Australian Tax Office Doesn't 'Get It'

by Mary Swire, Tax-News.com, Hong Kong

27 July 2001

The Australian Tax Office has backed off a ruling it proposed last May which would have forced businesses to treat all web-site development costs as 'software', and depreciate them over two and a half years.

While such a rule might have been reasonable for traditional businesses which buy or develop software for use over many years, most web-sites change at a rapid pace, especially for companies with a major web presence who may devote a large part of their cost structure to constant site improvement in the battle to compete and survive. A cynic might say that they're all unprofitable anyway, so it shouldn't matter - but that's no way to design tax policy, and a disincentive to invest in the web is the last thing a country needs if it wants to encourage Internet growth.

So the ATO has retreated - but not very far, and in a way that has dismayed many Internet professionals. The Tax Office will now allow some web-site development to be written off in the year the expense was incurred, but requires businesses to distinguish between "simple" sites (which can be written off) and more complex "software" (which still has to be depreciated over time).

The Tax Office says that each time a part of a site is replaced or removed, a determination must be made on what percentage of the changes is software. Domain names and ISP fees are deductible and so is content developed as 'part of ongoing business operations', but the acquisition of database content may not be. Any form of e-commerce functionality would label a web site as software.

"They have created a level of complexity for the industry and small web developers to have to maintain administrative distinctions between different parts of the site they are building," said Mr Peter Coroneos, chief executive of the Internet Industry Association. "Often they are so closely integrated it's difficult to tell. The industry is in a depressed state already."

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