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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:
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:
An upgrade of a website would include the following:
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.