Taxation Ruling TR 2016/3 discusses the deductibility of expenditure on a commercial website (as generally applies to income years commencing both before and after 14 December 2016). It is a significant ruling that has the potential to affect every business in Australia that has a website.
The first issue the ruling addresses is to identify what qualifies as a "commercial website". The Commissioner's view is that a commercial website is one used in the course of a business, irrespective of whether it is used directly to produce income.
The ruling explains that such a website is an intangible asset of the business, consisting of software installed on a server or servers and connected to the internet. Software provided on the website for installation on the user's device is not considered part of the website, but the content available on that website is part of the website (unless the content has an independent value to the business). Hardware, such as a business server or computer, and the right to use the domain name are not considered part of the website.
In terms of how expenditure on a commercial website is treated, the website is not a depreciating asset, except to the extent it can be classified as "in-house software". Accordingly, the ruling focuses on the deductibility of expenditure under s 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Under this provision, tax deductibility depends on whether the expenditure is revenue or capital in nature.
The ruling explains the treatment of a range of common types of business website expenditure, including:
- acquiring or developing a website: this type of expenditure is capital in nature;
- maintaining a website: this expenditure is revenue in nature, and includes expenditure on modifying the website, as long as the modifications do not alter the website's functionality, improve its efficiency or extend its useful life (in which case the expenditure may be capital instead) – this capital/revenue distinction is a matter of "fact and degree" according to the ruling; spending on a routine modification with minor enhancements is more likely to be considered revenue, but spending on substantial modifications or changes as part of a program of work is more likely to be considered capital;
- periodic operating, registration, web hosting and licensing fees: this type of expenditure is deductible over the period the expense relates to (eg a year's hosting fees are deductible over that 12 months);
- software: if the software qualifies as "in-house software", the special depreciation rules in Div 40 of ITAA 1997 apply, but if it is not "in-house software", the expenditure's tax treatment depends on the nature of the asset – the ruling states that the cost of periodically licensed "off-the-shelf" software is a revenue expense; and
- regular upgrades to existing website software: this type of expenditure is generally considered "operational" in nature and is therefore deductible.
Under the ruling, a business's social media presence is a capital asset, and separate from the business's website, but if the cost of setting up the presence (eg a profile page) is trivial and the profile is maintained mainly for marketing, the expenditure is revenue in nature. The Commissioner's view on other considerations are also set out, including the cost of domain names, the cost of leasing a website, and the possibly depreciable status of any copyright held by the website owner.
Although labour costs are usually on revenue account, they may be of a capital nature if there is a direct link between the employee or contractor in question and a capital asset, for example where the employee or contractor is engaged to develop a business website.
Finally, if expenditure on a commercial website is not deductible under s 8-1 of ITAA 1997 or the capital allowances rules, then the capital gains tax (CGT) regime will recognise it as part of the cost base of a CGT asset. It is unlikely that a deduction will be available under the "blackhole expenditure" provision in s 40-880 of ITAA 1997.
Need to know more?
The ruling makes it clear there are plenty of factors to take into account when establishing if you can claim the costs of setting up and running a website for your business. If you want to know more, contact us to talk about how the ruling could affect your business's tax deductions.