Australian businesses are increasingly adopting websites as essential sales and marketing tools.
The Australian Bureau of Statistics (ABS) has reported that just under half of businesses have a web presence, and online ordering has increased, generating $286 billion in revenue in 2015.
Similarly, social media engagement is trending upward, with a third of Australian businesses now using these marketing channels.
As technological permutations continue to impact the way businesses operate, our taxation system must keep pace too.
The ATO’s Taxation Ruling TR 2016/3 Income tax: deductibility of expenditure on a commercial website released in December 2016, is one of the latest instances supporting this evolution and will benefit businesses.
What is a commercial website?
The ruling defines a commercial website as an intangible asset consisting of software installed on server(s), but not software for installation on users’ devices. Mobile apps are included within the definition if these assist the interaction between the user and the business.
What does the ruling cover?
Taxation Ruling TR 2016/3 covers expenses deductibility for the following main areas:
- acquiring a website;
- developing a website;
- maintaining and modifying a website;
- migrating content; and
- expenses associated with domain names.
Expenditure for the following is not covered by the ruling:
- software that users can download from the site to assist their experience of the site;
- content that has value independent from the site itself – for example, on a portfolio website showcasing artwork, the artwork images, audio or video are considered separate depreciating assets relating to intellectual property;
- the right to use the domain name; and
- capital allowances outside of Div 40 and subdiv 328 of the Income Tax Assessment Act 1997 (ITAA 1997).
Benefits for businesses
By taking a broad view of a website’s purpose in the context of the whole of the commercial enterprise, the ruling provides particular clarity for businesses. It defines tax deductions for both revenue and capital expenditure, and gives guidance on applying the rules.
TR 2016/3 is useful for assessing the nature and timing of website expenditure for ongoing operations, and planning for a business’s future. Commercial websites may come with greater tax benefits than business owners previously realised!
The ruling provides incentives to join the online community that businesses without a website may not have considered before now. The ability to claim in-house software, website set-up and design as capital expenses is especially useful for small businesses that have evolved out of a sideline project or hobby. Where setting up a Facebook page or an Instagram profile only comes with a minor capital cost, the expense of maintaining these presences and updating content is a marketing one, so is deductible as incurred on revenue account.
Capital or revenue? Challenges for businesses
Influenced by technological and market developments, a commercial website is an asset that is constantly evolving. To ensure your business website remains functional, not to mention helping gain a market advantage and providing an optimum customer experience, you will need to regularly update and improve its content and functionality.
The ATO intends the ruling to better equip taxpayers in self-assessing their business deductions, but it’s important to note that applying the rules requires an element of subjective judgment, particularly when it comes to website “maintenance and modifications”.
For example, activities undertaken as website maintenance, such as making a number of piecemeal software updates, could in fact be assessed as a “program of improvement” if it results in a significant improvement to the website’s functionality. This means the related expenditure would be assessed as capital, not revenue, and would therefore not be deductible for the business.
The deductibility of costs for providing optimised access to website users on mobile devices such as smartphones and tablets also can vary: modifying an existing site for mobile means expenditure is considered revenue and can be claimed against operational costs as an ordinary business expense, but where a micro site or an additional website is designed specifically for better user experience on mobile and tablet devices, the cost is considered a capital expense.
Classification of expenditure on websites will present a challenge for many businesses, because factors of frequency, scale and impact on the business’s ability to increase profit-yield come into play. The levels of functional sophistication and the varying roles of business websites will also matter – and even a subtle variation in such can mean a different outcome when it comes to tax deductibility.