. For example, if you spent all the money buying livestock feed (a deductible expense) there will be no net effect on your income tax. The increase in assessable income will be offset by the increase in deductions claimed.

If the amounts received are intended to be used for personal emergency relief such as food or clothing, or other such non-business purposes, they are not included in your assessable income.

For more information see:

• Drought help

 

Tax consequences for contributors to drought assistance

If you are an individual not carrying on a business, money you contribute to a drought help crowdfunding platform is not deductible.

However, donations made to deductible gift recipients are generally deductible.

For more information see:

• Gifts and donations

More information

If you're unsure of your circumstances you may need to seek professional advice from us or a registered tax professional.

Even if you receive professional advice or use a tax professional to prepare your return, you're still responsible for providing proof of your income and deductions. Penalties may apply if you don't report your income correctly or if you claim deductions you're not entitled to.