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Authorisation Number: 1011958172383

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Ruling

Subject: Deduction-commercial website

Question 1

Is a deduction allowable for the costs incurred in acquiring a commercial website package under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

Question 2

Is the expenditure incurred under the contract for the building of a website deductible under the capital allowance provisions?

Answer: No.

Question 3

Is the expenditure incurred by you in commissioning the development of a website be taken into account in calculating a capital gain or loss in respect of a capital gain tax (CGT) asset?

Answer: No.

Question 4

Is expenditure incurred under the contract for the building of a website deductible under section 40-880 of the ITAA 1997?

Answer: Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 July 2010

Relevant facts

You operated a business.

You purchased a packaged deal from a website designer to construct and establish a commercial website.

The functionality of the website includes:

· mouse over menu roll over effect

· image fade through home page banner

· website statistics

· ability to send and receive emails.

You provided the brand identity of the business, text and images to be placed on the website.

The packaged deal does not include the creation of your brand identity, text, or the custom design of items, animation and graphics. You are required to supply to the web designer its brand identity, text, custom designed images and graphics. You may utilise a number of 'stock images' supplied by the web designer.

The website lists the products your business sells but does not provide the ability for customers to purchase products online, such as shopping carts.

You retain legal ownership of the website and may move the website, as designed, to another location as required.

The website is solely used to advertise your current business.

You paid a fee to a company to design and construct the website.

You are not in the business of buying and selling commercial websites.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 40-25

Income Tax Assessment Act 1997 subsection 40-25(1)

Income Tax Assessment Act 1997 section 40-30

Income Tax Assessment Act 1997 section 40-880

Income Tax Assessment Act 1997 subsection 40-880(2)

Income Tax Assessment Act 1997 subsection 40-880(3)

Income Tax Assessment Act 1997 subsection 40-880(4)

Income Tax Assessment Act 1997 subsection 40-880(5)

Income Tax Assessment Act 1997 paragraph 40-880(5)(a)

Income Tax Assessment Act 1997 paragraph 40-880(5)(f)

Income Tax Assessment Act 1997 subsection 40-880(6)

Income Tax Assessment Act 1997 subsection 40-880(7)

Income Tax Assessment Act 1997 subsection 40-880(9)

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 110-25(2)

Reasons for decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, relate to the earning of exempt income or are excluded by another provision of the taxation legislation.

The courts have considered the meaning of 'incurred in gaining or producing assessable income'. In Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 56 ALR 785; (1949) 8 ATD 431 the High Court stated that:  

For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.

Capital expenses

An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature (British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155).

Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature.

Deductibility of the expenditure for the construction and the establishment of a commercial website

You purchased a commercial website package by paying a one-off fee to the website designer.

The classic formulation of the matters to be considered in determining whether a loss or outgoing is of a capital or revenue nature is that of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403 where his Honour said:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

In your case, the expenditure incurred in developing a webpage brought into existence a virtual advertising site on the internet which provides an enduring benefit to the business. In addition, the website is an asset which becomes part of the infrastructure of the business as a result of a one-off payment paid to the designer for constructing the webpage.

As the expenditure incurred on constructing the website is capital in nature, you are not entitled to a deduction for the cost of constructing the website under section 8-1 of the ITAA 1997.

However, a deduction for the decline in value of a depreciating asset may be allowable under Division 40 of the ITAA 1997.

The website

You can deduct an amount equal to the decline in value for an income year of a depreciating asset under subsection 40-25(1) of the ITAA 1997. A depreciating asset is defined in section 40-30 of the ITAA 1997 and it excludes an intangible asset unless it is an item of intellectual property or in-house software.

Intellectual property

The definition of 'intellectual property' in subsection 995-1(1) of the ITAA 1997 states that an item of intellectual property consists of the rights an entity has under a Commonwealth law as the owner, or a licensee, of a copyright.

You purchased a packaged deal for the construction of a website. You supplied most of the information that appears on the website including text, images and the company's brand identity.

The web designer's services included designing the layout of the information supplied by you. It is considered that you legally own the copyright to the website design and you are free to migrate it to any alternative location.

The purchase of the packaged deal from the web designer has led to you holding an item of intellectual property, that is, copyright to the website design. Given the facts of this case, however, there is negligible value to the copyright considering that the copyright acquired from the web designer is limited to the design of the website, and not the information contained on the site which was supplied by you. The copyright in the website design has no commercial value and is merely ancillary or incidental to the services provided by the website developer in constructing and designing the website.

Even though you own the copyright over the website design as a depreciating asset for the purposes of subsection 40-25(1) of the ITAA 1997, the cost of that intellectual property is nil under Subdivision 40-C of the ITAA 1997. Accordingly, you cannot claim a deduction for the decline in value of the acquired copyright under section 40-25 of the ITAA 1997.

