web design

Mar 2017 3 Minutes

Claiming Deductions for Commercial Website Expenditure

It is increasingly common for small businesses to set-up and run a commercial website to promote their businesses.

The question that may invariably arise is the deductibility of the expenses incurred on the initial set-up and running of the website. The Australian Taxation Office (“ATO”) has recently issued Taxation Ruling TR 2016/3 stating their views on this matter.

Generally speaking, expenditure incurred in acquiring or developing a commercial website for a new or existing business is capital in nature. This means it cannot be claimed as a deduction outright. However, the commercial website can qualify as a depreciating asset. In particular, most commercial websites can be classified as software and the expenditure can generally be claimed over 5 years.

For taxpayers that qualify as Small Business Entities (“SBEs”), more generous concessions may be available under the Simplified Depreciation rules. If the cost of the initial development or set-up of the website is less than $20,000, it can be claimed in full as deductions in the year it is incurred. If it costs more than $20,000, the expenditure should then be allocated to the General Small Business Pool.

However, if the entity has an existing Software Development Pool, the Simplified Depreciation rules cannot be used and the expenditure must be allocated to that Software Pool instead. It should be noted that the $20,000 threshold ends on 30 June 2017 and the threshold will revert back to $1,000 effective 1 July 2017.

Expenditure incurred in maintaining an existing website can generally be claimed as a deduction for the full amount. Maintaining a website, in this sense, involves routine and regular activities, such as domain name registration and server hosting costs. Minor enhancements (or piecemeal modifications) to existing functionality are considered to be part of maintaining the website.

However, if the modification to the website is significant, it is arguable that the ‘profit-yielding structure of the business’ (of which the website is a part) is significantly enhanced and the expenditure is likely to be capital in nature. In this case, the expenditure is not immediately deductible but can be claimed over a period of time as discussed above.

It is also common for businesses to maintain a social media presence. Typically, the company information, member profile information and content entered onto social media reside on the social media platform. Further, the cost of setting up the profile is often minimal and the profile is maintained mainly for marketing purposes. In this case, the expenditure is generally treated as a revenue expense and is immediately deductible.

The ATO previously held the view in the now withdrawn Taxation Ruling TR 2001/6 that the initial set-up of a commercial website that contains no software, such as online purchase and information validation or processing functions, can be immediately claimed as a deduction. This view is no longer current and taxpayers cannot rely on this to claim an immediate deduction for their commercial website set-up expenditure.

If you have any queries on this please contact us and speak with Jane Chiang.