For the purposes of the ruling the ATO has defined a website to be: “an intangible asset consisting of software, and includes software integrated into the website for online use by a website user. However, it does not include software provided on the website for installation on the user’s device. The term ‘website’ includes content available on that website, but only to the extent that the content has no independent identity or value” (Para 6). It also assumes that the website is being run as part of a commercial enterprise, rather than merely a hobby or non-business venture.
The ruling also separately considers the additional assets related to a commercial website being: any hardware, the domain name(s) and any content that has an independent value to the business.
Summary of the ruling
The ruling broadly seeks to cover and take a position on the following types of expenditure for the most part relying on established principles:
Labour costs to manage and maintain a website are ordinarily deductible, unless those costs are directly attributable to a capital project (i.e. an employee hired for the sole purpose of creating a new website or significantly upgrading an existing site).
Off-the-shelf software used to create or maintain a commercial website are treated consistently with other business software (i.e. are treated as depreciable assets), however some small businesses may be eligible to concessional treatments to allow immediate deductions.
Periodic operating expenses will generally be deductible over the period to which the expenses relate.
The costs related to purchasing or creating a new commercial website are considered to be capital costs to the business and are unlikely to be generally deductible. The costs would then be considered to be capital and treated as ‘in-house software’ and depreciable over 5 years (or less for some small businesses).
The exception is for ‘microsites’ set up for a “transient marketing purpose”, where the costs may be treated as deductible.
Maintenance and minor improvement costs to the front end or back end of a website will generally be considered to be deductible where those changes do not ‘alter the functionality of the website’, ‘improve the efficiency of function of the website’ or ‘extend the useful life of the website’. This is largely consistent with the general rules of deductibility for repair and maintenance costs of your assets.
The degree to which the activities modify the site needs to be considered in each case, with minor changes or enhancements likely to be deductible and major changes and improvements being treated as capital in nature and depreciable (similar to new site expenditure in point 2).
The treatment of costs to modify a website is a to be considered a matter of fact and degree. The more significant the change or improvement is to the websites ability to enhance the business’s profit structure, the more likely the expenditure is capital in nature.
While minor modifications may be deductible, where a series of minor modifications are planned that substantially modify or improve the website, those costs may be considered to be capital in nature.
The treatment of expenditure on migrating website content to a website follows the character of the expenditure which prompted the migration of the content.
Moving content to a new website that’s been treated as capital and depreciable, would treat that expenditure in the same way. However, if the content is moved due to hardware needing replacement but with no functional change to the website, then the expenditure may be deductible.
The ruling considers expenditure to modify an existing site to correctly display on mobile devices to be a maintenance task and likely to be deductible, whereas the creation of a whole new site for use on a mobile device to be capital.
The ATO considers a business’s social media presence to be a capital asset of the business, and hence any expenditure in relation to that asset to be capital in nature and not generally deductible.
The exception to this rule is where the expenditure is “trivial” and largely incurred for marketing purposes, in that case the costs are likely to be deductible when incurred.
Where the website or backend software is leased by a business owner, the periodic lease payments made under the arrangement should be deductible as incurred, provided the business does not also have a right to become the owner of the website or underlying software.
The vast majority of hosted platforms run as software-as-a-service, like eCorner Stores, will fit into this category. The periodic costs incurred to use those services are likely to be deductible as they are incurred. However, consideration should be given to any initial set up fees or other assets purchased with the hosted online store, such as domain names, as these may be capital assets separate from the leased website.
Where the website owner holds copyright in a component of the website or as part of the website’s content (for example images and other site content), that copyright may constitute separate capital assets from the website. As such, the copyright should be considered separately and the website owner may be able deduct the decline in value of the expenditure related solely to the copyright.
Where that component is also part of an ‘in-house software’ asset, the most appropriate treatment will be to deduct the decline in value of the software. Noting that expenditure can only be deducted once as appropriate not as part of both the software and copyright.
A domain name is a unique name registered with a domain name registrar (for example, www.ecorner.com.au). Periodic registration fees, including the initial registration fee, are considered to be generally deductible when incurred. This is the case unless the fees relate to a period greater than 13 months, in which case the fee is deductible over the period to which the fee relates.
An amount paid once-and-for-all to secure the right to use a domain name is capital expenditure. Such an amount would be nil where the right is secured solely by registering the domain name.
The right to use a domain name is a CGT asset. As such, expenditure incurred in acquiring the right to use a domain name forms part of the cost base of that asset. If you purchase a domain name already registered by another business or at an auction, the costs to acquire that asset will not be deductible and will only be realised at the time the right to use that domain ceases (i.e. you sell the domain again or let it lapse) as a reduction to any capital gain or a capital loss.
The ruling also provides a useful flowchart for tracking through the various conclusions: https://www.ato.gov.au/law/view/sgif/pbr/tr2016-003a.gif
Some practical considerations
Broadly, the treatments outline below are consistent with any other commercial assets of a business, and as such it’s fairly straightforward to draw parallels to a physical store front or a warehouse. Thinking of your online store the same any other asset of your business should, in principle, lead to the right outcomes from both an accounting and tax perspective. Treatment of the costs will reflect whether you own or lease all or part of the website, and the nature of any investments you make into that site.
Challenges may arise where update or modification works are being completed on an existing website, as the practicalities of such a project may not be as clear as the ruling seeks to draw the line between deductible or a capital asset. For example, re-designing an older website to be responsive can be a complicated and cost intensive exercise (potentially more so than developing a new site for mobiles), however the ruling states that enhancing an existing site to be displayed correctly on any mobile device is a deductible expense whereas a new site for mobile devices would be capital and depreciable.
Again, drawing a parallel to a physical store front may help provide a basis for the treatment of any investment as deductible or capital. Repainting your store front is much different to completely refitting the store. Similarly minor cosmetic changes or improvements to your website shouldn’t be treated the same as a ground up re-design or migration to a new backend platform.
Additional considerations for small businesses
Small businesses, with an annual turnover of less than $2 million, have a range of tax concessions (currently available until 30 June 2017). Particularly, where a small business undertakes a website project valued at under $20,000, the project may be immediately deductible at the time the costs are incurred.
Need some help?
These issues rarely are front of mind when making investment decisions in relation to your website, and sometimes it doesn’t hurt to get advice, particularly if you find yourself stuck or aren’t confident you have the expertise or experience to correctly assess your requirements.
We, at eCornerAssist, would be happy to discuss any questions with you, and we, and our partners, are here to assist you finding the right path.
Written and published by Jae Debrincat, General Manager – eCorner Pty Ltd and Registered Tax Agent (25518276).