Private ruling: Assessable income
Date of advice: 24 September 2015
Published: September 2015
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the funds received as crowdfunding from external contributors be included in the assessable income of the partnership? | A1: No. | Q2: Will the funds received as crowdfunding from family contributors be included in the assessable income of the partnership? | A2: No.

Relevant facts and circumstances: The partnership is currently in the process of developing a product. This is the first project of this kind being completed by the partnership and the individual partners. The partnership commenced activities in relation to the development in 20XX, with an expected release date in 2016. In order to allow for the development of the game to continue, the partnership sought crowdfunding through a website. There were a number of different options available to people participating in the crowdfunding arrangement. These options require varying degrees of financial support, with different rewards being provided to the persons contributing the money. As part of the arrangement with the specified website, the partnership was required to nominate a target amount for the pledged money. It was a condition of the crow funding arrangement that the partnership would only be entitled to receive the amounts pledged if the funding target was achieved. The partnership attracted substantial interest and the total amount raised from 'external contributors' was approximately $X. Shortly before the cut-off date, the level of funding was still approximately $Y less than the specified target. In order to ensure that the target was achieved, family members agreed to contribute an additional $Z. There is no formal marketing strategy in place. The business records are minimal. They consist of a ledger used to track finances (based on bank statements) and a collection of receipts and invoices for any expenditure related to game development. Each of the partners undertook this endeavour with the intent of executing on a shared artistic vision. It is their desire to create a high-quality product to which they are proud to put their names to, that also provides some innovation within its genre, and contains some aspects of social commentary. The partnership does not have a business plan.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: 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 | Detailed Reasoning - Ordinary income: 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 3 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. We do not consider that the money received from the campaign was 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. | Detailed Reasoning - Carrying on a business: 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. | Detailed Reasoning - Application to your circumstances: We consider that at the time the crowdfunding campaign was launched the partnership's activities were preliminary to the carrying on of a business. Therefore, the funds the partnership received through crowdfunding, from both family members and external contributors, are not assessable income.