Can I claim website design as a tax deduction?
I'm thinking of starting an e-commerce site. Are the initial costs to build the website e.g. web designer/developer tax deductible? How about hosting and other costs?
Put simply and generally speaking, all business-related costs will become tax-deductible at some point (either outright or depreciated/amortised over time), it comes down to the "timing" of when these costs will be tax-deductible.
Preliminary to commencing business (initial costs):
Any "initial" development costs incurred to build a website, feasibility studies conducted & expenses incurred to "start-up" a e-commerce business (eg. set up a company/register a business) will be considered to be of "capital" in nature and will NOT be eligible for a tax deduction immediately until the website is "live" and the business has commenced & it generates a business income. These capital development costs will sit on your balance sheet as an "asset" of the business until that time the e-shop doors open!
The tax office sees your e-commerce website as an "asset" so the tax deductibility of costs of acquiring, developing or constructing a e-commerce site also depends on their nature, so it will be important to determine what expenditure is on "computer hardware", "software" and "content" as the tax office treats each of them differently.
1. Computer hardware - used to host a commercial website is treated as "plant & equipment" for tax purposes & will be depreciated over its "effective useful life" to the business (i.e. you pro rata claim a % of the cost as a tax deduction each tax year from when the unit of plant was "installed ready for use")*. eg. servers, computers, routers, backup drives, peripheral equipment, connections to internet.
2. Computer software - will be tax deductible & amortised over a period of 4 years if the software was used as a part of a commercial website (incurred post 13 May 2008, 2.5 years prior). This also includes salary & wages paid to staff in developing the software, software packages to create/design websites, testing/debugging, architecture, validation, interaction with users through a authentication process, supportive lifecycle documentation. This can be tax deducted on a straight-line basis (25% each year, pro rated) or elect to form a "software pool" (Year 1 = 0, Year 2 - 40%, Year 3 - 40%, Year 4 - 20%) from when it is ready for use.
3. Content - expenses incurred in developing initial content depends on whether it is a new or existing business. For your new start-up, the expenses will be "capital" as explained earlier and not deductible until such time the website is ready for use. When your business is up and running, existing and you want change the content, then these general expenses will be immediately deductible in that tax year they were incurred. eg. sound, video files, graphics, catalogues of goods for sale, inventory lists for customer online searches, collection of data.
"Ongoing" support, maintenance, insurance and hosting fees are 100% tax deductible once in the tax year they were incurred. This includes annual ISP and domain registration fees.
Expenses incurred on updating the content on a website should be immediately deductible.
Modifications & Alterations:
If your business is existing and later down the track you want to significantly modify/extend functionality/replace the e-commerce website then these costs may be considered "capital" in nature if they alter the structure of the site and similar treatment to above will apply. eg. a replacement & more sophisticated shopping cart, stock management database. This will be depreciated from when the new database is installed and the remaining tax value of old shopping cart will be immediately tax deductible at that time.
*As to the depreciation rates to use for a tax deduction, it will depend on your situation. There is a simplified tax system (STS) for small businesses that allows a 15% tax deduction automatically in the tax year website cost was incurred (without pro rata from time of payment to 30 June that year). There is also a choice in the method of depreciation - Prime Cost (even spread, quicker schedule of deductions) and Diminishing Value (reducing balance, slower schedule of deductions). Ok, I may lose you here so I will not go too heavy.. :-)
I hope this makes sense. Basically, if your e-commerce site is ready to open its doors, then your tax deductions will start to flow, but not before. Some will be deducted over time (asset-based) and some will be immediately deductible (ongoing/maintenance costs). Good luck! Cheers, Paul
As with the answers above, if you are running a business all expenses are tax deductable.You will need to get help from a taxation specialist to advise you on what is deductible straight away and what needs to be depreciated.
Another important fact, if you are selling outside Australia, is keeping the costs of building your overseas business separately as these expenses could be reimbursed by the Australian Government once they reach a certain threshold as part of the export incentive programs. Check these incentives out with Austrade. They are easier than you think to apply for and as long as you meet certain criteria you will be approved.
As long as it's not a hobby, but a business, then yes, website design costs will be tax deductible just the same as the costs for establishing and running any other business are tax deductible.
Some of the costs may not be deductible straight-up, but may be spread over a number of years, but other running costs like hosting etc are deductible when you incur them.