By Steven Roberts and Andrew McCulloch
Crowd Funding with the advances of internet technology is becoming a more popular source of generating income and capital in Australia. We have previously addressed recent changes in the Corporation Act and its effects for those seeking to source new debt and equity based funding from Crowd Funding sources. In this edition we will discuss the income tax consequences and the current ATO view on such arrangements.
Understanding the Terminology
First let’s bed down some Crowd Funding basic concepts:
Promoters: Initiator of the project or venture (those seeking funds).
Contributors: Pledgees to the project (those who contribute funds).
Reward-Based Funding: Where a promoter offers goods or services in return for a contribution made.
Donation-Based Funding: Payment is made towards the project without the receipt of anything in return or only for acknowledgement.
Equity-Based Funding: Where payment is made in return for a share or equity interest in that project/venture/entity.
Debt-Based Funding: Where a contributor lends money to a promoter, who in return agrees to a repayment of principle and interest on that loan.
For promoters, before the nature of the income received is considered it is important to determine if the nature of project being conducted is in the form of a business activity.
To determine whether a taxpayer is in the process of carrying on a business one of the following must be met:
- There must be an undertaking of activities in a business like manner and in a commercially viable way. The ATO has issued Taxation Ruling TR98/11 which may assist in this determination.
- The project must have been launched with the implicit intention to derive a profit. This rule applies regardless of whether a profit is ever made, you are not already running a business, the project is not part of the usual course of business or you didn’t know how a profit will be derived.
If a business is not being carried on, it is possible that the monies received will not be assessable income. Similarly any expenses incurred are not deductible.
However, assuming a business is being carried on, the following are the taxation implications depending on the type of funding arrangement:
Nature of Income
- Reward-based funding: The consideration received for the provision of goods and services is considered to be assessable income in the hands of the promoter. Any expenditure incurred in relation to generating that income may also be deductible expense.
- Donations-Based funding: If the donation received has been a product of income-producing activities then it is likely to be determined to be assessable income in the hands of the promoter. The major test comes down to the understanding between the promoter and contributors and what the funds are used for.
- Equity-Based funding: Funds in relation to raising capital is considered to form part of the capital of the business and non-assessable for income tax purposes. Dividends and returns paid back to investors are non-deductible.
- Debt-based funding: Funds received in form of a loan are considered to be debt based and as such not assessable for income tax purposes. Interest paid on the loan is a deductible expense for the taxpayer provided the loan is acquired and used for purposes of generating an income.
For contributors, the same considerations in relation to carrying on a business and profit making intentions may be taken into account when trying to determine the eligibility to claim any expenses relating to Crowd Funding. Some contribution types such as Equity-based and Debt-Based funding are viewed to be an investment made by the contributor and as such the income received from these vehicles of funding will be assessable to the taxpayer regardless of whether they are carrying on a business.
Nature of Expense
- Reward-based funding: An expense may be claimed if the goods or service aresourced as part of carrying on a business and generating assessable income.
- Donations-Based funding: Donations may be non-deductible for income tax purposes due to the gift being made in a private manner. Exceptions to this may be when the donation is made to a deductible gift recipient (DRG). Another exception is if the gift is made byway of a grant from a supplier to help a customer increase their production and generate more income for that supplier in the future, or for purposes of sponsorship and advertising.
- Equity-Based funding: Funds contributed for purposes of securing rights or an interest in a project will be capital in nature and therefore non-deductible for income tax purposes. Dividends that are received from the promoter will be deemed to be income assessable in hands of the contributor. Disposal, sale or transfer of the rights and interest in the project may be considered a disposal for Capital Gains Tax purposes.
- Debt-based funding: Any contribution made by way of loan by the contributor will be capital in nature and non-deductible expense. The interest received from the promoter for the provision of such a loan will be assessable income in hands of the taxpayer.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.