As a business owner, work out what tax deductions you can claim for the cost of digital products used in your business.
There are 2 types of expenses you can claim – operating expenses and capital expenses. The type of expense determines when you claim your deduction.
You must apportion your expenses between business and private use, only claiming a deduction for the business portion.
For a summary of this content in poster format, see Digital product expenses (PDF, 228KB)This link will download a file.
The Small business technology investment boost is available to small business entities as part of the 2022–23 Budget Government initiative.
Small businesses (with an aggregated annual turnover of less than $50 million) can deduct an additional 20% of the expenditure incurred for the purposes of business digital operations or digitising its operations.
The boost applies to eligible expenditure incurred between 7:30 pm AEDT on 29 March 2022 and 30 June 2023.
The boost is applicable to business expenses and depreciating assets such as:
- portable payment devices
- cyber security systems
- subscriptions to cloud-based services.
Example: cyber security system
Law & Co Pty Ltd (Law & Co) is a law firm specialising in conveyancing and is a small business entity with an aggregated turnover of $5 million. On 18 May 2023, Law & Co purchased and installed a cyber security system enabling it to conduct a secure e-conveyancing and to prevent any clients' identity and property theft. The total cost is $11,000 (GST inclusive). Law & Co is registered for GST and entitled to the GST input credit of $1,000.
Law & Co is entitled to claim a deduction for the depreciation of a capital expense and can claim the cost of the cyber security system excluding GST amount ($10,000) as a deduction under temporary full expensing in its 2022–23 tax return if they meet relevant criteria. The bonus deduction is calculated as 20% of the cost of the assets, which is $2,000.
Therefore, in its 2022–23 tax return, Law & Co claims:
- $10,000 temporary full expensing
- $2,000 bonus deduction.
Operating expenses are the expenses you incur in the everyday running of your business.
- internet service provider fees
- software subscription fees – for example, accounting, cybersecurity, point of sale (POS), learning, job, client and inventory management software
- cost of running a website – for example, site maintenance that preserves its character
- file-sharing services
- cloud storage
- lease payments.
You claim most operating expenses as a tax deduction in the year you incur them.
Example: scanner and photocopier lease
On 1 November 2022, Flowers R Best Pty Ltd entered a 12-month lease agreement for a scanner and photocopier. The monthly fee is $100.
Flowers R Best Pty Ltd can claim the lease cost as an operating expense in its 2022–23 tax return.
It does not qualify as a capital expense because ownership of the assets sits with the entity leasing them to Flowers R Best.End of example
Capital expenses are either:
- the expense of a depreciating asset – including the amount you paid for the asset and the expense of transporting and installing it
- an expense associated with establishing, replacing, enlarging or improving your business.
- computers and computer accessories
- mobile phones and tablets
- connectivity boosters
- POS machines
- in-house software
- cost of acquiring or developing a website.
You generally claim capital expenses over time, reflecting the asset’s depreciation (decline in value).
Your business may be eligible to claim an immediate or accelerated deduction for a capital expense using a tax depreciation incentive.
Example: laptops hire purchase
B Co Pty Ltd has an aggregated turnover of $9.5 million. The company purchased multiple laptops on a hire-purchase agreement, for its staff to work away from the office. The total cost (excluding any interest component) was $153,500.
The laptops were purchased on 15 March 2023, delivered on 19 March 2023, and immediately issued to staff for business use.
The hirer of the assets is treated as the holder of the assets under the hire-purchase agreement and is entitled to claim a deduction for the depreciation of a capital expense.
B Co Pty Ltd can claim the full purchase price of the laptops ($153,500) in the 2022–23 income year under temporary full expensing because:
- it is the holder of the laptops under the hire-purchase agreement
- its aggregated annual turnover is less than $5 billion
- the laptops were purchased after 7:30 pm, 6 October 2020
- the laptops were first installed ready for business use before 30 June 2023.
B Co Pty Ltd can claim the interest component as an operating expense.End of example
On 20 July 2020, ACME Clothing Pty Ltd purchased 10 new computers outright for $1,800 each (total cost $18,000) to support its expansion into online sales. The computers were delivered the following week. ACME Clothing’s aggregated turnover is $8 million.
If it chooses to use the simplified depreciation rules, ACME Clothing can claim the entire purchase amount of $18,000 under the instant asset write-off when lodging its 2020–21 tax return because:
- its aggregated annual turnover is less than $10 million
- the individual cost of each asset is less than the 2020–21 instant asset write-off threshold of $150,000
- the computers were purchased before 7:30 pm (AEDT) on 6 October 2020
- the computers were installed and ready for use before 30 June 2021.
Example: website development
In January 2023, Jenna engaged a consultant to develop a website for her small business. It cost $2,000 including labour and software and was ready for business use later that month.
Jenna can claim a deduction for the capital expense of developing the website ($2,000) under temporary full expensing in the 2022–23 income year.
Refer to TR 2016/3 Income tax: deductibility of expenditure on a commercial website.End of example
You can claim some software costs as operating expenses in the year you incur them, including:
- software subscription fees
- the cost of commercial off-the-shelf software with an effective life of one year or less.
If the effective life is more than a year, you need to consider if it is in-house software.
Example: software subscription
Zoe from Zoe’s hair salon subscribes to a software as a service (SaaS) provider, which allows her to access software for up to 300 of her customers per month to book a hair appointment online. It is a standardised, cloud-based service where no modifications to her IT infrastructure were required.
Zoe can claim the month-by-month fee for this service as an operating expense in the year she incurs them.End of example
In-house software is computer software, or the right to use computer software that you acquire, develop or have someone else develop for your business use, not for sale.
Deductions for in-house software may be claimed in a number of ways, depending on the circumstances and your eligibility to use a tax depreciation incentive, such as simplified depreciation rules.
If the software is still in development and is not ready for use, you can use the software development pool rules. Once you make the choice to allocate these expenses to a software development pool, you must allocate all later in-house software expenses to a pool.
Example: in-house software – temporary full expensing
On 15 January 2023, Westside Recruiting Pty Ltd purchased client relationship management software for $5,000, with an effective life of more than one year. The software was downloaded and installed on its business computers the same day.
Westside Recruiting Pty Ltd also entered a cloud storage contract for $150 a month, to back-up its business files.
The aggregated annual turnover of Westside Recruiting Pty Ltd is $6 million.
Westside Recruiting Pty Ltd will claim the full purchase price of the software ($5,000) using temporary full expensing because:
- it is a purchase of software with no amount deductible outside the general depreciation rules (in-house software)
- its aggregated annual turnover is less than $5 billion
- the software was purchased after 7:30 pm, 6 October 2020
- the software was installed and ready for use before 30 June 2023.
It can also claim the cloud storage costs ($150 per month) as an operating expense in its tax return.End of example
Example: in-house software – software development pool
Nguyen is a sole trader who runs an interior design business. He set up a software development pool in 2022 when he started his business's website. In August 2022 he paid $1,500 to have customised software developed to create bookings and store client information.
Nguyen must allocate this expenditure ($1,500) to a software development pool and claim a deduction over the next 5 years in his tax returns.End of example
When calculating your claim, you must apportion your expenses between business and private use, only claiming a deduction for the business portion.
If you are registered for goods and services tax (GST) and can claim the full GST credit, you must exclude the GST amount of the asset.
You must keep accurate records to substantiate your claims for digital product expenses. This includes:
- tax invoices
- loan or lease documents
- details of how you calculated your claim.