The Australian Taxation Office recently released its stance on how crowdfunding proceeds should be taxed, but one industry body says it lacks crucial details which could result in startups being taxed too early, before revenue is generated from the funds.
You can read the guidelines here but the short of it is if you earn or receive money through crowdfunding, some or all of it may be considered taxable income, which needs to be declared.
For many projects it can take months or years for the product to be delivered to a backer. Take the recent Indiegogo campaign run by Flow Hive which was insanely successful, raising $US12.45 million. It could take months for the Byron Bay-based Anderson brothers to fulfil all their orders. The current wait on new orders is five months.
Crowdfunding Institute of Australia chairman Matthew Pinter says many startups running crowdfunding campaigns have a working prototype but aren’t in the position to sell it yet.
“The fact that you’ve got revenue coming to you, that’s great,” he said, adding “it could take them months or years to fulfill those orders.”
It could even go bust in the mean time which is what happened with Australian home automation startup Ninja Blocks, which raised $1.4 million over eight months before calling it quits in May when development on its product ran over time and over budget.
While the ATO’s guidance is instructional, Pinter says it could mean companies using this source of funding to get projects off the ground could be taxed upfront, before an income is earned.
“If you read the guide latterly, it puts successful rewards-based crowdfunded startups at a disadvantage, taking tax on money from backers even before the product exists. It’s irrational when most other countries are offering tax write-offs and incentives; our tax office appears to want a cut of the money upfront,” he said.
“Crowdfunding generally serves innovative startup businesses who are heading out into the world with a product and asking customer to back them. They aren’t in a position to make a profit. A successful campaign means they’re going to have a business because they’ve been given sufficient backing. Yes, they should pay tax but they should pay tax like normal businesses.”
The government is currently consulting with industry on a legislative framework for crowd-sourced equity funding by public companies, including whether corporations law should be changed to facilitate access to crowd-sourced equity funding by proprietary companies.
It’s expected to introduce legislation to parliament during the spring session this year.
Pinter argues the ATO’s view on the tax treatment of crowdfunding, which is likely to be updated when the government puts its new legislation together, shows a lack of understanding of some of the basic principles.
“Startups using rewards-based crowdfunding ask ‘backers’ to prepay for products or services to aid development and test the market, so it is difficult to see how these ventures would be profitable at this stage, particularly given the money is refundable (a listing condition on most platforms),” he said.
Instead Pinter wants the ATO to revisit the guidelines, adding more detail and promoting incentives for Australian startups like the federal government’s R&D concessions.
“Clearly the ATO want to protect revenue, though in the long run these are job / tax generators so we need to apply the rules fairly and let them have a go,” he said.
He’s concerned if the details aren’t clarified startups will disclose income at an inappropriate juncture and put themselves under unnecessary stress.
“They haven’t done enough on it – there’s not enough in the finer points,” he said.