What is crowdfunding and what are the income tax consequences?
Crowdfunding is the practice of using internet platforms, benefit events or mail order subscriptions to drive investment for a project, cause or service. There are four main types of crowdfunding:
Donation-based crowdfunding: A contributor only donates to the project, with no expectation of anything in return.
Reward-based crowdfunding: As the promotor, your business provides goods/services in return for the contributor contributing to the project (i.e. sending merchandise or providing a discount).
Equity-based crowdfunding: A contributor receives equity in the promotor company in return for contributing. The contributor becomes a shareholder with certain rights such as voting rights, distribution rights etc.
Debt-based crowdfunding: A contributor lends money to the promotor, in return the promotor will pay back the principal with additional interest.
With the increase in online social media activity, many businesses turn to crowdfunding as a means of increasing their cash position to fund their business goals. Although not well known, there are tax consequences to crowdfunding. In this blog, I will focus on the tax consequences of crowdfunding on the promotor (aka the business initiating the crowdfunding project).
Are funds generated from donation-based or reward-based crowdfunding models counted as assessable income?
As always with tax, the answer to this is: it depends, but likely.
If the crowdfunding income is received through the course of employment or entered with the intent to make profit or received in the ordinary course of business, then the income from crowdfunding will be counted as assessable income (and must be included as such in your tax return). If income is assessable, you can claim deductions for expenses which relate to earning this income.
However, if the crowdfunding project occurs before you are “carrying on a business”, then the income may not be counted as assessable income. For example, if the activity funded is a hobby and not a business.
Are funds generated from an equity-based crowdfunded model counted as assessable income?
Funds received under this model are not counted as assessable income as strictly speaking, these funds form part of the share capital of the company promoting the project. Dividends paid to contributor-shareholders are not deductible but can be franked.
Are funds generated from a debt-based crowdfunded model counted as assessable income?
Funds received under this model are not counted as assessable income. The promotor is able to claim an deduction for the interest expense on the repayments to the contributors.
Contact us at Dolman Bateman or Buildersbooks if you are looking for an experienced accountant or Bookkeeper.
This information is not to be relied upon without speaking to your accountant, tax agent or financial adviser depending on the advice