The ATO’s view of Crowdfunding and Tax
04 November 2016
Crowdfunding is gaining huge popularity across the globe. In Australia interest in the various forms of crowdfunding is increasing rapidly. Soon we may catch up with the rest of world which means that our tax and corporate legislation will need to catch up too.
Expectations were high earlier this year as Australia appeared poised to enact legislation to improve the environment for equity sourced crowdfunding. However in the midst of election chaos the Bill lapsed at dissolution in the Senate. At the time there did appear to be broad support to move forward on equity sourced crowdfunding legislation. We should hear more on that later this year.
There has, however, been some progress in tax legislation. The ATO has recently released details on its current view on the tax implications of crowdfunding arrangements with the promise that as the industry expands and new developments arise, they will continue to review and update the information.
At a high level some of the key points made by the ATO include the following:
- Some or all of income earned or received through crowdfunding may be assessable income, depending on the nature of the arrangement, the taxpayer's role in it and their circumstances.
- The tax laws which apply to investment and financial activity undertaken in a conventional manner (e.g. buying goods and services, buying shares, lending money) apply in the same way to investment and financial activity conducted under crowdfunding.
- Crowdfunding transactions may be subject to GST, depending on the type and nature of the arrangement.
- Equity sourced crowdfunding is likely to be a popular route for investors who are planning to take advantage of the concessional tax treatment for Early Stage Innovation Companies (ESIC).
- Taxpayers must keep records explaining all transactions that relate to any crowdfunding arrangement for five years.
Once the Government consultation on the appropriate legislative framework for crowd-sourced equity funding by public companies has been completed, including whether the Corporations law should be changed to facilitate access to crowd-sourced equity funding by proprietary companies, (which we are hoping for) the ATO will review their position.
The Four Main Types of Crowdfunding
The ATO recognises that there are currently four main types of crowdfunding. Each using a different strategy to attract funding with different potential tax consequences for the parties involved:
- 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 - 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 - 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.
- 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.
Income tax Implications for the three parties, or roles, in a Crowdfunding Arrangement
The ATO believe that there are usually 3 parties (or roles) in a crowdfunding arrangement:
- Promoters - 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) is known as the "promoter";
Promoters in a crowdfunding arrangement maybe taxed depending on the nature of the funds and the way in which they are received particularly under a donation-based or a reward-based arrangement where:
- crowdfunding is used in the course of employment
- a transaction or scheme is entered into with the intention or purpose of making a profit or gain
- a taxpayer receives money or property in the ordinary course of business (money or property received in exchange for goods and services is income, but money received by way of loan is not).
- Intermediary - the organisation providing the crowdfunding platform, known as the "intermediary";
Typically a crowdfunding platform is provided by an Intermediary who charges the promoter a flat fee or a percentage of the total funds received. If you are the Intermediary the fees that you charge and some or all of the total funding may be assessable income.
- Contributors - individuals or entities that contribute or pledge money, known as "contributors".
The ATO have said that in some cases a person who contributes funds to a crowdfunding venture or project, may be subject to tax on any returns received. This would be expected where the contributor is carrying on a business or is expecting to make a profit from the transaction. The ATO are currently working on developing examples to provide more detail.
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.
Funds contributed by an individual who is not carrying on a business are not deductible. This should be contrasted to donations made to deductible gift recipients undertaking various charitable pursuits. 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 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.