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TAX ON CROWDFUNDING

The practice of raising fund and finding supports using internet and/or social media is known as Crowdfunding. Any individuals involved in crowdfunding needs to be aware of the tax consequences. Based on the role in crowdfunding arrangement it is determined whether the money received is income. If it is assessable income, then a taxpayer has to include it in income tax return and is also allowed to claim deductions.  

Crowdfunding roles

• Promoter: The initiator of the project or venture;
• Intermediary: The organisation providing the crowdfunding website or platform;
• Funders: Individuals or entities that contribute or pledge money.

Types of crowdfunding

There are currently four main types of crowdfunding. Each uses a different strategy to attract funding and each may have different tax consequences for the parties involved.

• Donation-based crowdfunding:  A funder makes a payment or donation to the project or venture, without receiving anything in return. The funder's contribution may simply be acknowledged;
• Reward-based crowdfunding: The promoter provides a reward (goods, services or rights) to funders in return for their payment. There are different levels or types of reward, according to the funder's contribution;

• Equity-based crowdfunding: The funder makes a payment in return for an interest or share in the equity of the promoter. Typically, the promoter is a company in which the funder acquires shares in return for their payment; 

• Debt-based crowdfunding: The funder loans money to the promoter who, in return, agrees to pay the interest on the loan.

CROWDFUNDING AND INCOME TAX

Assessable income – Promoters
Depending on the nature of the funds and the way in which the promoters receive the funds, it may be assessable income. Funds received or the profit made through crowdfunding, particularly under a donation-based or a reward-based arrangement, are likely to be assessable income where you:

• Use crowdfunding in the course of your employment;
•  Enter into a transaction or scheme with the intention or purpose of making a profit or gain;
• Receive money or property in the ordinary course of your business (money or property received in exchange for goods and services is income, but money received by way of loan is not).

Assessable income – Intermediaries
Typically, promoters make use of crowdfunding websites (or platforms) which provide a way of marketing the project or venture, connecting to potential funders and receiving pledges of support and/or payments from funders. The crowdfunding platform is usually provided by a third party (or intermediary) who charges the promoter a flat fee and/or a percentage of the total funds received.

If you're the intermediary in a crowdfunding arrangement, the fees you charge and some or all of the total funding may be assessable income.

Assessable income – Funders
If you contribute funds to a crowdfunding venture or project, any promised return to you may be assessable income.