Jenny Wong explains the ATO's position on the deductibility of expenditure related to building and maintaining a commercial website.
Many businesses have websites and there are a number of costs associated with building and maintaining a website. The Australian Taxation Office (ATO) recently finalised its ruling on the deductibility of expenditure on a commercial website (TR 2016/3) and the principles of determining what is tax deductible outright and what is not should be observed.
Questions you need to ask is whether the expenditure is capital or revenue? If it is revenue, the expenditure can be claimed as a general deduction under Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 97). If it is capital, can it be claimed as a deduction under the capital allowance regime, for example, as in-house software and claimed as tax depreciation deductions over 5 years. Generally, the expenditure is in house software if the expenditure relates directly to the commercial website; the commercials website is mainly used by the business for interaction with customers and the expenditure is not deductible outside the capital allowance provisions.
If it is neither a revenue expense, not in-house software then the capital gains tax (CGT) regime will recognise the expenditure as part of the cost base of a CGT asset.
The ruling also provides that s40-880 will generally not apply to commercial websites because capital expenditure on commercial websites will usually be in-house software and if not, is likely to be part of the cost base of a CGT asset.
Here is a table summary of the expenditure the ATO considers to be capital vs revenue in TR 2016/3
|Expenditure incurred in acquiring or developing a commercial website for a new or existing business.|
|Expenditure on a microsite where the expenditure represents a permanent improvement to the business structure.|
|Labour costs directly referable to the enhancement of the profit yielding structure of the business.||Labour costs incurred as ordinary business expense that doesn’t enhance the profit yielding structure.|
|Expenditure on ‘off the shelf’ software products is of capital nature where the product provides an enhancement of the profit yielding structure of the business. This may be depreciable as ‘in-house software’||“Off the shelf” software product expenditure that is licenced periodically.|
|Expenditure for new functionality to a website or upgrade existing functionality of website that adds to the profit yielding structure.||Periodic lease payments if a commercial website is leased from a web developer provided the business does not also have a right to become the owner of the website.|
|Expenditure incurred to migrate content from old to new website or migrated to a new platform as part of an upgrade.||Expenditure for maintaining a website eg periodic operating, registration, web hosting and licensing fees.|
|Social media presence is considered to be a capital asset of a business separate from its website.||Expenditure on a temporary microsite.|
|Expenditure to secure the right to use a domain name||Periodic registration fees for a domain name including initial registration fee.|
|Expenditure for regularly upgrading existing website software to allow webpages to appear correctly with new mobile devices, browsers and operating
The principles in the ruling are supported by numerous examples and you should consider the ruling, identify your expenditure associated with commercial websites to see if you are in compliance with the principles in the ruling.