In-house software

Subsection 995-1(1) of the ITAA 1997 states that in-house software is computer software, or a right to use computer software, that you acquire, develop or have another entity develop that is mainly for you to use in performing the functions for which the software was developed.

You purchased a packaged deal containing a website which has been created from software developed and provided by the web designer. The functionality of the website is as demonstrated through the online demo and as per the current system build. The functionality includes:

· mouse over menu roll over effect

· image fade through home page banner

· website statistics

· ability to send and receive emails.

In this case, the website does not function for e-commerce or for selling products online, such as that of a shopping cart. It serves the function of advertising online by providing product listings and contact details but not the ability for online purchases. While the website may have some minimal software embedded in it to enable the website functions to be exploited by you, any software supplied has negligible value as a discrete asset and is merely ancillary or incidental to the supply of the website.

Accordingly, in this instance, the cost of in-house software that you may hold is nil as it is incidental to the services provided by the web designer. Therefore, you cannot claim a deduction under subsection 40-25(1) of the ITAA 1997.

Capital gains tax

Section 108-5 of the ITAA 1997 states that a CGT asset is any kind of property, or a legal or equitable right that is not property. Under subsection 110-25(2) of the ITAA 1997, the costs incurred to acquire a CGT asset can be included as part of the cost base of the asset for the purposes of calculating a capital gain or loss.

You have contracted a web designer to establish and design a website for your business to advertise your products and services.

The United Kingdom case of Zim Properties Ltd v. Proctor (H M Inspector of Taxes) (1985) STC 90; 58 TC 371 ( Zim Properties Case ) concerned damages received by a vendor against a solicitor for negligence, where the buyer rescinded the contract of sale upon the failure of the vendor's solicitor to demonstrate good title to the property. The court took the approach that it was necessary to determine whether the damages were received in respect of the underlying property or the right to sue arising on the solicitor's default.

The decision in the Zim Properties Case is relevant to the Australian CGT provisions in that many transactions can be broken down into several sub-transactions, each of which might independently attract the operation of those provisions. In such situations, it is relevant for the Commissioner to consider what the real transaction is.

An executory contract for the transfer of a CGT asset is, by definition, itself a CGT asset. The subsequent performance of the contract discharges and satisfies the contractual rights and on the face of it may cause a CGT event C2 to happen.

However, in such circumstances, the real transaction is the acquisition of the underlying CGT asset (the property) rather than the ending of the rights that merely facilitate that acquisition. This approach is consistent with the view expressed in Taxation Ruling 95/35 regarding compensation receipts and identifying the relevant asset for the purposes of the CGT provisions.

In determining what the most relevant asset or transaction is, it is often appropriate to adopt a 'look-through' approach to the transaction or arrangement.

In your case, under the contract with the web designer, the expenditure was for the provision of services to set up and design the website and not for the right to have service provided. As such, the expenditure for the establishment of the website would not be taken into account in the calculation of a capital gain or capital loss of a CGT event.

Section 40-880 of the ITAA 1997

Subject to the limitations and exceptions contained in subsections 40-880(3) to 40-880(9) of the ITAA 1997, a taxpayer can deduct in equal proportions over a period of five income years under section 40-880 of the ITAA 1997, capital expenditure incurred in relation to their business which is carried on for a taxable purpose.

You purchased a packaged deal from a web designer for constructing and establishing a commercial website which is capital in nature. The website relates to your business of selling products and providing services.

It is considered that the purchase for the purchase of the packaged deal is capital expenditure incurred in relation to your business which is carried on for a taxable purpose.

However, subsection 40-880(5) of the ITAA 1997 sets out that you cannot deduct anything under section 40-880 of the ITAA 1997 for an amount of expenditure incurred to the extent that it:

· forms part of the cost of a depreciating asset (paragraphs 40-880(5)(a) of the ITAA 1997)

· is taken into account in working out the amount of a capital gain or capital loss from a CGT event (paragraph 40-880(5)(f) of the ITAA 1997).

As noted above, the expenditure for constructing and establishing the website does not form part of the cost of a depreciating asset or is taken into account in working out the amount of a capital gain or capital loss from a CGT event. Further, the expense is not considered to be of any other type of deductible amount covered in subsection 40-880(5) of the ITAA 1997.

In addition, no other subsections noted in section 40-880 of the ITAA 1997 applies to limit the amount you can deduct under section 40-880 of the ITAA 1997 for the expenditure incurred for the constructing and establishing a commercial website.

Therefore, you are entitled to a deduction under section 40-880 of the ITAA 1997 calculated over a period of five years, for the cost of the construction and establishment of the website.