With more and more businesses having websites, the taxation treatment of the costs associated with building and maintaining those websites is an important topic.
After a long period when it had no major binding public guidance available, late last year the ATO released a ruling on the deductibility of expenditure on a commercial website.
Taxation Ruling TR 2016/3 – Income tax: deductibility of expenditure on a commercial website sets out the ATO’s views on when expenditure on a website will be:
- on revenue account and thus, generally deductible outright in the year it is incurred; or
- on capital account – in which case the expenditure will, at best, only be deductible under the capital allowance (aka depreciation) rules.
Expenditure on revenue account
At the risk of oversimplifying TR 2016/3 – which runs to almost 50 pages and contains 26 examples – here is an outline of the expenditure on a commercial website that the ATO believes to be of a revenue nature:
- Labour costs incurred as ordinary recurrent business expenses that are not directly related to the enhancement or enlargement of the structure of a business;
- Expenditure on “off the shelf” software products that are licenced periodically;
- Where a commercial website is leased from a web developer, periodic lease payments to the web developer (provided the business does not also have a right to become the owner of the website);
- Periodic operating, registration, web hosting and licensing fees will be deductible over the period to which the expense relates;
- Expenditure for maintaining a website – including remedying software faults and performing modifications that add minor functionality or make small enhancements to the website;
- Periodic registration fees for a domain name, including the initial registration fee, will be deductible when paid (unless the period covered by the fee is greater than 13 months – in which case the fee is deductible over the period to which it relates);
- Expenditure on regularly upgrading existing website software to allow webpages to appear correctly with new mobile devices, browsers and operating systems (provided the expenditure does not: add significant new functionality; materially expand existing functionality; replace a material part of the website; or create a business asset / advantage which is distinct from the website);
- Expenditure on piecemeal modifications and minor routine enhancements to a website;
- Expenditure on the migration of content due to the replacement of hardware (provided there is no material change to the website);
- Expenditure on a temporary microsite that is set up for a transient marketing purpose;
- Expenditure on a social media profile (provided the cost of setting up the profile is minimal and the profile is maintained mainly for marketing purposes).
Establishing a basic website without an online sales facility is an affair of capital according to the ATO
A notable exclusion from the list of expenditure on a website that will be revenue in nature according to the ATO is expenditure on establishing a basic website – i.e. one that does not have an online sales facility and only needs updating when details about the business change.
Notwithstanding the fact that the website purely has a marketing function, the ATO states that expenditure on the establishment of the website is capital in nature as the website “is the digital equivalent of a permanent [advertising] hoarding.”
Expenditure on capital account
Here is an outline of the expenditure on a commercial website that the ATO believes to be of a capital nature:
- Labour costs that are directly referable to the enhancement or enlargement of the profit yielding structure of the business. For example, labour costs incurred on the construction of a new website or a major modification to an existing website – such as expenditure on the establishment of a new online sales function;
- Expenditure on ‘off the shelf’ software products that provide an enhancement to the profit yielding structure of the business. For example, the purchase of an ‘off-the-shelf’ computer program which enables a taxpayer to: design and customise their website; create search functions; organise the website content: and provide a client login function;
- Expenditure incurred in acquiring or developing a commercial website for a new or an existing business;
- Expenditure incurred in acquiring or developing a microsite where the microsite represents a permanent improvement to the business structure;
- Expenditure on the addition of new functionality to a website or to upgrade the existing functionality of website in a way which adds to or enhances the profit yielding structure of the business;
- Expenditure incurred to move content from an old website to a new website or to migrate content to a new platform as part of a website upgrade;
- Once and for all expenditure to secure the right to use a domain name.
TR 2016/3 is an important tax ruling which contains numerous examples that illustrate how the ATO intends to implement its views on when expenditure on a website will be of a capital or revenue nature.
Taxpayers who have been claiming all of their expenditure on websites as allowable (marketing) deductions would be well advised to consider TR 2016/3 and to revise their taxation positions – especially as TR 2016/3 applies to income years both before and after its date of issue.