Tax: The Pac-Man of funding received from the crowd

Abstract

Small businesses often struggle to get funding due to the lack of collateral. Alternative funding, such as crowdfunding, became increasingly popular after the financial crisis in 2008. The objective of the study was to determine if funding, received by businesses from alternative sources of funding, is subject to income tax in South Africa. A legal doctrinal research approach was applied by reviewing available literature, tax legislation and relevant case law in South Africa, the United States of America, United Kingdom and Australia. It was determined that existing income tax provisions do not specifically refer to crowdfunding and principles laid down in decided tax case law need to be considered to determine if the amount received, is a gift made out of pure generosity. The amount is likely not to fall within the ambit of ‘gross income’ of the project owner if the donor expected nothing in return and the funding was not used by the project owner to supplement trading activities. With reward-based crowdfunding, the funding is highly likely to fall within the ambit of gross income since something is expected in return for the funding provided to the business. It is imperative that South Africa issues application guidance to reflect the intended meaning of the legislature regarding the tax treatment of funding received by project owners.Contribution: This article demonstrated that it is imperative that South Africa issues application guidance to reflect the intended meaning of the legislature regarding the tax treatment of funding received by project owners.