Claiming deductions for expenses associated with a website requires an analysis of the costs and circumstances.
Website costs can be broadly classified as either capital expenses, or ongoing running costs. If a business is new, website expenses incurred before the business starts may be included for deduction under special provisions.
Running costs or capital?
Website running costs are generally claimable in full as a tax deduction immediately, in the year incurred. Capital costs are generally claimable over a number of years. There are several categories of capital expense which are outlined below.
However the rules for distinguishing capital costs from running costs are somewhat unclear. A taxation ruling issued in 2001 (TR 2001/6) was withdrawn in 2009, and had application under Division 46 (capital allowances for software) which was repealed with effect from 1 July 2001. The current position is determined under Division 40 – Capital Allowances.
Following a review, the Tax Office released draft ruling TR 2016/D1 (6 April 2016) which was subsequently finalised as TR 2016/3 Income tax: deductibility of expenditure on a commercial website, issued on 14 December 2016. The Ruling contains a number of practical examples which illustrate how deductibility of expenditure can be assessed.
Prior to the issue of the final ruling, the general view the Tax Office expressed in material on its website had been that the more substantial a website costs are, the more likely they are to be capital in nature, and therefore deductible over more than one financial year, rather than immediately deductible. Consistent with the Ruling, this language has since been removed.
The updated Ruling draws a distinction between costs described as “piecemeal modifications and minor improvements” (which in isolation might be considered an immediate deduction), and costs which form part of a program of work which substantially changes a website over a period of time.
The latter might more appropriately be considered a capital expense. See the discussions from para. 25 onward: “The character of expenditure incurred on modifications to a website is a matter of fact and degree.”
Website running costs
Ongoing running costs are usually recurring and readily identified as operating costs.
They include such expenses as:
- domain name
- site hosting services
- ongoing content maintenance, such as uploading of images and text, amending text and/or data (e.g. prices)
- ongoing technical maintenance, such as security and other incremental platform updates
Website capital costs
Capital expenses will generally be deductible by instalments over more than one tax year (i.e. as depreciation). The amount claimable in each year will depend on the nature of the cost, and when it is incurred.
Broadly, there are three possible types of capital expense:
- website setup costs incurred before a business starts
- inhouse web development costs
- other capital costs
Small businesses: see the $20,000 threshold for accelerated small business depreciation claims (extended to 30 June 2019) and ATO Depreciation. [update Feb 2019] The availability of the instant asset immediate deduction is to be extended to 30 June 2020, with the ceiling lifted to $25,000 from 29 January 2019. See Treasury Laws Amendment (Increasing the Instant Asset Write-Off for Small Business Entities) Bill 2019
Website costs before a business starts
Website expenses incurred before a business starts would not be deductible if it were not for special tax provisions. This is because the expenses may be incurred too soon for there to be the required connection for tax purposes between the expenses and an income-earning activity.
Website expenses incurred before a business starts may be claimable over 5 years. An example provided by the Tax Office is $2,000 spent on a website design before a business starts. The expense is claimed in 5 equal instalments starting from the year incurred. See further on black hole expenses here.
In-house web development costs
“In-house” software includes computer software acquired, developed or commissioned mainly for the taxpayer to use. It doesn’t include software which is trading stock or which is deductible elsewhere under the tax rules.
Software developed in-house for a complicated website may be deemed to be ‘in-house software’ which would therefore be depreciable as an asset
- with a statutory effective life of 5 years from 1 July 2015 (4 years from 13 May 2008, or 2.5 years before that); or
- within a software development pool, over 5 years from 1 July 2015 or 4 years prior to that
Factors such as the complexity and amount spent are influential (see tax office examples in next paragraph) in determining whether there is an in-house software asset. The costs could include a portion of allocated wages and may (by definition) include a license.
A complicated website might be expected to have a custom-built or highly customised interface, with interactive elements and perhaps other sophisticated features and tools managing access authorities, membership, e-commerce functions and content management.
Website capital costs examples
The tax office provides an example of the purchase of “an $800 static website” for a small business which is fully deductible in the year incurred. What exactly would be included in the $800 is not explained. Presumably the basis of claim is either that the expense is “too small” to be considered a capital outgoing, or it is comprised of ongoing running costs.
By contrast, “a business website hosting package that costs you $4,000 to set up” is provided as an example of capital expenses which would then be claimable over 5 years from 1 July 2015 or as part of the small business pool.
Dedicated hardware such as a computer server, screens and modems etc are easily recognisable as plant and equipment and would be depreciable as such.
Once a capital cost (asset) is deemed to exist, depreciation may be according to:
- the Small Business instant asset write-off rules (in-house software is excluded) and/or access to the low value pool
- General depreciation based on effective life
- Article: Right claims for expenditure on commercial websites – (KPMG)
- ATO – Claiming website costs
- ATO depreciation
This page was last modified on 2019-02-14