Website development on tax treatments
Today websites are crucial to almost every business. It has become almost impossible for a business to function without one.
Businesses use websites in various ways; the website may be the entire business, or the website may just be used for advertising or marketing.
Depending on the complexity of the site required, the cost involved in creating and running a website can vary greatly. Similarly, the tax treatment of website costs is far from simple.
Website development – expenditure on software
Expenditure incurred to acquire, develop or construct a website used for the purpose of earning assessable income may be considered expenditure on software by the ATO.
Rather than receiving a deduction immediately for this expenditure, the money spent on the website is required to be capitalised and written off over a period of four years (for expenditure on software incurred prior to 13 May 2008 the write off period is two and a half years).
According to the ATO, whether a website is software or not is a question of fact. Generally if the website is a simple website, i.e. just a document or a series of documents which have been converted to html, there will have been no software created.
The expenses incurred in creating or acquiring a simple website may be fully deductible in the year that they were incurred. However, as a business website gets more sophisticated, the ATO is more likely to take the view that software has been created, and the business will be denied a deduction in the year that the costs were incurred.
This view provides a somewhat strange outcome, as generally a more sophisticated website is designed to simplify business practices yet it complicates the deductibility of expenses.
The ATO has set out a number of ‘indicators’ that it says suggest that software is present in a website. These are:
- The website allows for interaction with individual users, for instance a ‘sign in’ or membership system
- The website underwent a validation process that involved testing and debugging for errors
- The website is specifically designed to meet certain criteria
- Supportive documentation is necessary to assist with the various phases in the lifecycle of the website.
Should a business have a website that has one or more of these indicators they will be required to apportion the costs of creating the website between the software component and the other parts. This could potentially be an extremely complicated exercise, involving substantial compliance costs.
Some businesses may decide to acquire computers or other hardware to allow them to host their own website. The cost of acquiring computer hardware to host the website is regarded by the ATO as ‘a unit of plant.’ This means that the costs associated with the purchase of hardware also cannot be deducted in the year that they are incurred. Instead, they will be capitalised and depreciated over the effective life of the hardware (currently four years for computers generally and three years for laptops).
If a business pays someone else to host the website, the business may deduct that cost when it is incurred as part of the ongoing and regular expense of operating a website and if you are in any way concerned contact us to talk it through.
Alterations to website
Generally, for the website to be successful, a business will be required to regularly update its website with new content or design changes. However, be warned, the ATO considers changes that alter the structure of the site and the associated costs to be expenditure on software.
The ATO believes the structure of the site has been altered where the website provides new functions that were not present before the work. Take, for example, a furniture business operating a website to advertise furniture. Should this business then add a shopping cart function to the website this would be considered software and any expenditure incurred by the business in adding this function would have to be deducted over four years.
The business may also be required to spend money maintaining the website. Most websites require ongoing maintenance to allow them to continue to function in the necessary manner. So if the furniture business were simply to replace one catalogue with another, then any expenses incurred in doing this and any other administrative functions would be immediately deductible when they were incurred.
In light of the above, business owners should be wary of the complicated tax law applicable to websites and be sure to keep all records so that costs incurred can be treated correctly for tax purposes.