ATO backflips on treatment of Web development costs

The Australian Taxation Office has reversed a proposal made last year to tighten the definition of tax-deductible software in relation to commercial Web site development.

On Wednesday, the ATO changed a draft ruling (DR 2000/6) it made in May 2000 to change the definition of ‘software', after the IT industry said it was "technically inaccurate", according to taxation specialist Deloitte Touche Tohmatsu. Some expenditure on commercial Web site development will now be deductible in the year the expense was incurred, as opposed to a write-off over a two-and-a-half-year period.

According to Deloitte Touche Tohmatsu's tax partner for technology, Stuart Osborne, the proposed ruling would have restricted certain businesses from eligibility to claim tax deductions on software used in the commercial Web site development process, which the ATO said involves any outlay made on designing, planning, testing, uploading of content or loading a site onto a server.

Under the Tax Office's new ruling (TR 2001/D6), software used to create ‘simple' Web sites is not a tax-deductible expense. Simple Web sites involve expenditure on documents that have been converted to HTML format or marked up with simple links, according to the ATO. Any spend on simple Web sites like these could be considered for full deductibility in the year the business incurred the cost.

Osborne told Computerworld that various IT industry bodies and Web development companies managed to reverse the ATO's draft ruling as they were opposed to the idea of determining what client work was or was not tax-deductible.

While Osborne believes the majority of companies will be happy with the outcome, he said there was a catch for startup companies in certain circumstances. For instance, "startups would not be eligible for tax relief when it came to Web site costs associated with new ventures of a capital nature", Osborne said.

Businesses that use software to build business-to-consumer or business-to-business e-tailing or e-procurement sites are only eligible for tax deductions over a two-and-a-half-year period, according to Osborne.

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