Crowdfunding Tax Returns and GST
In a business world, having a large pool of capital, plays a vital role in deciding whether a business idea is feasible or not. Borrowing money through issuing shares and loans from financial institutions to fund those ideas is the most traditional and common way to raise capital. However, there is a new way to fund your ideas without going through all burdensome paperwork and complex creditability checks. The most modern way to raise capital. As per estimates; about 50% of all funding in the year 2040 will be via crowdfunding. Crowdfunding at the moment is in its initial stages of evolution but as time goes by has the potential to become one of the most priminent ways to raise capital and thretens to outpace all other ways of raising capital in a few decades.
Crowdfunding is a method to raise funding by combining little individual investments into a larger capital pool. There are three main parties involved in the crowdfunding arrangement: the initiator of a business idea or a non-profit project, the organisation who creates a platform between parties and the contributor who invests financially or materially into the project.
As the project may generate income for all the involved parties, tax issues have become a concerning matter. There are two types of tax effects to be considered: GST and Income Tax. Depending on each scenario, GST or income tax will be applied.
In general, there are four different kinds of crowdfunding donation-based, debt-based, equity and rewards-based.
The donation-based crowdfunding is recognised when contributors donate gifts or money to a project through a platform without expecting any payment or reward in return. In this case, the project is not for profit and contributors will not receive any benefit from such a donation. Thus, GST and Income Taxes may not be relevant. Nevertheless, the crowdfunding platform will have to pay income tax as they usually charge initiators an amount of fees for providing their services.
Secondly, the debt-based crowdfunding occurs when initiators borrow money from contributors. In return, the contributors will receive interest and principal after an agreed period of time. Income tax will apply to the interest earned by the contributors and to the services fees by the mediator company (the crowdfunding platform). The initiators will have to consider income tax as well as GST regardles of whether their project is making a profit or loss.
Thirdly, the equity crowdfunding is a transaction between contributors and initiators, in which the contributors pay to own a share of a company including voting rights or priority dividend payment. Given the circumstances involving such an equity based funding instrument, GST may apply to the share selling transaction of initiators and income tax is applied to the dividends earned on those shares from contributors.
The final one is a rewards-based crowd funding business. In this crowdfunding method, contributors pay money to the initiators with expectation to receive discounts or any products before selling to public. The contributors may consider GST on their obtained products and initiators will have to consider income tax on sold products or the amount of received funds. The initiators would also need to account for GST on moneys received.
Income tax is applies when there is an activity or intention to carry on a business or profit-making schemes. A one-off transaction outside the ordinary course of a business could be tax free.
It is understandable that the tax issues are complicated and different depending on each circumstance such as size of the business, type of funding and purpose of a project. To make sure that you do not miss out any tax compliance obligations and avoid tax penalties, it is wise to consult with a qualified and trained tax professional. Given the added complexities of modern crowdfunding methodologies and due to the use of multiple ways of crowdfunding and use of different platforms for the same activity, such accounting can get quite complex and creates a recepie for incorrect tax effects. However though, even with the complexities the concepts of taxing income within and accurals or cash basis of accounting still remains the same.