Crowdfunding – ATO’s discussion paper about the tax implications for the ‘Promoter’, ‘Intermediary’ and ‘Contributors’

Overview – 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. 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. It is 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 three parties (or roles) in a crowdfunding arrangement:

1. 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‘
2. the organisation providing the crowdfunding website or platform, known as the ‘intermediary‘
3. 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 four 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.

1. 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.
2. 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.
3. 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.
4. 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.

The Commissioner’s general advice is: 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.

Tax effect for Promoters – with respect to the Commissioner, it appears he’s too ready to treat money received as assessable income – suggesting that amounts received are assessable if the Promotor is in business or undertaking a profit making undertaking or sheme. This seems to ignore underlying principles, such as none of donations, amounts subscribed for equity or loan proceeds being assessable income. Perhaps receipts for goods might be assessable, with costs incurred as deductions.

Tax effect for Intermediaries – fees intermediaries take for the use of their platform are assessable income.

Tax Effect for Contributors – the publication rather perfunctorily declares: “the funds they contribute to promotors are not deductible” (which appears doubtful as a general proposition). Payments that will result in receipt of goods, may well be deductible, depending on the contributor’s circumstances. Donations could conceivably be deductible if it met the income earning nexus for the taxpayer (under s8-1) or if it is a contribution to a DGR. Certainly contributions to benefits of a capital nature (such as for shares or debt) would be capital in nature and not deductible.

GST treatment is also relevant and dealt with at further length in the following article on the ATO’s website.

[ATO website – Crowdfunding; Crowdfunding ‘how to’ article; LTN 207, 26/10/16]