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Edited version of your written advice
Authorisation Number: 1051304930240
Date of advice: 10 November 2017
Ruling
Subject: Am I in business - Income - Crowdfunding
Question 1
Are you carrying on a business of developing an online streaming application during the 2017-18 financial year?
Answer 1
No.
Question 2
Will the funds received by way of crowdfunding from external contributors be included in the assessable income of the Partnership?
Answer 2
No.
This ruling applies for the following period
Year ended 30 June 2018.
The scheme commences on
1 July 2017.
Relevant facts and circumstances
An Australian Business Number (ABN) for the Partnership was applied for and the Partnership’s activities commenced.
The Partnership is currently in the process of developing an online application (the App). This is the first project of this kind being completed by the Partnership and the individual partners.
The Partnership is conducted from the homes of the Partners.
The Partnership does not have a business plan, but has arranged its activities into four main categories:
● Conducting research into whether this service is viable;
● Developing an online App;
● Increasing peoples’ awareness of this concept and
● Obtaining content
In order for the Partnership to obtain content on its online App, the Partnership will seek crowdfunding through an online platform.
As part of the arrangement with the online platform, the Partnership will be required to nominate a target amount for the pledged money. It is a condition of the crowdfunding arrangement that the Partnership would only be entitled to receive the amounts pledged if the funding target is achieved.
The Partnership intends to use a fixed amount target on a donation/reward model, where contributions can be made either for a reward or for no reward. Reward options require varying degrees of financial support, with different rewards being provided to the persons contributing the money.
The online platform will charge a service fee of 3-5% for the use of its platform.
Donors will be regularly updated on the progress on the application.
The campaign will launch and last for approximately 30 days.
The Partners have contributed around $X,000 towards the Partnership.
The Partnership has considered raising funds via other means; however it was advised that it has not progressed to a point sufficient for investment.
The Partnership intends to use the funds raised as listed.
● Travel - $XX,000
● Software/hardware - $X000;
● Support for the team over the travel period - $XX,000;
● Legal costs - $X,000;
● Research - $X000;
● Marketing - $XX,000 and
● Trademarks - $X000
The Partnership keeps records of its activity on a drive on its online Cloud with basic documentation relating to research, coding and other miscellaneous matters. The Partnership does not keep accounts as it does not have any revenue or financing.
The Partnership has set up a separate bank account to records sales and expenses however this account has not been utilised as no sales have been made to this point in time.
One Partner is currently studying and spends approximately 30 hours per week on both this activity and their studies.
The other Partner is employed in the information technology industry. They have extensive web site development experience but the services of an additional party will be needed more complex design issues.
The Partnership has no formal marketing plan in place but assistance in this area is provided by an external party, who has experience in digital marketing. Neither the partners or the marketing assistant is being paid for their services.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1997 section 995-1
Reasons for decision
Detailed reasoning
If you earn or receive any money through crowdfunding, some or all of it may be assessable income, depending on the nature of the arrangement, your role in it and your circumstances.
Funds you receive or the profit you make through crowdfunding are likely to be assessable income where you:
● use crowdfunding in the course of your employment
● enter into a transaction or scheme with the intention or purpose of making a profit or gain
● receive money or property in the ordinary course of your business
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts.
Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.
Other characteristics of income that have evolved from case law include receipts that are earned, expected, relied upon and have an element of periodicity, recurrence or regularity.
Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.
Taxation Ruling TR 97/11: 'Income tax: am I carrying on a business of primary production?' summarises the indicators that can be applied to your circumstances to determine whether you are carrying on a business:
● whether the activity has a significant commercial purpose or character;
● whether the taxpayer has more than just an intention to engage in business;
● whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;
● whether there is regularity and repetition of the activity;
● whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business;
● whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit;
● the size, scale and permanency of the activity and
● whether the activity is better described as a hobby, a form of recreation or sporting activity.
Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. There is no one factor that is decisive of whether a particular activity constitutes a business
Application to your circumstances
In this case, the Partnership commenced the research and development of an online streaming App in mid-2017. At this stage the App is incomplete and not available for purchase.
To develop the App further you intent to generate money through a crowdfunding campaign.
We do not consider that any money received from the crowdfunding campaign will be earned or expected. The amount cannot be said to have an element of periodicity, recurrence or regularity. Further there is no evidence to suggest that the Partnership entered into the transaction with the intention or purpose of making a profit; as such the Partnership has not derived any assessable income.
It is difficult to establish that the activity has a significant commercial purpose or character given that the Partnership does not have any business plan or formal marketing strategies in place.
However there is some element of regularity and repetition to the activity as substantial time has been invested in researching and developing the App to the point where it has the ability to stream, although no consumer interface or content is available.
At this point in time the Partnership has failed to demonstrate a purpose or prospect of profit.
We consider that when the crowdfunding campaign is launched the Partnership’s activities are preliminary to the carrying on of a business.
Therefore, the funds the Partnership receives through crowdfunding, from external contributors, are not assessable income.
Additional information
Please note that this ruling has not considered whether the Partnership is carrying on a business after the crowdfunding project. Further, we have not considered whether any funds raised through any subsequent crowdfunding projects are assessable.
Therefore you should evaluate your level of activity on a regular basis to see whether you are carrying on a business.
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