ATO says web development costs should be claimed over five years

Macworld Australia Staff
18 November, 2015
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In case you were looking for further evidence that the Australian Tax Office has little idea of how businesses operate, it has offered up some advice on developing your business’ website.

“If you spend the money before your business starts, you claim the costs over five years once you start operating.”

So, you have an idea for a business, start creating the website for it and then claim the cost over five years.

I’m not an accountant, so you should get your own advice. But as someone who operates a small business, I find the ATO’s advice to be somewhat divorced from reality.

Let’s say your site is for a small business. Anyone who’s started a business knows the effort you put in early on is quite massive and you need to watch the cash-flow closely.

Most of the people I’ve spoken to and worked with develop their first website using relatively inexpensive tools. Given basic hosting with support for open source tools for design, shopping carts, product catalogues and other components is reasonably inexpensive, most of the cost is in labour.

What makes this even more confusing is the following information from the ATO.

“If you spend the money after your business starts, there are different ways of claiming a deduction. Depending on the cost, you’ll either be able to claim the full deduction in that year, or you’ll need to claim it over a number of years.”

In other words, register your business, conduct at least one transaction and then you can claim the development and operational costs as per normal capital and operational expenses.

The ATO has provided some examples of how this might work here. But this presupposes your business sets aside money in a “software development pool”.

The trouble is, websites are live. They change constantly, not just in terms of content, but also with design. The simplest way to manage this would be to separate the website into two components: hardware and software.

If you run your own physical web servers, these can be handled just like any other fixed asset. If you use a hosting provider that you pay each month for supply of services, that’s an operational expense.

Assuming development and maintenance of the website are ongoing, then software you buy, that’s over the ATO’s thresholds for capital assets, are handled as any other capital assets with ongoing development and maintenance covered as operational expenses.

What all this points to is website establishment, development and maintenance are something the ATO is struggling to understand in a real-world context. When starting out – make sure you document all your costs and get your accountant’s advice as to the best way account for everything.

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