What accountants need to know about crowdfunding and tax

Are new laws about to make it easier for small businesses to crowdfund?

Proposed new laws aim to make it easier for small businesses to raise capital through crowdfunding – but there are strings attached.

By James Dunn

The Australian Government finally presented its equity crowdfunding legislation mark II to Parliament late in November 2016, a year after it first introduced the Bill, which was left stranded by the July double-dissolution election.

For the revised Bill, several tweaks have been made to the original legislation, including lifting the size of the unlisted public companies that can access this kind of funding, from A$5 million in assets to A$25 million.

If the legislation is passed, these small businesses will be able to raise up to A$5 million through crowd-funding platforms in any 12-month period.

However, to take advantage of the new laws, small businesses must become unlisted public companies. This will give them an exemption for up to five years from certain corporate governance and reporting requirements, making the process less costly and onerous.

On the investor protection front, retail investors will have an investment limit of A$10,000 per company in a 12-month period, and a cooling-off period of 48 hours in which they can pull out of an investment.

The Bill before parliament limits access to crowd funding to public companies, however, Treasurer Scott Morrison stated on introducing the Bill into Parliament in November 2016 that the government is continuing to consult on extending the regime to proprietary companies, which are generally prohibited from offering shares to the general public. 

“I have instructed Treasury to continue developing a framework for proprietary companies as a priority and would expect that an extension of the framework will be introduced through subsequent legislation in the near future,” he says.

At the time the original Bill passed through the House of Representatives in February, and was recommended for Senate passage by the parliament’s economics legislation committee, the then (and current) opposition members of the committee dissented from the majority recommendation that the Senate pass the Bill, arguing that not allowing proprietary companies to access crowd-sourced equity funding would deprive start-up enterprises of the benefits of the Bill, because they were unlikely, due to regulatory costs, to initially structure themselves as public companies limited by shares.

If the legislation is passed, these small businesses will be able to raise up to A$5 million through crowd-funding platforms in any 12-month period.

“Treasury wants to strike the appropriate balance between investor protections and the funding needs of small businesses,” says Paul Drum, head of policy at CPA Australia.

“Proprietary limited companies are meant to be closely held, and it’s not clear to us that we should be moving away from that concept,” he says.

Drum says CPA Australia supported the passage of the original bill, which stipulated that a company seeking crowd-funded equity had to be a public company, with limited disclosures, with a cap on how much could be invested. CPA Australia felt this was an appropriate compromise between the funding need of business and investor protections, which could be reassessed in a few years’ time.

Jonny Wilkinson, director of crowd-funding platform Equitise, says his firm can offer open-access crowd-funding opportunities in New Zealand – which has had relatively liberal equity crowd-funding regulations since 2014 – but in Australia, until the Bill becomes law, Equitise can only market to wholesale and sophisticated investors.

“We’d like to open these opportunities up to all Australian investors, and we’d also like to see this form of funding extended to proprietary limited companies, so that it is accessible to the majority of companies that want to use it,” he says.

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“The requirement to become a public company is reasonably onerous on a lot of the companies that would want to use equity crowdfunding.”

Equity crowdfunded companies that also meet the tests to become Early Stage Innovation Companies (ESIC) may become popular with certain investors wanting to take advantage of recently enacted tax incentives for investments in ESICs.

These incentives provide eligible investors who purchase new shares in an ESIC with a:

  • non-refundable carry forward tax offset equal to 20 per cent of the amount paid for their qualifying investments. This is capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year
  • modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than ten years may be disregarded. Capital losses on shares held less than ten years must however also be disregarded.
The reintroduction of the crowdfunding Bill in late November was preceded by the release of the tax framework for crowd-sourced equity funding by the Australian Taxation Office (ATO).

The ATO stated that the tax laws applying to investment and financial activity undertaken in a conventional manner – for example, buying shares in a public company, and franked and unfranked dividends – would apply in the same way to investment and financial activity conducted through crowd-funding.

“Crowd-sourced equity funding would be treated the same as any other kind of equity funding, in terms of capital gains tax applying to gains in the valuation of the investor’s equity, and a dividend distribution from a crowd-funded equity investment being treated the same as a dividend from an ASX listed company – franked or unfranked, it would be treated the same in the hands of the recipient,” says Drum. 

“The industry knows that there are no special tax deals for this space.”

Read next: 5 Aussie crowdfunding successes

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