With the Uber-GST stoush earlier this year mostly settled, the Tax Office has offered an olive branch to another high-profile disruptive economy in the form of provisional guidance that promises things will change if they need to.
Historically the Tax Office’s stance on crowdfunding has been narrow but definitive. Late last year, the regulator said crowdfunding activities would likely incur GST liabilities if they involved exchanging goods for donations. It’s common that ‘promoters’ (the individuals asking for donations) offer ‘funders’ prizes for their contributions, and the Tax Office saw that occurrence as a taxable consideration. That applied only to goods, though.
“…No GST should be payable by the entity where a contributor gets an equity or debt interest in return for the contribution,” the ATO crowdfunding guidance then advised. Today that hasn’t changed, but its complete guidance has been fleshed out to account for more off-kilter crowdfunding arrangements.
One of these arrangements is known as reward-based crowdfunding and it involves donors receiving goods, services or rights in exchange for their donations. According to the Tax Office, this type of arrangement should incur a GST liability. The problem is that a GST-on-donations model may be difficult to implement.
Say we’re dealing with a sidewalk Santa selling reindeer ears in Melbourne’s CBD throughout December. This Santa works on behalf of a charity registered as a gift recipient. Any money this Santa collects is GST-free. He doesn’t need to add GST to the cost of the donation.
Compare that with an online crowdfunding campaign calling for donations to a Christmas appeal. Shirley started the campaign, but she is not working on behalf of the charity running the appeal; she is not a registered gift recipient. Just like our sidewalk Santa, if people donate $5, they receive a Santa hat. But because they receive goods in exchange for their donation, the Tax Office says Shirley must collect GST on their donations. From the donors’ perspective, a gift is an incentive to contribute. If GST is levied on donations, especially specialty donations given for holidays or to charities, it may disincentivise potential donors. The good news is the Tax Office is currently asking for consultation to construct a framework that would apply to scenarios like this.
Crowdfunding and income tax relies on a case-by-case treatment because donations don’t always fit neatly into definition of ‘ordinary income’ under tax law. In fact, the Tax Office’s case examples point out a host of instances where crowdfunding proceeds do not amount to assessable income because the donations are not “regular or recurring.”
Same goes for donors who donate to crowdfunding campaigns in exchange for equity in a business. The equity-based model borrows its rules from traditional business share arrangements, meaning it’s free from GST but subject to income tax.
“Supply of shares is an input taxed financial supply that is not subject to GST and the funder is not entitled to an input tax credit for the acquisition of the shares,” the Tax Office said in its guidance statement.
If this guidance made one thing clear it’s that we can be more firmly certain the Tax Office is keeping its eye on the way crowdfunding evolves. This provisional guidance is comprehensive, and most importantly, upholds the philanthropic spirit of the entire model.