Digital products are a way of working life. Almost every working Australian will need and use a computer, software applications, online apps and conduct work online at some stage. There are some jobs that are fully online and rely on these types of products and services.
Small businesses often rely on computers and software to run administration tasks and point of sale, as well as for accounting, invoicing and keeping track of stock.
When it comes to claiming digital products, there are some big winners!
Operating VS Capital Expenses
Small businesses will be able to claim a variety of operating, or running expenses, as well as capital expenses. The type of expense determines when and how you can claim digital products.
Some expenses will be able to be claimed immediately, that is in the year in which they were incurred, while others will need to be depreciated over time. Generally, capital expenses will need to be depreciated.
Pro Tax Tip: Often digital products are used privately as well as for work. Don’t forget to apportion and only claim the work-related percentage of the expense.
Operating expenses are costs that you or your small business incur to either perform your job or to run your business.
In the digital space, these running costs include:
- Internet service
- Software subscriptions – such as accounting packages, cybersecurity, point of sale, learning and management software
- Costs of running a website – maintenance and design
- File sharing and cloud storage services
- Database and online subscriptions
- Electronic material such as e-books and e-journals
- Social media advertising spend
- Professional search engine optimisation (SEO) and Google Ads (SEM)
- Lease payments
Generally, running expenses can be claimed in the year in which they are incurred.
Pro Tax Tip: In order to claim tax deductions, you need proof of your expense. Keep your receipts, tax invoices, contracts, financial communications as well as any logbooks or work-related diaries. Make sure your records contain the name of the supplier, the cost of the asset, what the asset is, the date of purchase and the date of the document.
Capital expenses are either the expense of a depreciating asset, or an expense with establishing, replacing or improving a business. Examples of capital expenses related to digital products include:
- computers and computer accessories
- mobile phones and tablets
- connectivity boosters
- point of sale machine
- in-house software
- cost of acquiring or developing a website.
Pro Tax Tip: There are often tax incentives that allow for capital items to be claimed in the year in which they are incurred, so keep your eyes out with budget changes and business schemes rather than having to wait to depreciate your asset.
Can I Claim My Website?
When people think of digital products, a web site is usually top of the list, but when it comes to claiming a website, it can get a little complicated.
There are two parts of a website: development, and creation expenses, and maintenance costs. You might be surprised to learn that the creation of a website is considered to be a capital expense and may need to be depreciated. This includes hiring a developer for the purpose of creating the website as well as the associated costs used to build the website, hosting fees and domain registration.
Website operating expenses, such as upgrades can be claimed as a running cost, as can monthly or yearly fees to keep the website operating. Any repairs and maintenance required for your website can be claimed as an operating expense.
There is little use having a web site if you don’t advertise it. Marketing, advertising and public relations costs can be claimed as a tax deduction.
Pro Tax Tip: The 2022 Federal budget announced a 120% tax rebate on new technologies including websites. This means that an Australian small business with an aggregated turnover of less than $50 million can claim 120% of the costs as a tax deduction. Small businesses that are eligible for the Small Business Technology Investment Boost can claim up to $100,000 against the 120% technology rebate.
Off-the-shelf software and software subscriptions applications can be claimed in the same year you incurred the expense if it has a life of one year or less. If the software package is deemed to have more than one year of effective life, then you’ll need to depreciate the cost.
Some off-the-shelf software packages might not be suitable. Some businesses will need to have specific packages developed for their use. In–house software, or software that has been developed that can’t be bought commercially can be claimed immediately if the package has one year or less of shelf life. If the life is more than one year, the package will need to be depreciated.
There are three ways in which software can be claimed:
- Business cost – small business can use the simplified depreciation rules for the purchase and development of software that is installed and ready to use.
- Software development cost – expenses can be allocated for the development of in-house software to a software pool.
- Disposal of in-house software – abandoned software can remain in the software development pool. If you don’t use the software again, an immediate deduction can be claimed.
Claiming digital products as a tax deduction is not a one-size-fits-all scenario, and the way in which items need to be claimed can become complex. It’s recommended to seek the help of a professional when it comes time to claim your tax deductions and obligations. A tax accountant can help maximise your tax return as well as provide advice on what you need to do during the year to keep your tax bill down.