Do you have a great idea? Do you need funding? Crowdfunding is an emerging way of securing funds to see your inventive ideas become reality.
There are several types of crowdfunding that you can use:
Donation based – funding a cause without the fundraiser providing anything in return. This is typical for charities or philanthropic endeavors.
Reward based – funding to bring an idea or concept to fruition in exchange for a reward – discounted final product, free product or service.
Equity based – funding in exchange for a share in the promoter.
Debt based – funding is paid back at a rate of interest.
It is important to note that the Corporations Act restricts proprietary companies to having no more than 50 non-employee shareholders. Therefore, companies that wish to engage in equity based crowdfunding will need to become public companies, which also mean to a greater cost and regulatory burden.
If people latch onto your idea or venture and the project reaches its funding target and goes ahead, what next?
If the funding is contributing to a business activity or project with the purpose of generating income, then for tax purposes the funding is assessable income in the year that the funds are received. In general, no money is transferred from either the donor or the project promoter until the funding target it reached. Consequently, if you pay tax on the income that you receive for your project, then you will also be able to claim a deduction for expenses related to that activity (such as the percentage fee that crowdfunding platforms like Kickstarter and Pozible will charge on successful crowdfunding projects that reach their targets).
If you choose to use the reward based crowdfunding model, then the rewards given away may also be subject to GST. If you are registered for GST and are obliged to provide anything in return for the funds sourced, then the reward will likely be subject to GST. If there is no obligation to provide anything, then GST is unlikely to apply.
Perhaps you do not have the entrepreneurial spirit, but are instead thinking about getting involved in a project by helping to fund it. Where do you stand in terms of protection and tax?
While it is important to note that the promises made by crowdfunding projects are subject to consumer laws, it is very difficult to get your money back if the promoter fails to deliver. The crowdfunding platforms also do not take responsibility if the rewards are not delivered.
Furthermore, where you make a donation to a philanthropic cause or other project that is being crowdfunded, it is generally not a tax-deductible donation unless the project promoter or organisation is a registered deductible gift recipient. If, on the other hand, you are expecting something in return for the contribution that you make, then the tax treatment of the payment will depend on the situation (for example, a payment for an equity stake in a business is likely to be capital in nature).
Unfortunately, crowdfunding in Australia remains ill-defined with there being no crowdfunding legislation. There was a bill before parliament before the election that sought to clarify and restrict the crowdfunding process by creating clear rules for funding and consumer protections. It is expected that as crowdfunding gains in popularity that further legislation will be proposed and enacted.
Contact us today about the options and implications of alternative funding sources.