Crowdfunding can have tax consequences

Entrepreneurs with an idea they want to put into practice can have difficulties in obtaining funding, particularly from traditional sources, to progress their ideas. Crowdfunding can help.

So-called “crowdfunding” is a relatively recent addition to the funding scene. It is often connected with the arts, or online communities or social networks, but is not necessarily limited to that.

Crowdfunding generally involves funding a project or business venture by raising funds from a large number of people, typically via the internet.

READ MORE: Three key tips for crowdfunding

So how does tax relate to crowdfunding? If the project is a business, there may be income tax and GST consequences.

The GST treatment of crowdfunding depends on a number of things. Typically, the promoter of the project or venture will engage an intermediary to operate an online platform that allows the promoter to connect to potential funders. Various models are used to attract funding.

In the ATO’s view, the GST treatment of crowdfunding for a promoter operating in Australia may vary according to:

• the model adopted (see below) and what supplies are made to the funder;
• whether the promoter is carrying on an enterprise;
• whether the promoter is registered for GST;
• whether the promoter makes supplies that are connected with Australia; and
• whether the funder is in Australia. Supplies by a promoter may not be subject to GST if either the promoter or the funder is not in Australia.

The main crowdfunding models include:

Donation-based funding

Deductible gift recipient status is needed in order for donations to the business to be tax deductible. Where the funder donates a payment to the project or venture without receiving anything in return, the ATO considers that the promoter does not make any supply to the funder and does not have any GST liability. Where an intermediary is used, the intermediary makes a taxable supply of services to the promoter which is subject to GST. The promoter would be entitled to an input tax credit for the services he or she acquires from the intermediary.

Reward-based funding

Under this model, the promoter provides goods, services or rights in return for payments by funders. The ATO considers the promoter will have a GST liability if a taxable supply is made to the funder. If the promoter makes a taxable supply, the funder is entitled to an input tax credit if the funder is registered for GST and the acquisition is made for a creditable purpose. Generally, no input tax credit is available if the acquisition relates to the funder making input taxed supplies. The intermediary would be taken to make a taxable supply of services to the promoter.

Equity-based funding

Here, the funder makes a payment in return for an interest in the equity of the promoter. Typically this will occur when the promoter is a company in which the funder acquires shares in return for their payment. Supply of shares is not subject to GST and the funder is not entitled to an input tax credit for the acquisition of the shares. The intermediary makes a taxable supply of services to the promoter. Input tax credits are typically not available for acquisitions that relate to the promoter making input taxed supplies. However, the ATO says if certain circumstances are satisfied, the funder may be entitled to input tax credits for acquisitions that relate to the making of input taxed financial supplies.

Debt-based funding

Under this model, the funder loans money to the promoter who agrees to pay the interest in return. The promoter is considered to make an input taxed supply of an interest in or under a debt to the funder. The funder makes an input taxed supply of an interest in or under a credit arrangement to the promoter. No GST liability arises, and the funder is not entitled to an input tax credit for the acquisition made from the promoter. The intermediary makes a taxable supply of services to the promoter. Input tax credits are typically not available for acquisitions that relate to the promoter making input taxed supplies.

Crowdfunding can be a critical source of funding for projects that find traditional funding sources difficult to obtain. Of course, crowdfunding can involve multiple funders and this can be a complication, particularly where taxation matters are concerned.

Anyone considering the use of crowdfunding as a source of funds for their venture should get professional advice. There may or may not be tax consequences of using crowdfunding but the precise nature of the way the funding is organised is important.

Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

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