Crowdfunding: tax and GST implications

In this article we provide a brief introduction to crowdfunding and the implications of this practice on both the entity receiving the funding and the entities that contribute or pledge money.

What is Crowdfunding? 

Crowdfunding is a method used to raise funds to finance a project or venture. Crowdfunding is typically achieved through an intermediary, accessed via an online platform. The two most common models of crowdfunding used within Australia are: 

• Donation-based crowdfunding—funders make donations to the project without receiving anything in return; and
• Reward-based crowdfunding—the promoter provides a reward to funders in return for their payment (e.g. free or discounted merchandise) .

Equity-based and debt-based crowdfunding where funders make payments in return for a commercial loan or an interest in the equity of the business are also available. 

How can crowdfunding create opportunities for businesses?

Businesses can capitalise on the growth of the crowdfunding industry to access funding for projects which may otherwise be difficult or costly to obtain. Crowdfunding can also be a useful means of generating buzz around your project and facilitating social media interest. 

The two main players in the Australian market are Pozible and Kickstarter who claim a funding success rate of 58% and 35.8% respectively - project funds are generally not provided until the funding target is reached. 

What are the tax implications?

When engaging in crowdfunding, it is important to determine whether the money you receive is assessable income for tax purposes and whether GST needs to be applied to any funds received. The income tax and GST treatment of any crowdfunding arrangement will vary depending on the nature of any agreements made and consideration given. 

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