myIR, payments and more
Questions we've been asked: General issues
Section BD 2, Income Tax Act 1994 - Allowable deductions
A taxpayer has asked how he should treat expenditure incurred in creating a website to be used by him in deriving gross income. (The same considerations could also apply if the taxpayer had contracted another person to create the website for him.)
A website is a collection of web pages or web files. "Web" is an abbreviation for the "World Wide Web", the graphical part of the internet. A web page is created using different programming languages (such as hypertext markup programming language ("HTML")). The use of programming code such as HTML enables web pages to have a number of features, such as video files, sound files, and links to other sites. A web browser interprets the code for graphical interface with a user's personal computer. A web page is transferred to a user's computer via the hypertext transfer protocol ("HTTP"). A website resides on an HTTP server.
A website's development has a number of steps (that can be undertaken in any order), including acquiring a domain name - the site's internet address. The site needs to be designed and programmed. A website owner may wish to register the site with different internet search engines, and to embed search strings in the site. The owner will also need to rent space on a web server.
The domain name of the website is generally acquired for a modest sum (less than $200). However, in some cases acquiring the domain name may require substantial expenditure. Expenditure incurred in acquiring a domain name is capital expenditure and non-deductible. In terms of the applicable capital/revenue tests established by the courts such expenditure is of a one-off nature, gives rise to an enduring benefit, gives rise to an identifiable asset, and is part of the business structure of a taxpayer. A domain name is not "depreciable intangible property" as defined in section OB 1, and listed in Schedule 17, of the Act. As such, the expenditure incurred in acquiring the domain name is also not depreciable.
The HTML or other programming that makes up the website is an asset, being a computer software program. The costs incurred in creating the website are appropriately categorised as capital expenditure. In terms of the applicable capital/revenue tests established by the courts, such expenditure:
- is of a one-off nature
- gives rise to an enduring benefit
- is part of the business structure of a taxpayer.
As a capital asset, the costs of creating the website must be capitalised and may be depreciated. To be depreciable, the software must be used in deriving gross income. Consistent with other computer software, it may be depreciated at a rate of 50% diminishing value or 40% straight-line.
This approach (of capitalising expenditure and depreciating it) is consistent with the views expressed by a number of commentators. In an accounting context the view that capitalisation and amortisation is appropriate has been expressed by Dr Rachel Baskerville in "Web Sites - Lame Ducks or Golden Geese" Chartered Accountants Journal (March 2000, page 62) and by Mr Craig Fisher in "Accounting for Web-sites" Accounting, Corporate and Tax Alert (Issue 93, 5 June 2000, paragraph 200). The approach of capitalising and depreciating is also consistent with the draft Australian Tax Office ruling TR2000/D6.
Ongoing costs of updating or adding to the information on a website are of a revenue nature, and are deductible when incurred if they meet the general test of deductibility in section BD 2(1). It is a matter of degree as to whether expenditure is updating and maintaining a web site, and hence revenue, or a reconstruction or functional improvement to a website, which would be capital. It is difficult to give general guidance on the distinction, as was noted (in a different context) by the Privy Council in Auckland Gas Co Ltd v CIR (unreported, PC Appeal 32 of 1999, judgment 14 June 2000). However, some examples can be given as to the distinction between the two categories in the context of websites.
Maintenance of a website would include the following:
- Updating the content of a web page
- Adding content to a web page
- Correcting minor errors or bugs in a website, and
- Minor style or format changes relating to matters such as font types, font sizes, colours and so on.
An upgrade of a website would include the following:
- Adding new features to a website, such as adding a sales capability with credit card processing features
- Adding extra pages to the website
- Upgrading the version of the software used in the website, and
- Completely changing the layout and functions of the website sufficient to be a reconstruction.
These examples are consistent with the distinction between maintenance and upgrade in the Commissioner's existing computer software policy statement (Income Tax Treatment of Computer Software in Tax Information Bulletin Vol 4, No 10 (May 1993)). The examples also reflect the fact that a website may start out as a very simple website with few features, and yet may be upgraded over time to be a complex e-commerce site with advanced features such as the ability to purchase goods and services online, with online credit card processing capability. Just as the general capital/revenue principles apply to the original website (and the capital classification of that), any upgrade which adds new functions is also subject to those general principles and will also be on capital account.
