DEDUCTIONS FOR COMMERCIAL WEBSITE EXPENSES
Taxation Ruling TR
2016/3
9 February 2017
The Commissioner of Taxation (Commissioner)
sets out his views on the deductibility of expenditure incurred in
acquiring, developing, maintaining or modifying a website for use
in carrying on a business, including expenditure relating to domain
names in Taxation Ruling TR 2016/3. TR 2016/3 applies to income
years both before and after 14 December 2016.
In the Commissioner's view a website is an intangible asset
consisting of software and includes software integrated into the
website for online use by a website user. It does not, however,
include software provided on the website for installation on the
user's device, such as software sold to third-parties. Computer
hardware, the right to use the domain name and content available on
or incorporated into a website that has independent value to the
business and that can be separately identified and are not
considered by the Commissioner to be part of a commercial
website.
Capital v Revenue
TR 2016/3 highlights the importance of the general capital/
revenue distinction and the need to determine if the cost is a
"recurrent" operational expense or "referable to the enhancement of
the profit yielding structure of the business", the former being
deductible and the latter being capital in nature and not
deductible.
The deductibility of expenditure on a commercial website under
section 8-1 of the Income Tax Assessment Act 1997
(section 8-1 and ITAA 97) depends
on whether the expenditure is of a capital or revenue nature.
The Commissioner considers that expenditure not deductible under
section 8-1 (or any other provision outside Division 40 (capital
allowances) and Division 328 (small business entities)) may be
"in-house software" and deductible under the capital allowances
regime. "In-house software" is defined in in section 995-1(1) ITAA
97 as computer software (or a right to use computer software), that
a taxpayer acquires, develops or commissions and that is "mainly"
for the "taxpayer" to use in performing the functions for which the
software was developed (i.e. not mainly for sale). TR
2016/3 provides that where expenditure is incurred on "in-house
software" that expenditure may be deducted over five years from the
time that the software is first used or installed ready for use. To
the extent that the expenditure is incurred on developing computer
software, the expenditure might be allocated to a software
development pool and deducted in accordance with the pool rules in
section 40-455 ITAA 97. Small business entities using the
simplified depreciation rules in Subdivision 328-D might be able to
write off the expenditure less than $20,000 in value immediately,
otherwise the expenditure can be deducted in accordance with the
general small business pool rules.
Whether expenditure is deductible depends on the facts and
circumstances in which it is incurred. The Commissioner sets out a
number of examples in the ruling illustrating his views as to the
application of the capital/ revenue distinction and to assist
taxpayers with their decision making process.
Expenditure which the Commissioner considers to be common in
relation to commercial websites includes:
- labour, including contractor and employee costs: The
Commissioner considers that being of a recurrent nature these are
ordinarily deductible. However, there are circumstances in
which they could be capital in nature, such as, for example, where
the website (or related project) is intended to provide a long-term
benefit and of a capital nature and the labour costs are allocated
to that project and form part of its cost base.
- expenditure on "off the shelf" software products: In the
Commissioner's view expenditure on off- the-shelf software that is
licensed periodically is a revenue expense; whilst expenditure that
is capital in nature may be depreciable under Division 40 if the
"off the shelf" product constitutes "in-house software"; and
- periodic usage, registration or licensing fees: In the
Commissioner's view these are revenue expenses and deductible over
the period to which the expense relates. For example, in the
Commissioner's view where a commercial website is leased from a web
developer, the periodic lease payments made are deductible as
incurred, provided the business does not also have a right to
become the owner of the website.
In TR20016/3 the Commissioner considers particular categories of
expenditure such as acquiring or developing a commercial website,
the maintenance or modification of a commercial website, content
migration, social media expenditure, domain names and copyright and
when in his view the expenditure is deductible or comprises part of
the cost base of a CGT asset.
Should you have any queries in relation to this alert, please
contact one of the members of our Revenue Law team.