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Great source of funding 

Crowdfunding – is it worth it?

We’ve all seen the success stories of an innovator with a great idea who, supported by crowdfunding, was able to launch a successful and high growth business.  But what happens to the money?
There are several types of crowdfunding:

  • Donation based – funding a cause without the fundraiser providing anything in return.
  • Reward based – funding to bring an idea or concept to fruition in exchange for a reward – discounted final product, free product or service.
  • Equity based – funding in exchange for a share in the promoter.
  • Debt based – funding is paid back at a rate of interest.

The Corporations Act restricts proprietary companies to no more than 50 non-employee shareholders.  So, companies offering equity need to become public companies (generally small unlisted public companies) to successfully use crowdfunding to raise capital. 
The most common form of crowdfunding in Australia is reward based. 
Assuming the project reaches it’s funding target and goes ahead, the next question is often ‘what happens with the money?’ 
Crowdfunding platforms – such as Kickstarter and Australian based Pozible – take a percentage fee on successful crowdfunding projects that reach their targets.  In general, no money is transacted from either the donor or the project promoter until the funding target is reached.
If the funding is contributing to a business activity or project with the purpose of generating income, then for tax purposes the funding is assessable income in the year the funds are received.  Conversely, if you pay tax on the income you receive for your project then you can claim a deduction for expenses related to that activity.
The rewards given away may also be subject to GST.  If the project promoter is registered for GST and is obliged to provide anything in return for the payment, then this is likely to be subject to GST.  If there is no obligation to provide anything, then GST is unlikely to apply.
From an investor’s perspective, while the promises made by crowdfunding projects are subject to consumer laws, it’s very difficult to get your money back if the promoter fails to deliver.   And, the platforms facilitating crowdfunding don’t take responsibility if the rewards are not delivered.  Also, while the money you contribute might be called a donation, it is not generally a tax-deductible donation. If you are expecting something in return for the contribution that is made, then the tax treatment of the payment will depend on the situation (e.g., a payment for an equity stake in a business is likely to be capital in nature and non-deductible).
Crowdfunding in Australia remains ill defined.  A Bill before parliament before the double dissolution sought to clarify and restrict the crowdfunding process by creating clear rules for funding and consumer protections.  This Bill, which may be resurrected in some form, sought to limit crowdfunding to public unlisted companies with less than $5m in assets and raise up to $5m per annum.  New Zealand already has crowdfunding legislation in place.  
Need help? Contact us today about the options and implications of alternate funding sources.

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Posted on August 21, 2016

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