In this article we explore what exactly crowdfunding is and the implications of crowdfunding for both the entity receiving 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 and accessed via an online platform.
The two most common types of crowdfunding used within Australia are:
- Donation-based crowdfunding– in this type of crowdfunding, supporters make donations to the project without receiving anything in return;
- Reward-based crowdfunding–the promoter of the project provides a reward to funders in return for their monetary support (e.g. Free or discounted merchandise)
In debt-based and equity-based crowdfunding funders make payments in return for a commercial loan or an interest in the equity of the business.
How does 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 an effective way to generate buzz around your project and facilitate social media interest.
The two main players in the Australian crowdfunding 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 treatment of income tax and GST of any crowdfunding arrangement will vary depending on the nature of any agreements made and consideration given.
How can Brentnalls help?
At Brentnalls, we have the knowledge and experience to help you to investigate the broad range of funding opportunities available to businesses in this current digital age and to navigate the complex taxation implications associated with transactions of this nature. If you have any questions regarding crowdfunding, please contact your Brentnalls WA team member.