Crowdfunding has fast become a go-to strategy for people in need of large amounts of money quickly, but is the money raised considered to be income and therefore taxable?
Campaigns on various platforms range from the shameless (lavish weddings/honeymoons) to ground-breaking (new innovative products), and whether each campaign is taxable depends entirely on the circumstances of each case. Generally, if the campaign is related to running/furthering your business or is a profit-making plan, then any money received would be classed as income.
Crowdfunding is when an individual or business (the promoter) uploads a description of a campaign (eg to fund an activity, a project or a new invention) along with the amount they want to raise to a third-party internet platform such as Kickstarter, GoFundMe, Indiegogo or Pozible. Other people online (the contributors) can then choose to support the campaign or cause by pledging money.
These days it feels like anything can be crowdfunded – you may have heard the ridiculous story of a man who wanted to raise US$10 for a potato salad and ended up with US$55,000 from complete strangers. Or perhaps you've heard of shameless couples who want people to fund their lavish weddings or honeymoons. On the more serious side, crowdfunding can be useful for people like self-publishing authors, musicians looking to produce their own albums, and inventors creating prototype products.
There are several types of crowdfunding, and each may attract different tax consequences for the promoter of the campaign. A large number of campaigns are what can be described as donation-based. This is where a contributor to the campaign pledges an amount of money without receiving anything in return. If you're a contributor in this case, you will not able to deduct an amount contributed in a crowdfunding campaign as a "donation" in your Australian tax return unless the cause you've donated to is an endorsed or legislated deductible gift recipient (DGR). An exception is if you carry on a business and the cost of contributing to the campaign directly falls under your business expenses such as sponsorship or marketing.
Other campaigns can be referred to as rewards-based. In these cases, the promoter provides a reward, such as goods, services or rights, to contributors in return for their payment. For example, differing levels of campaign-related merchandise may be available, depending on the amount pledged by the contributor. Usually, the acquisition of goods or services by the contributor means their payment is considered to be private in nature and not deductible.
As the promoter of a campaign (either donation-based or rewards-based), whether the money you receive is considered to be taxable depends on the circumstances.
In general, if the money received is to be used to further your business or is a profit-making plan, then it is considered to be income. Remember, the hurdle for something to be a profit-making plan is much lower than that for a business. If a promoter launches a crowdfunded project with intention of making a profit, and then carries out the project in a business-like way, the money raised could very well be considered part of their income.
Whether or not crowdfunded money is classified as income can rely on minor details, and will be determined by the facts in each case. For example, money received from crowdfunding the making of a movie may or may not be income for the promoter, depending on factors such as whether the promoter draws a personal salary from the crowdfunded income, whether the promoter will keep any of the funds raised, and whether the movie made will be widely distributed.
Source: https://www.ato.gov.au/business/income-and-deductions-for-business/in-detail/crowdfunding/; https://www.moneysmart.gov.au/managing-your-money/donating.