A tax deduction for your commercial website – October 2014

There is no denying that the internet pervades our everyday living in multiple and various ways these days. The commercial world is not only similarly tied-in with all things “cyber”, but in fact many businesses rely to such an extent on being “online” that they couldn’t survive without it.

Of course the internet is not a “one-size-fits-all” tool for commercial activities, as the purpose behind having an online presence varies greatly depending on the business involved.

A particular website could be just for promotions and marketing, or it could provide essential contact details or information about services offered. Another business will require e-commerce capabilities, or other interactive services such as online quotes, or be capable of taking customer feedback.

Depending whether a complex or a “plain-vanilla” web presence is needed by a business, the costs involved in creating, running and maintaining a website can vary greatly. Therefore estimating the financial demands of website development and maintenance — and the resulting tax consequences — can be far from 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 may be deemed by the Tax Office to be “in-house software” if it is used to perform the functions for which it is developed. The software in these circumstances is an intangible asset.

However, where an intangible asset is determined to be in-house software, as in this case, it would be classified for tax purposes as a depreciating asset that can be written off over time. Of course uncontrovertibly the hardware (such as a computer server) if used in-house would likely be considered “plant and equipment” and can be depreciated, with the effective life for such assets generally being four years.

Businesses owners should be mindful however that costs dedicated to maintaining their 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, can generally be seen as operating costs in the ordinary course of business.

This would mean that these types of costs may therefore be deductible in the same year that they are incurred. An example of these types of costs may be the hosting of a website, as this is part of the regular ongoing cost of operations.

In very broad terms, the following are the tax treatments available for website expenses.

Depreciable assets (written off over the life of the asset)

• Dedicated hardware (server, CPU and other physical assets)
• “In-house software”, which is depreciated at 25% prime cost if it is not allocated to a pool.* This software typically includes:

o   interactive functions

o   e-commerce tools

o   membership or “sign-in” requirement

• Wages or contractor fees to the extent that they are in respect of the items above.

* If allocated to pool, 0% in first year, 40% in each following two years, then 20% in remaining year.

Deductible expenses

• Cost of third-party hosting
• 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 of complexity.

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 an in-house software asset has been created and deployed, and the business involved may be denied an upfront deduction in the year the costs are incurred, with these costs instead required to be allocated to a capital account and depreciated.

Salary, wage and/or contracting costs could also be included, apportioned appropriately to website expenses.

Rulings and decisions

The Tax Office has already provided an “interpretive decision” regarding the allocation of such costs between deductible expenses and non-deductible capital expenditure. The decision concluded that salary and wage costs could be on capital account if:

• the duties of the employees were mostly involved with major upgrades of assets on an ongoing basis
• the relevant assets formed a significant part of the taxpayer’s business structure, and

• the employees were “engaged in a systematic manner and as part of their normal duties, in the construction and upgrading of the taxpayer’s depreciating assets”.

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. These are:

• 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, and
• supportive documentation is required to assist in the various phases of the lifestyle of the website.

For now however, as the above ruling has been withdrawn and no replacement has been issued, the Tax Office seems determined to take a very “case-by-case” approach to deciding on which costs it will allow a business to claim upfront or as part of a depreciating asset. Having said this, if a business’s website seems to cover one or more of these tax treatment indicators as spelled out by the Tax Office, it is more than likely that the tax treatment will require having related expenses apportioned on a “revenue” (deductible) or “capital” (depreciable) basis. Good advice will be essential in this area, so see this office for guidance. Where the case is unclear a private binding ruling from the Tax Office may need to be obtained.

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