I am Brett Beaver, a Perth based “business services” tax tragic, welcome to Tolerable Tax (TT)! Following a small hiatus from my TT postings, I’d like to kickstart this current series of TT by discussing crowdfunding and the pozible application of Income Tax and Goods and Services Tax (GST).
Parties seeking crowdfunding generally adopt a donation based, rewards based, equity based or debt based model and there are generally three parties in a crowdfunding arrangement:
1) the initiator of the project or venture (the ‘promoter’);
2) the organisation providing the crowdfunding website or platform (the ‘intermediary’); and
3) individuals or entities that contribute or pledge money (‘funders’).
The focus of the remainder of this TT post will be on the promoter of the crowdfunding project.
It is crucial to determine and understand whether the money you, as the promoter, receive through crowdfunding is assessable income and whether GST applies. This may have a considerable impact on initial cash flow modelling and budgeting for your business.
The current guidance from the ATO does not cover the finer details surrounding crowdfunding, such as timing of recognition of assessable income. It is likely that the ATO’s guidance will continue to evolve as new legislation is introduced, particularly around equity based models – given the recent #innovationagenda announcement – so watch this space.
Based on the current guidance from the AATO, cash funding that a promoter receives or the profit made through crowdfunding, particularly under a donation-based or a reward-based arrangement, are likely to be assessable income where the promoter:
- uses crowdfunding in the course of his or her employment;
- enters into a transaction or scheme with the intention or purpose of making a profit or gain;
- receives money or property in the ordinary course of his or her business.
Based on the above, to determine whether the money received is considered assessable income (and therefore taxable), the main issues a promoter needs to consider are:
1) are you carrying on a business? and
2) is there a profit-making scheme or motive?
Both of these are questions of fact and very much depend on the promoters particular circumstances. This can be difficult to ascertain at the outset of your new crowdfunded venture, so I would encourage you to speak to your tax advisor.
An area that is not currently addressed in the ATO’s current guidance is the timing of recognition of income for tax purposes. Therefore, at present, when advising clients, we are referring back to existing case law and ATO Rulings on timing of recognition of income.
I want to also point out that as with any other business venture, a promoter may also face other income tax consequences as part of the establishment of his or her new venture, including the potential application of capital gains tax, consideration of the trading stock provisions and the application of GST, the latter of which has had specific guidance released from the ATO.
The ATO’s current view of the application of GST on proceeds from crowdfunding for a promoter, operating in Australia, varies depending on:
- the model adopted (i.e. donation based, rewards based, equity based or debt based) 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.
Consider this example:
If a promoter adopts a reward based model seeking backing from Australian funders, is carrying on an enterprise in Australia and is making taxable supplies (i.e. sale of goods or services that are not considered GST-Free or Input Taxed) that are connected with Australia, then the money received by the promoter will be subject to GST.
Practically, this may mean 1/11th of the money received from a promoters crowdfunding campaign will be payable to the ATO as GST!
So where to from here:
- Crowdfunding may be an attractive source of funding for your new venture. But as seen above, this has created new compliance obligations for all parties involved.
- Work with your professional advisors to ensure that your crowdfunding campaign is organised correctly (for example, do it work within your existing business structure) and that you understand your various tax obligations;
- Include expected income tax and GST obligations in your initial cash flow budgets;
- Be mindful of changes to guidance available from the ATO regarding use of crowdfunding.
Let me know in the comments if you would like a particular topic discussed in a future instalment of TT and I will do my best to accommodate! Remember, I am unable to give advice, but am always happy to share my thoughts on an area of tax. For specific advice, talk to your advisors or contact me.
For the uninitiated or for who this is the first TT post you have enjoyed (welcome!), please remember, Tolerable Tax does not contain specific advice. Each taxpayer’s circumstances differ and you should always seek advice (specific to you) before taking any action.
Tolerable Tax will be back with an exciting new post soon. So until then, may your tax be tolerable!