Private ruling: Business deductions - website
Published: July 2012
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is an immediate deduction allowable for the initial costs incurred in the construction of the website? | A1: No. | Q2: Is the expenditure incurred for the construction of the website able to be pooled in the general small business pool? | A2: Yes | Q3: Is an immediate deduction allowable for on going internet hosting and licensing costs in relation to the website? | A3: Yes

Relevant facts and circumstances: You are a small business entity with a turnover of less than $2 million. You elect to use the simplified depreciation rules. You have never had any expenditure allocated to a software development pool. You commissioned a third party to develop a website for your business. The website construction started and was completed in the 2010-11 income year; however it was progressively improved by you over the next few months. You provided the third party with your existing logo and information regarding your objectives for the website. The website is used in your business to promote your business, provide information regarding your location, opening hours and contact details. You also promote specials on your website. You own the website and domain name and it is able to be relocated. The website is developed on an existing framework and you are able to make changes to the site yourself, including changes to prices, photos and the overall layout. Features of the website include: · Links to supplier websites · Email reply form - enabling viewers of the website to contact you · eCommerce capabilites - allowing you to sell products online and collect payments in real time (however you do not currently utilise this feature)

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 subsection 40-25(1) | Income Tax Assessment Act 1997 section 40-30 | Income Tax Assessment Act 1997 subsection 328-110(1) | Income Tax Assessment Act 1997 subdivision 328D | Income Tax Assessment Act 1997 section 328-175 | Income Tax Assessment Act 1997 section 328-185 | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The initial costs incurred for the construction of the layout and structure of the website are not deductible as they are capital in nature. However you are entitled to a deduction for the decline in value of these costs as in-house software. The on going expenditure incurred for operating the website such as internet hosting, and licence fees are deductible as revenue expenses as they are expenses incurred in operating your business. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, relate to the earning of exempt income or are excluded by another provision of the taxation legislation. | Detailed Reasoning - Capital expenses: An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature ( British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155). Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature. | Detailed Reasoning - Deductibility of the expenditure for the layout and structure of the website: The classic formulation of the matters to be considered in determining whether a loss or outgoing is of a capital or revenue nature is that of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403 where his Honour said: There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. In your case, you engaged a contractor to the design the layout and structure of your website. The website provides online advertising space for your business by providing a mechanism where clients view your products and contact you. The website also has the capability to enable you to sell your products online. Therefore, the expenditure incurred in developing a website secures an enduring benefit for your business. The expenditure that relates to the initial layout and structure to create the website is capital in nature and not deductible under section 8-1 of the ITAA 1997. However, a deduction for the decline in value of a depreciating asset may be allowable under Division 40 of the ITAA 1997. | Detailed Reasoning - Deductibility for the decline in value of the website: You can deduct an amount equal to the decline in value for an income year of a depreciating asset under subsection 40-25(1) of the ITAA 1997. However, if you are an eligible small business entity, you can instead choose to deduct amounts for the decline in value of your depreciating assets under section 328-175 of the ITAA 1997 using the simplified depreciation rules. A depreciating asset is defined in section 40-30 of the ITAA 1997 and excludes an intangible asset unless it is an item of intellectual property or in-house software. | Detailed Reasoning - Intellectual property: The definition of 'intellectual property' in subsection 995-1(1) of the ITAA 1997 states that an item of intellectual property consists of the rights an entity has under a Commonwealth law as the owner, or a licensee, of a copyright. You initially engaged a contractor for the construction of the website. You provided the contractor with your logo and the information to be included in the website. The website contractor's services included designing the layout of the information supplied by you. It is considered that you legally own the copyright to the website design as you are free to migrate it to any alternative location. The engaging of the website contractor has led to you holding an item of intellectual property, that is, copyright to the website design. Given the facts of this case, however, there is negligible value to the copyright considering that the copyright acquired from the website contractor is limited to the design of the website, and not the information contained on the site which was supplied by you. The copyright in the website design has no commercial value and is merely ancillary or incidental to the services provided by the website contractor in constructing and designing the website. Even though you own the copyright over the website design as a depreciating asset for the purposes of subsection 40-25(1) of the ITAA 1997, the cost of that intellectual property is nil. Accordingly, you cannot claim a deduction for the decline in value of the acquired copyright. | Detailed Reasoning - In-house software: Subsection 995-1(1) of the ITAA 1997 states that in-house software is computer software, or a right to use computer software, that you acquire, develop or have another entity develop that is mainly for you to use in performing the functions for which the software was developed. In determining the extent that a website is made up of software must be determined on a case by case basis. Generally the simplest website consists of little more than the 'marking up' of text and the use of links to other web pages as provided for by basic html. The more sophisticated that a website is may indicate the presence of software as the website often require design, text authoring or transformation, image and graphics acquisition/capture, manipulation and html coding or generation. In your case, the website was developed to serve the function of interacting with your clients and enable your business the capability of selling your products online. Although you are not currently utilising the online shopping function of the website, you have nevertheless purchased the software to enable you to do so. The website has been created from software developed and provided by the software development company. The functionality of the website that was built, including the online shopping functionality is considered in-house software. Therefore, you can claim a deduction for the decline in value of the cost of the software that provides the functionality for the website. Under the uniform capital allowance rules, you can choose to allocate to a software development pool expenditure you incur in developing (or in having developed) in-house software you intend to use solely for a taxable purpose. Once you allocate expenditure on such software to a software development pool, you must allocate all such expenditure incurred thereafter (in that year or in a later year) to that pool. However, if you are an eligible small business you may choose to calculate deductions for your in-house software using the simplified depreciation rules contained in subdivision 328D of the ITAA 1997. In this case, if you haven't previously allocated such expenditure to a software development pool and you choose not to do so in that year, you can allocate the adjustable value of the developed software to a small business pool at the time it is first used, or installed ready to use, for a taxable purpose. As you are a small business entity that has elected to use the simplified depreciation rules and have not previously allocated any expenditure to a software development pool, you can include the costs for developing the website in your general small business pool under section 328-185 of the ITAA 1997. For further information Guide to depreciating assets 2011 can be accessed through the ATO website at www.ato.gov.au. | Detailed Reasoning - Operating expenses of the website: Generally any asset acquired or held by a business requires ongoing maintenance to ensure it operates in its intended manner. In relation to a website, annual registration costs of internet service providers and regular domain name registration costs are deductible as part of the ongoing and regular expenses of operating a website. In your case, the on going costs of the hosting and licence fees are deductible expenses incurred in operating your business and are deductible under section 8-1 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.