South Africa: Crowdfunding And Tax – Two's Company, Three's A Crowd

Last Updated: 29 June 2016
Article by Michael Reifarth and Yani Van Der Merwe

Most Read Contributor in South Africa, September 2018

There has been a rapid expansion of the crowdfunding industry during the last couple of years where businesses and entrepreneurs use crowdfunding platforms to promote their business ideas and to obtain funding from the public to finance their ventures. Although there are advantages and disadvantages to a crowdfunding arrangement in comparison to traditional funding arrangements, one constant factor applicable to both alternatives is that the transactions between the recipient and the provider of funding will, at all times, be subject to the provisions of the Income Tax Act, No. 58 of 1962 (the "Act"). In this article, we briefly consider some of the possible South African tax implications that may arise pursuant to the utilisation of the various types of crowdfunding that have lately been gaining traction in South Africa.

Rewards-based crowdfunding

In terms of rewards-based crowdfunding, investors (the "Investors") generally make an "investment" into a business with an undertaking by the business (the "Recipient") that they will receive goods or services in return for the funding provided once the business has been launched successfully.

The tax consequences arising for Investors and Recipients depend, inter alia, on legal form of the transaction entered into between the parties. The contracts in place between the Investors and the Recipient will therefore have to be analysed in order to test the precise nature of the relationship between the parties. For example, it will have to be tested whether the parties have concluded an agreement in respect of the sale of goods or the provision of services, or if the parties have entered into a partnership.

We set out below certain tax aspects which require consideration in respect of a rewards-based crowdfunding arrangement.

In terms of the Act, "gross income" is defined (in the case of any resident), as the total amount, in cash or otherwise, received by or accrued to or in favour of such resident during any year or period of assessment, excluding receipts or accruals of a capital nature. Therefore, if the payment by an Investor constitutes an advance revenue receipt by the Recipient in respect of the sale of its trading stock or the provision of a service (i.e. the receipt is not of a capital nature), the Recipient will be required to include such amount in its gross income in the year of assessment during which the amount is received by or accrued to it, whichever is the earlier. This could mean that although the goods or services may only be supplied in following years of assessment, the Recipient will need to account for income tax thereon in the year of assessment in which the amount is received or accrues.

In determining this tax liability, it should be considered whether the Recipient would be entitled to a deduction of expenditure incurred against such income.

In terms of the general deduction formula contained in the Act, for the purposes of determining the taxable income derived by the Recipient from carrying on any trade, certain amounts of expenditure and losses may be deducted from the income of the Recipient where,inter alia, such amounts are actually incurred in the production of the income. Whether or not the Recipient is carrying on a trade is a question of law that will have to be decided on a case-by-case basis. If the Recipient receives an amount from the Investor at a time that it has not commenced carrying on a trade, the Recipient will not be permitted a deduction of expenditure incurred from the abovementioned income in terms of the general deduction formula. The Act, however, makes provision for the deduction of certain expenditure incurred prior to the commencement of trade, but such deductions may only be permitted in years of assessment when trading has commenced and may also be limited. In addition, the Act also permits an allowance in respect of future expenditure to be incurred by the Recipient in respect of certain contracts. Although limited in application, the Recipient could be permitted a deduction of an allowance of certain expenditure in terms of section 24C of the Act.

Debt-based crowdfunding

In terms of debt-based crowdfunding, the Investors provide funding to the Recipient by means of loan funding, which is then repaid over time with interest.

There should be no tax implications arising for the Recipient or the Investor upon the issue of the loan by the Recipient.

If the loan funding takes the form of an interest bearing loan, the provisions of section 24J of the Act may apply to such a loan. This section,inter alia, regulates the incurral and accrual of interest in respect of financial instruments. In terms of section 24J, interest income and expenditure will effectively be spread over the term of the loan for tax purposes. Upon settlement of the loan, certain adverse tax implications may arise for the Investor and/or the Recipient in instances where total consideration paid by the Recipient to the Investor over the term of the loan and at settlement thereof differs from the amounts taken into account for tax purposes.

Furthermore, if the debt owed by the Recipient is written off by the Investor or reduced for no consideration, then the provisions of section 19 of the Act or paragraph 12A of the Eighth Schedule to the Act may apply, which could give rise to income tax or capital gains tax ("CGT") implications for the Recipient.

It should also be noted that specific anti-tax avoidance provisions may apply in instances where the terms of the loan or the interest payable on the loan contain certain equity-like features (for example where the interest payable in respect of the loan is not determined with reference to an interest rate, but rather with reference to the profits of the Recipient). In such cases, the provisions of the Act deem interest payments to be dividends paid by the Recipient to the Investor and are taxed accordingly. In such instances, the Recipient would not be allowed a tax deduction of such interest and the interest payments would be subject to the dividends tax.

Equity-based crowdfunding

In terms of equity-based crowdfunding, Investors provide funding to a start-up company by subscribing for shares in the Recipient company. The Investors will then receive dividends when the Recipient becomes profitable.

With regard to dividends declared and paid by the Recipient to an Investor, such dividends will generally not be subject to income tax in the hands of an Investor, unless certain anti-avoidance provisions apply in terms of which dividends are deemed to be income in the hands of the Investor.

Dividends tax is levied at the rate of 15% on the amount of any dividend paid by any company, subject to certain exemptions. Certain documentary requirements must be met in order to rely on certain exemptions from the dividends tax. There is no exemption available where the beneficial owner of the dividend is a natural person.

Any gains in respect of a disposal of the shares by an Investor may give rise to income tax or CGT implications in the hands of such an Investor, depending on whether the Investor trades in the shares or not.

A transfer of the shares may further be subject to securities transfer tax, payable by the Recipient, which may recover the tax so payable by it from the transferee.

In light of the above, we recommend that the tax implications arising out of crowdfunding be considered before providing substantial funding or utilising such platforms to obtain funding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions