Tax and your business’s website costs
There’s no doubt that the internet can be a crucial tool for small business, and many businesses are essentially just ‘online’ enterprises (no web, no business). But no website is a ‘one-size-fits-all’ proposition, as the purpose behind having an online presence varies greatly depending on the business involved. Is it just for promotions and marketing, to provide essential contact details or information about services offered? Will it offer e-commerce capabilities or other interactive services such as online quotes, or be capable of taking customer feedback?
Depending on the complexity or otherwise, the costs involved in creating, running and maintaining a website can vary greatly, and estimating the financial side of website development and maintenance can be far from straightforward. Similarly, the tax treatment of these costs can also be nowhere near straightforward.
From a tax treatment point of view, the sticking point with website expenditure is determining whether such costs are essentially of a ‘capital’ nature, or operational outgoings.
The software that allows the website to operate is deemed to be ‘in-house software’ if it is used to perform the functions for which it is developed. In-house software is a depreciating asset that can be written off over time. Of course the hardware (such as a computer server) if used in-house is considered ‘plant and equipment’ and can be depreciated, with the effective life for such assets generally being four years.
However costs dedicated to maintaining the website, and expenses associated with uploading content, such as price lists or changing details of goods or services on offer, and replacing text or pictures, constitute operating costs in the ordinary course of business, and are therefore deductible in the same year these costs are incurred. This includes the expense of paying someone else to host the website, as this is part of the regular ongoing cost of operations.
In very broad terms, these are the tax treatments available for website expenses.
- Dedicated hardware (computer server)
- Creation and maintenance of more complicated website content. Deemed ‘in-house software’, which typically includes:
- interactive functions
- e-commerce tools
- membership or ‘sign-in’ requirement
- Wages or contractor fees to the extent that they are in respect of the items above.
• Upload of simple text content, company information, price lists (replaced periodically)
• Operation costs in the ordinary course of business.
But the Tax Office’s view of a website being ‘in-house software’ or not — and therefore treated as depreciable capital expenditure — can also be coloured by the simplicity and/or complexity of a website. It all comes down to what the Tax Office refers to as ‘a question of fact’ and degree.
A very general assertion can be made that the simpler a website is (that is, if it is merely a few documents converted to code) the more likely it is that the business can argue that costs — for example, the periodic uploading of content — are of a revenue nature carried out in the normal course of business. Expenses incurred in creating and uploading content for the bare-bones website are likely to be fully deductible in the year such costs are incurred.
But in cases where more sophisticated website elements come into play, such as adding a shopping cart, the Tax Office will likely take the view that software has been created and deployed, and the business involved may be denied a deduction, and costs may be required to be allocated to capital account and amortised. Salary, wage and/or contracting costs are generally also included, apportioned appropriately to website expenses.
As a rough guide, the Tax Office issued a tax ruling that set out some ‘indicators’ regarding the tax treatment of a business’s website:
- it allows interaction with users, such as them ‘signing in’, or some system of membership
- it had to undergo a testing process to iron out bugs and fix errors
- it is specifically designed to meet certain criteria spelled out by the business
- supportive documentation is required to assist in the various phases of the lifestyle of the website.
The above ruling has now been withdrawn, and so far the Tax Office has not issued a replacement ruling. But if a business’s website seems to cover one or more of these indicators, there’s a good chance that the Tax Office will be looking to have related expenses apportioned on a ‘revenue’ (deductible) or ‘capital’ (depreciable) basis. Good advice will be essential in this area.
Concessions for small business
One thing to remember is the recently (from July 1, 2012) added ability of small businesses to instantly write-off capital assets up to a value of $6,500. As well, assets costing more than $6,500 can be allocated to a small business pool and subjected to a depreciation rate of 15% in the year of allocation and 30% thereafter.