Private ruling: Income - sale of website
Date of advice: 13 September 2016
Published: November 2016
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the portion of the sale proceeds attributable to the sale of the website domain name treated as capital proceeds? | A1: Yes. | Q2: If a capital gain results from the sale of the website domain name, are you able to apply the 50% discount to the capital gain? | A2: Yes. | Q3: Is the portion of the sale proceeds attributable to the code and database (in-house software) treated as a balancing adjustment? | A3: Yes.

Relevant facts and circumstances: You created a website more than four years ago and have been running it as a hobby. The website consists of the domain name, the code and the database. The website is a blog and online community. It does not sell any products or services. You have not sold websites previously and do not have plans to do so in the future. You have an unrelated full-time job. An individual has offered to purchase the website.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Subdivision 40-D | Income Tax Assessment Act 1997 Section 40-30 | Income Tax Assessment Act 1997 Section 40-285 | Income Tax Assessment Act 1997 Section 40-290 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Division 115

Reasons for decision: Summary: The sale proceeds are to be apportioned between the domain name and the in-house software. The portion relating the domain name is capital proceeds and any resultant capital gain may be discounted by 50%. The portion relating to the in-house software may result in an assessable balancing adjustment. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes income derived from all sources whether in or out of Australia, during the income year. You have received an offer from an individual to purchase a website you have created. The website consists of a domain name, the code and database. For reasons which are discussed below, it is considered that two assets are being sold: • the domain name, and • the code and database - collectively referred to as 'in-house software'. The treatment of the portion of the payment relating to each asset will be discussed separately. | Detailed Reasoning - Sale of domain name: Section 108-5 of the ITAA 1997 defines a capital gains tax (CGT) asset as any kind of property or a legal or equitable right that is not property. A CGT asset may be tangible or intangible. The right to use a website domain name is a legal or equitable right and therefore is a CGT asset. The disposal of a CGT asset (the domain name) triggers CGT event A1 at the time the sale contract is entered into. The portion of the sale proceeds attributable to the sale of the domain name are considered to be capital proceeds and are included in calculating the gain or loss from its sale. You will make a capital gain if the capital proceeds from the sale are greater than the cost base of the domain name. Conversely, you will make a capital loss if the capital proceeds from the sale are less than the cost base of the domain name. Division 115 of the ITAA 1997 allows an individual taxpayer to discount a capital gain by 50% if they hold the asset for more than one year. In your case, if the capital proceeds exceed the cost base of the domain name, a capital gain will result. As you have owned the domain name for more than 12 months you are entitled to discount the capital gain by 50%. Assuming you do not have any other capital gains or losses for the year, the discounted capital gain is included on your tax return and tax using the marginal tax rates. Conversely, if the capital proceeds are less than the cost base of the domain name, a capital loss will result. The capital loss can be offset against other capital gains for this income year, or future income years. Please note: the fact that the website was not used in a business or to derive income does not exempt it from the capital gains tax provisions of the taxation legislation. | Detailed Reasoning - Sale of in-house software: Section 40-30 of the ITAA 1997 defines a depreciating asset as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used (it's effective life). Certain assets are excluded from being depreciating assets for the purposes of ITAA 1997 and include: land, items of trading stock and intangible assets unless specifically mentioned in the legislation. The legislation specifically names in-house software as an intangible depreciating asset. In-house software is defined as computer software or a right to use computer software that you develop or have another entity to develop: • that is mainly for you to use in performing the functions for which the software was developed, and • for which you cannot deduct amounts under a provision of the taxation legislation outside of Division 40 (capital allowances) and Division 328 (small business entities). In-house software has a four year effective life. Subdivision 40-D of the ITAA 1997 states that you may have to make an adjustment to your taxable income if you stop holding or using a depreciating asset. This adjustment is known as a balancing adjustment. The adjustment is generally based on the difference between the actual value of the asset when you stop holding it and its adjustable value. A balancing adjustment event occurs for a depreciating asset when it is sold, even if the asset has not been used in income producing activities and you were not able to claim a deduction for the decline in value. Section 40-285 of the ITAA 1997 states that the balancing adjustment amount will be included in your assessable income where the asset's termination value exceeds the asset's adjustable value. The termination value of a depreciating asset that is sold is the sale proceeds. The adjustable value of a depreciating asset at a particular time is the opening adjustable value for that year plus any second element costs for the year, less its decline in value for the year up to that time. The opening adjustable value of an asset for an income year is its adjustable value to you at the end of the previous income year. Section 40-290 of the ITAA 1997 states where a depreciating asset is used for both a taxable and non-taxable purpose, the balancing adjustment amount must be reduced by the amount that is attributable to the use for a non-taxable purpose. In your case, • the website code and database are considered to be in-house software and therefore depreciating assets • the termination value will be that portion of the sales proceeds attributable to the in-house software • the adjustable value of the asset can be assumed to be nil as in-house software has an effective life of four years and you have had the website for longer than this period. You can calculate the amount of the balancing adjustment to be included in your tax return as: Termination value - cost of in-house software. Please note, that in calculating the cost of the in-house software you are unable to include the cost of your own labour.