When is expenditure on a website tax deductible?
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When is expenditure on a website tax deductible?

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.

Summary

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.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.
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