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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.
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.”
Lets hear it direct from the ATO
Source: Websites and Tax
Capital assets and expenses
Assets that have a longer life are called capital assets. Examples include buildings, motor vehicles, furniture, machinery and equipment.
A capital expense is either:
- the cost of an asset that has a longer life (usually more than one income year)
- an expense associated with establishing, replacing, enlarging or improving the structure of your business.
Website development and software expenses can be claimed differently depending on the type of expense and how much it costs.
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You may be able to claim deductions for certain small value assets in the year of purchase. Otherwise, you claim an amount for the decline in value (that is, depreciation) of the asset each year over a number of years.
You can also ‘pool’ most capital assets and claim depreciation for the pool, which is simpler than depreciating the individual assets.
If you’re an eligible small business you can use the simplified depreciation method, which allows you to claim expenses for assets (up to a certain limit) in the year the expense was incurred.
If you incur expenses creating or maintaining a website for your business, you may be able to claim the costs as a deduction.
You can depreciate the costs of a website over time. You do this by various depreciation methods, including putting the expenses into a pool.
However, special rules apply to in-house software you acquire or develop for business use, not for sale.
If your expense is:
- in-house software – use the prime cost method to deduct the cost each year
- included in a software development pool – deduct the different proportions of the expense each year.
If you have chosen to allocate expenditure on your software to a software development pool, website costs will have an effective life of five years if you incur them on or after 1 July 2015.
Ongoing running and maintenance costs
You can claim a deduction in the year you incur some ongoing expenses associated with running and maintaining your website. Some examples include domain name registration fees and server hosting costs.
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: A $20,000 threshold for accelerated small business depreciation claims has been increased to $30,000 on an asset-by-asset basis and extended until 30 June 2020 under proposals announced in January 2019 and expanded upon in the Budget 2019 announcements. The Treasury Laws Amendment (Increasing and Extending the Instant Asset Write-Off) Bill 2019 has been approved by the parliament.