The cost of renting space on an HTTP server is deductible; assuming the general test of deductibility is met. The annual renewal fee for registration of a domain name is also deductible. Such costs are of a revenue nature, because they are ongoing in the nature of a servicing charge, and are analogous to expenditure incurred in renting space in a building or in hiring goods.
Other pages in: General issues
- QB 12/11: Income tax - look-through companies, rental properties and avoidance
- QB 12/10: Do the historic depreciation rates continue to apply to grandparented structures acquired before 1 April 2005?
- QB 12/09: Income tax - look-through companies: interest deductibility where funds are borrowed to make a payment to shareholders to reflect an asset revaluation
- QB 12/08: Income tax - look-through companies: interest deductibility on funds borrowed to repay shareholder current accounts
- QB 12/04: Income tax - deductibility of expenditure on widening or metalling a farm acess road or track
- QB 12/03: Income tax - deductibility of expenditure on cattle stops
- QB 12/05: Income tax - deductibility of expenditure on stock yards
- QB 12/02: Income tax - Treatment of quad bikes for depreciation purposes
- QB 12/01: Income tax - deductibility of expenditure on replacing and extending an inlet race to a dairy shed
- QB 11/03: Income tax - look through companies and interest deductibility
- QB 11/02: Deductibility of expenditure incurred by bloodstock breeders in respect of horses that they race
- QB 11/01: Residential investment property or properties in Australia owned by New Zealand resident - NRWT treatment of interest paid to Australian financial institution
- QB 09/06: GST - Apportionment of the cost of bare land for the purposes of a change-in-use adjustment
- QB 10/06: Elections for qualifying company status
- QB 10/01: Reimbursing shareholder-employees for motor vehicle expenses and the use of the Commissioner's mileage rate
- Are tax sparing disclosures still required?
- QB 09/05: Residential investment property or properties in Australia owned by New Zealand resident - NRWT treatment of interest paid to Australian financial institution
- QB 09/03: Decisions on application of CA 1(2) - common law interest and income under ordinary concepts
- QB 09/02: Holiday houses - income tax treatment
- QB 09/01: Payments made in addition to financial redress under Treaty of Waitangi settlements - income tax treatment
- QB 08/04: Income Tax Act 2007: research and development credits (subpart LH) - tax avoidance (section BG1)
- Kiwisaver - creditable membership
- QB 08/03: Application for a private ruling or product ruling on an issue dealt with in a mutual agreement made under a Double Tax Agreement - Tax Administration Act 1994, sections 91E(4)(D)(ii) and 91F(4)(D)
- QB 08/02: Commissioner's power to issue a replacement ruling that operates retrospectively
- QB 08/01: Tax Administration Act 1994 - Section 91E(4)(f) and self-assessment
- QB 07/05 - Ability to rule where the Commissioner is auditing or investigating - whether the Commissioner has a discretion to rule or is prohibited
- QB 07/02 - Whether The Minor Beneficiary Rule Exemption In Section HH 3B Applies On A $1,000 "Per Beneficiary" Or On A $1,000 "Per Beneficiary Per Trust" Basis.
- Tax treatment of wooden scaffolding planks
- Exemption from gift duty for dispositions of property made by or under an order of the Court: section 75(A) Estate and Gift Duties Act 1968
- Private and product binding rulings - to whom do they apply?
- Bankrupt's ability to carry forward accumulated losses
- Records for controlled foreign companies or foreign investment funds to be available in English
- Qualifying foreign private annuity exemption from the Foreign Investment Fund regime
- Tourism service providers' payments made to tour guides or drivers - the income tax liability of those parties and the tour operator employing the guide or driver
- Managing communications associated with a dispute referred to the Adjudication Unit
- When does derivation occur in relation to land sales with a deferred settlement, by business taxpayers who provide vendor finance?
- Section 108 Tax Administration Act 1994 (TAA) - commencement of four year statutory period (November 2002)