Tax incentives for funders of small businesses: A fit for crowdfunding?

Abstract

Orientation: Internationally, crowdfunding has developed over several years as an alternative funding model for small businesses that would otherwise not be able to qualify for traditional business funding in the form of loans through normal funding channels such as commercial banks.

Research purpose: The objective of the study is to determine whether the Income Tax Act of South Africa provides incentives to encourage crowdfunding.

Motivation for the study: Tax policy is considered at a time when there is uncertainty globally about the tax treatment of crowdfunding and when there is no guidance specifically for the South African income tax implications.

Research approach/design and method: A mixed-method approach, which commenced with legal doctrinal research followed by a survey, was applied. The tax implications of funding provided by the crowd (i.e. the public) in South Africa were compared with the tax implications in the United Kingdom and Australia.

Main findings: A tax incentive will encourage funders to provide funding in instances other than donation-based funding that is made from pure generosity. However, existing provisions in the Income Tax Act of South Africa that provide incentives to funders of small businesses are not fit for crowdfunding. A single tax credit aligned with international practice is proposed to encourage funders to provide funding to small businesses.

Practical/managerial implications: The findings provide valuable insights for policymakers as they demonstrated that tax incentives encourage funders to provide funding.

Contribution/value-add: This article contributes to the limited research that has been done on crowdfunding in South Africa and provides some of the first empirical results.