Clarifying deductions for digital product expenses

The ATO has released some guidance on the typical treatment of expenses that are incurred by business taxpayers in connection with digital products.

First, the ATO confirms that operating expenses incurred in the everyday running of a business can generally be claimed as a tax deduction in the year in which they are incurred. This would normally cover expenses such as ISP fees, software subscription fees, the ongoing costs of operating a website, file-sharing services, cloud storage and asset lease payments.

When it comes to capital expenses it is necessary to determine whether they relate to a specific depreciating asset, in which case deductions would generally be claimed over a number of years, although immediate deductions can be available in some cases (e.g., under the temporary full expensing rules or small business instant asset write-off rules). Examples include the costs of computers and computer accessories, mobile phones and tablets, POS machines, in-house software, and the cost of acquiring or developing a website.

With respect to software costs, the ATO indicates that software subscription fees and the cost of commercial off-the-shelf software with an effective life of one year or less can be claimed immediately, although the deduction needs to be reduced to take into account any private usage.

Regardless of whether the expenses are normal operating costs or relate to a depreciating asset it is important to identify whether there is an opportunity to take advantage of the small business technology investment boost. The boost provides a bonus deduction of 20% for eligible expenditure incurred by small businesses with aggregated annual turnover of less than $50m between 7:30pm AEDT on 29 March 2022 and 30 June 2023.