Most small businesses and independent contractors have a website these days. If you are planning to launch a new website or refreshing an existing one, it's important to understand the tax implications. As with all things tax, it's not always easy.
The complexity of the technology and associated services that go with running a website can make it tough to determine what you can claim upfront as a tax deduction and what you need to depreciate over time.
Capital or revenue cost?
To work out what you can and can't claim as an immediate deduction, it's important to understand which of your website expenses are capital or revenue costs.
A simple way to think about it is this. If the expense relates to the initial development or acquisition of the website, the ATO considers the expense capital in nature, so it can't be claimed immediately as a deduction.
The same goes for any changes to your website that improve the business's ability to make a profit. These expenses are also considered capital expenses and not immediately deductible.
Other examples of capital expenses include the costs incurred when migrating content from an old to a new website, or the cost of securing the right to use a domain name.
It's important to check with us when it comes to any software you have developed in-house. For this to be immediately deductible, it must be complex and seen as significantly improving your website.
Claim revenue costs now
On the other hand, costs related to the running and usage of your website - such as operating and routine maintenance costs - are considered by the tax man to be revenue in nature.
These include periodic domain name registration fees, your monthly hosting fees and upgrading website software to appear correctly on new mobile devices, browsers and operating systems. These costs are all immediately deductible in full.
Updating your website content with new articles, graphics or advertising is also considered a maintenance expense and is immediately deductible. However, if you develop a microsite that links back to your main business website, the costs relating to this are not immediately deductible.
For a gripping read, you can always check out the details in the ATO's taxation Ruling TR 2016/3.i This lengthy document provides lots of examples of different types of website expenses and whether the tax man considers them capital or revenue in nature.
Reprieve for small business
But before you start combing through all your website expenses to try and work out whether you can claim them upfront, it's worth noting there is a reprieve for smaller operations.
If your business qualifies as a Small Business Entity, you may not need to work out whether your website expenses are capital or revenue in nature. Under the government's popular $20,000 instant asset write-off concession, the business portion of website capital expenses can be written off immediately, rather than depreciated over five years, if they are less than this amount.ii
To qualify to use the simplified depreciation rules and claim and immediate deduction, your turnover must be under $10 million and the capital expense for your website must have been first used or installed ready for use during the income year you are claiming the expense.
This means if you are a small business and do not have large website costs, you can avoid the problem of working out what is and is not deductible.
It's worth noting, however, that the $20,000 immediate write-off concession currently expires on 30 June 2019, although it may be extended again in the next Federal Budget.
If it is not extended, the concession drops to $1,000 and all your website expenses over this amount will need to be classified as capital or running costs. You will then need to depreciate capital expenses over time.
Call us today to find out more about how to correctly claim expenses relating to your business website or the instant asset write-off concession.