Income tax and crowdfunding - E Consett.pdf (715 kb)
Income tax may not be front of mind when starting a crowdfunding campaign, but early consideration of the issues could prevent a panic-inducing call from the Australian Taxation Office. The choice of crowdfunding model adopted will dictate the income tax consequences of the funds raised and may, in turn, have significant implications for the early-stage cashflows of the project.
At a minimum, crowdfunding project creators should ask themselves (or their accountant):
- whether they are carrying on a business for income tax purposes;
- the point in time at which the business commenced or will commence;
- what are the rights and obligations arising under the chosen crowdfunding platform; and
- which crowdfunding model is intended to be used to raise funds.
General guidance is available from the Australian Taxation Office on whether a business is carried on (albeit in a different context) and the importance of timing on the deductibility of expenditure, as well as a fact sheet on the GST implications of crowdfunding. To date, however, there has been no public guidance on the income tax implications of crowdfunding.
Where a company is carrying on a business and seeking to raise funds, a summary of the key income tax considerations for funds raised under each of the 4 main crowdfunding models is set out below.
Funds received are likely to be ordinary income, with the timing of derivation depending on the obligations imposed by the platform. For example, an obligation to provide a refund may defer derivation until the rewards are provided. The cost of providing the reward should be deductible.
Although the position is less clear than with the reward-based model, existing case law suggests that funds received under the donation-based model may also be treated as income. Project creators should, therefore, further consider the risk and implications of the funds being assessable immediately upon receipt.
Although equity-based funding is currently heavily restricted in Australia, the Government is slowly working towards relaxing certain requirements which may result in an increased uptake of this model.
Funds received under this model will not be assessable to the project creator. Payments to the funders will not be deductible to the project creator, but may be frankable in certain circumstances.
Debt-based funding is similarly restricted but there are no current proposals to enable a wider adoption of this model.
Nevertheless, if used the funds received under this model will not be assessable to the project creator. Provided certain requirements are met, the project creator will be able to claim deductions for interest payable to the funders.
A discussion of the different crowdfunding models and a more detailed explanation of the income tax treatment of funds received under those models can be found in the article Income tax and crowdfunding: when old meets new (linked above).