Good project planning and management is essential to any crowdfunding campaign. Without a clear idea of how much your project will cost, you could end up unable to deliver on your promises to your funders.
Use this guide to plan your project and make sure your campaign is a financial success.
Crowdfunding or crowd-sourced funding?
There's a difference between crowdfunding and crowd-sourced funding (CSF).
Crowdfunding is used by artists and entrepreneurs to find money from a large group of people for one-off projects. Campaigns are usually set up through websites like Pozible, Equitise or Birchal. The people who support a crowdfunding campaign usually do so in exchange for a product or service.
CSF was introduced to Australia by the Australian Government as a way for start-ups and small and medium-sized businesses to get financing from the public. Eligible companies can raise up to A$5 million a year using CSF to start or grow their business or pay off debts. Each contributor can provide up to $10,000 in exchange for shares.
Crowd-sourced funding laws
The Australian Securities and Investment Commission (ASIC) regulates CSF under the laws in the Corporations Amendment (Crowd-sourced Funding) Act 2017.
There are serious consequences for breaking CSF laws. If you're considering starting a crowdfunding or CSF campaign, get advice from your accountant and lawyer before you start.
Create a budget
You need to have a clear idea about how much money you'll need before you start a crowdfunding or CSF campaign. This is to prevent you from running out of money before you can complete your project and give your funders the reward you offered for their support.
Start by developing a detailed project budget with a contingency amount. This will give you an idea of how much you might need to raise.
Know what you have to offer
Most crowdfunding campaigns give something to those who support the project:
- Will it be products or services?
- Will it be an equity interest?
- Will the money be a loan and get repaid?
- Are the funds simply a donation?
Make sure you've factored the full cost of the rewards into your budget. You don't want to find yourself in a situation where the rewards cost more than what you've received.
Figure out your tax implications
There will be different consequences for tax depending on whether:
- your project is classed as a hobby or a business
- the money you receive from your supporters is considered a donation or a loan
You can find out about the tax implications for crowdfunding on the Australian Taxation Office (ATO) website.
Are you a business for tax purposes?
The first place to start is to determine if you're in business at all. If your project is a hobby, you might not have to deal with GST or income tax on your crowd-sourced funds.
The ATO has information about the differences between a hobby and a business.
Is the money a donation?
If you are in business, what you give in return for the money you receive will help to determine the tax issues.
If you treat the money received as a donation to your business, it's likely the money will be revenue so there could be GST and income tax issues. The cost of providing any rewards (such as goods or services) should be a tax deduction.
Get professional advice
You don't want to find out you owe GST and income tax after you've used all the money. That's why it's important you seek advice from your accountant or adviser before you start to raise funds for the project. This way any cash flow implications can be built into your project's budget.
Tax deductible donations
A donation to your business by an individual will generally not be tax deductible to the person making the donation. For your funders to receive a tax deduction, your business must have Deductible Gift Recipient (DGR) status with the ATO.
DGR status is usually reserved for not-for-profits, charities and community organisations. It's unlikely the ATO will grant DGR status to a private business.
Are you asking for a loan or offering equity?
If the funds received are treated as debt or equity, it's unlikely that you'll have to deal with GST or income tax. But debt and equity raise other issues.
If the money raised from crowdfunding or CSF is treated as a loan, at some point the debt will need to be repaid, with interest at a rate agreed between the parties. Given the amount of people involved, this could be an administrative nightmare.
If the money raised is treated as equity, you're effectively 'selling' part of your business to those who contribute funds. This poses a range of complex issues, including:
- whether your business structure allows you to sell equity
- whether you're willing to give up a part of future profits or value to investors
- how you'll determine the value and percentage ownership interest for each investor
- how you'll manage your share register if there are many funders
- whether you'll need a shareholders' agreement