Most businesses have an online presence – whether to advertise their business or allow customers to purchase goods or services. Websites vary in costs and complexity – from a simple “skin” to a retail site that you may have engaged a web developer to design and set up.

It’s just as well then that the Tax Office has recently provided guidance on how you can go about claiming a deduction for your website development costs. This will depend on when you’ve incurred the costs of developing your website and the size of your business.

Start up costs

If you incur the expense before you start running your business, you can typically claim the cost over five years (20% per year) once your business has started up.

After you start

Small business (turnover less than $10 million annually)

If you’ve already started up and your “aggregated turnover” is less than $10 million, you can use the simplified depreciation rules. That means:

• if the cost is less than the instant asset write-off threshold of $20,000, you can claim a deduction for the full expense amount in the income year you incur the expense (until June 30, 2018)
• if the cost is equal to or more than the instant asset write-off threshold, you can allocate it to a general small business pool for accelerated depreciation deductions.

Note that you cannot use the simplified depreciation rules if you’ve chosen to allocate expenditure on the software to a special “software development pool” allowed under the tax law.

Non-small business (turnover more than $10 million annually)

The rules work like this for non-small business entities:

• for “in-house software”, deduct on a straight line basis with an effective life of five years
• if the software is included in a software development pool, deduct different proportions of the expense each year over five years.

Note that “in-house software” costs can only be added to the software development pool if they were incurred to develop software, not to buy software “off the shelf”.  Chat to us if you would like some clarity on this area.

Ongoing website costs

Regardless of turnover, you can also claim an outright deduction for certain “ongoing running and maintenance costs”, like domain name registration and server hosting costs in the same income year the expenses are incurred.

Examples

The Tax Office has provided some examples to illustrate its rules regarding website cost claims.

Website package

In July 2017 your small business bought a $2,000 website hosting package. You also have to pay service fees of $50 a month, plus $50 a year for the domain name. You can claim a deduction of $2,000 in your 2017-18 tax return under the simplified depreciation rules, and a deduction for the monthly and yearly fees in the year you incur those expenses.

Software update

You had set up a software development pool in 2016 when you set up your business’s first website. In August 2018, you incurred $4,500 in costs to update the software behind the website. You have to allocate this expenditure to the software development pool and can claim a deduction for it over five years.

The rules for claiming a deduction can be complex depending on the nature of your website – contact our office if you require assistance.