Crowdfunding is no longer the less sophisticated little brother of venture capitalism, and agribusinesses have joined the party. As the uptake of crowdfunding increases it is important that businesses are aware of the risks of failing to recognise income received from crowdfunding projects as assessable for income tax purposes, where it is appropriate to do so.
From an Australian income tax perspective, the Australian Taxation Office’s (ATO) view of modern crowdfunding is that it is “the practice of using the internet and/or social media to find supporters and raise funds for a project or venture”.
The ATO considers that the various platforms of crowdfunding can be consolidated into four main types. For the purposes of this article we will focus on the two that most likely result in assessable income being reward based funding and donation based funding:
- Reward-based funding: as the name suggests a reward is given to the funder in return for their payment
- Donation-based funding: where nothing is received in return for the payment except perhaps recognition that the amount has been contributed
- Debt-based funding: more conventionally, where loans are lent by the funder and the amount is repaid with interest (it is the new social media element found in peer-to-peer online lending that classifies this as crowdfunding rather than ordinary debt)
- Equity-based funding: where typically the funder acquires shares in a company in return for their payment.
To demonstrate the true capabilities of crowdfunding in the agribusiness sector, one only has to look at the crowdfunding success story of Flow Hive, the brain child of Stuart and Cedar Anderson, a father and son team from Byron Bay, NSW. The basic concept is a beehive where honey can be harvested without having to smoke the bees or manually remove the frames. Instead, honey is removed with the turn of an Allen key.
Not only does Flow Hive have the honour of being one of Indiegogo’s (a rewards based crowdfunding platform based in the USA) most successful campaigns (not bad for an Australian duo on an American platform), but the funding success of the campaign is a demonstration of the power of crowdfunding. The facts speak for themselves:
- Flow Hive’s original funding goal was for US$70,000 over a one month period. They received this amount in eight minutes
- In the following 24 hours they received US$2 million, thought to be the most ever pledged in that time frame on any crowdfunding platform.By the completion of the campaign they had raised US$12.2 million
- Although still very much in its infancy, crowdfunding (as a business capital-raising strategy) could become a popular financing alternative within the agribusiness sector. A few examples of these, other than Flow Hive listed above, include:
- GreenAg Turkey Farm: This farm, located in Kingsthorpe Queensland, has turned to crowdfunding to assist in raising funds for an onsite processing plant.
- Mount Beckford Free Range Farm: This farm is located in Mt Beckford Victoria. They launched a Pozible crowdfunding campaign with an aim to raise approximately $37,000 to assist is opening an onsite processing plant. They successfully raised nearly $45,000 from 223 supporters from across the country
- Dad’s Oats: This crowdfunding campaign held on the Pozible platform sought funds to support the first full commercial batch of Dad’s Oats. These are Echinda Oats grown in north central Victoria. The initial goal amount was $10,000 and in total they received $19,300 from 243 supporters.
Income tax implications
Because of its relative fledgling status in Australia, the taxation of crowdfunding is largely untested.
From an income tax perspective, to determine what amounts, if any, received under a crowdfunding model are assessable to a taxpayer, there are two threshold questions: Firstly, is the recipient of an amount through crowdfunding carrying on a business and, secondly, is the taxpayer involved in a profit making scheme?
Carrying on a business
The ATO accepts that not all taxpayers who engage in crowdfunding will automatically be carrying on a business either when the project launches or when the project is complete.
If a business is not being carried on either because the activities are preparatory in nature or the activities constitute a hobby rather than a business, then the income received from the crowdfunding activity will generally not be assessable. The corollary to this is that expenses incurred on such venture or project would not be deductible. This is an important fact to note if the project involves new processes or technologies which could be quite expensive.
Profit making scheme
The ATO directs most of its attention to the profit-making element or the profit-making intention of the project/idea. Where any activity is carried out in an organised fashion with the clear intention to make a profit, even if the mechanics of how that profit is to be made are not known, any proceeds derived from such activity will likely be assessable income. The benefit is that the expenses incurred in making that profit may be deductible.
Given the potential size of funds received from these campaigns the question of the timing of income derivation is also an important one.
In the case of reward based and donation based funding the preferential view is that income should be treated as having been derived when promised goods are delivered to the funders. It is considered that accounting for the income in this manner more accurately reflects the business activities of the taxpayer. In situations where the funds are refundable up until the goods are delivered or where the amount will be refundable if the goods are not delivered by the due date, the general tax position on the derivation of income, being that the amount will only be assessable to the recipient once the transaction is final and all conditions and contingencies have been satisfied, should apply. This may allow greater flexibility for the taxpayer in managing their tax affairs as there are generally contingencies surrounding the delivery dates of products promised under crowdfunding projects.
Some crowdfunding platforms operate on the basis that funds, once committed, will not be refundable even if the project fails to realise its goals. The ATO may be inclined to argue that it is at this point that the income received should be treated as having been derived. However, the author is of the view that in a large number of cases it would be appropriate to defer recognition of the income at least until the deadline for delivering the project/goods has arrived.
Even if the platform itself does not enforce a refund policy, the funders may still have other legal rights that they can exercise in the case that they do not receive their promised goods. The conditions and contingencies in relation to the terms of the crowdfunding need to be clearly understood in order to establish the appropriate income tax treatment.
The taxation consequences of amounts received under a crowdfunding campaign can be complex depending on the nature and terms of the amounts received by the taxpayer and the timing thereof. These amounts can also be substantial and it is important that any amounts received are treated properly as either assessable or non-assessable from the outset as the consequences of misclassifying income could have significant financial ramifications.
Care should be taken to ensure that the income tax treatment does not undo any of the value that the crowdfunding is intended to create.
The views expressed in the article are those of the author and not representative of the views of Deloitte, and are not intended to be legal advice in any instance. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.