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Tax Deduction For Digital Product Expenses

Q: What records should I keep to substantiate my claims for digital product expense deductions?

To substantiate digital product expense deductions, maintain accurate records, including tax invoices, loan or lease documents, expense calculations for business/private use, payment records, an asset register, software subscription details, and records of in-house software development. Keeping these records organised helps ensure compliance with tax regulations.

By QuickBooks Australia

May 3, 2023

In today's rapidly evolving business environment, digital products can play an important role in maintaining productivity and efficiency for many businesses.

This means understanding the tax deductions available for digital product expenses is key for you as a business owner. For example, you could claim a mobile phone tax deduction or an internet tax deduction.

It’s important to be aware of all the deductions you’re entitled to, as this could affect your bottom line come the end of the financial year (EOFY).

We’ll explore the different types of expenses related to digital products to help you better understand the deductions available for your business.

Types of digital expenses

The Australian Taxation Office (ATO) outlines two types of digital expenses you can claim – operating expenses and capital expenses. It is important to note only the business portion of this expense can be claimed.

1. Operating expenses

Operating expenses refer to the costs you incur during the daily operation of your business.

Examples of digital product operating expenses include:

Fees for internet service providers
Subscriptions for software services like QuickBooks
Website maintenance costs
File-sharing services, and cloud storage

You can generally claim these operating expenses as a tax deduction in the tax year you incur them.

2. Capital expenses

Digital product capital expenses can include the costs of depreciating assets or expenses related to major purchases that affect business growth.

Examples of digital product capital expenses include buying new computers, mobile phones, tablets, cameras, point of sale (POS) machines, and the cost of developing a website. Unlike operating expenses, you claim capital expenses over time for the asset's decline in value.

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Small Business Technology Investment Boost

The Small Business Technology Investment Boost is something to be aware of for future tax years. This was announced as part of the budget for 2022-2023. Under this scheme, small businesses with an annual turnover of less than $50 million may be allowed to deduct an additional 20% for digital operations. The boost applies to expenses made from 7:30 p.m. on 29 March 2022 till 20 June 2023.

However, it is not yet law. So the ATO advises businesses to continue claiming deductions under the existing tax laws until further updates are provided.

Software expenses

The cost of software can fall under the broader category of operating expenses. Software subscription fees and the costs of off-the-shelf software with an effective life of one year or less fall under this category.

In-house software is software that you acquire or develop for your business use. Software with an effective life of more than one year falls into this category.

You can claim expenses for in-house software in several ways, depending on your circumstances and eligibility for a tax depreciation incentive:

Software development pool
If the software is still in development and not ready for use, you can apply the software development pool rules. You can claim deductions for these expenses over several years, typically five years, rather than in the year the expenses were incurred.
As of writing in April 2023, expenses after 1 July 2015 are depreciated at these rates:
Year 1 - N/A
Year 2 - 20%
Year 3 - 30%
Year 4 - 30%
Year 5 - 10%
Disposal of in-house software
Expenses for software that was in development and part of a software development pool remain in the pool if the development of the software or project is abandoned.
If you receive consideration, like insurance, for abandoning software in a software development pool you must include the consideration in your income.
If you stop using and never expect to use in-house software again then you may be able to claim an immediate deduction providing it wasn’t part of a software development pool.
The amount you can deduct is your total expenses subtracted by the money you received for the software or part of the software.
Business costs
If you are a small business with software that is ready to use and already installed, you can use the simplified depreciation rules for small business.
If you don’t want to use the simplified depreciation rules or the software development pool, you can use the prime cost method.
If your in-house software expenses are less than the instant asset write-off threshold, you may be allowed to deduct the expense in the year it was made.
If you have in-house software expenses greater than the instant asset write-off threshold, you could depreciate it under the general small business pool rule.

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Calculating your claim

When calculating your claim, it is important to separate your expenses between business and personal use. You can only claim the business part of your digital product use.

If you are registered for goods and services tax (GST) and can claim the full GST credit, you’ll need to exclude the GST amount of the asset for your claim.

Of course, calculating your claim correctly will rely on accurate record keeping. This includes tax invoices, loan or lease documents, and details of how you calculated your claim. These will help you substantiate your claim when it comes to the EOFY. Accounting software, like QuickBooks, can help business owners like you keep track of expenses as they occur.

How QuickBooks can help

QuickBooks Tax Software can help make the tax season more simple, offering features that help sort, track, and report various expenses associated with digital products, helping you stay organised and on top of your tax obligations.

With QuickBooks, you can:

Efficiently track and categorise expenses
Generate financial reports to aid in tax filing
Streamline tax preparation with records for eligible deductions

You can also lodge business activity statements (BAS) directly from QuickBooks. We’ve even outlined the preparation steps to e-lodge forms through the easily navigable software.

Try the powerful software with a free 30-day trial today.

FAQs

How do I apportion expenses between business and private use for tax deduction purposes?

You should determine the percentage of business use for each expense based on factors, such as usage time or the number of users. Maintaining detailed records of business and private will help to support your claim. Then, apply the business-use percentage to the total expense to calculate the deductible amount. For example, if you use a software subscription for 80% business use and 20% personal use, you can claim 80% of the expense as a tax deduction. Ensure you record how you arrived at the business-use percentage to substantiate your claim.

What records should I keep to substantiate my claims for digital product expense deductions?

Disclaimer: This page is provided for general information purposes only and does not constitute accounting, tax, business, or legal advice. You should always consult your own advisors for advice relating to your business or situation. Always consult the ATO directly as information changes from time to time.

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Tax Deduction For Digital Product Expenses

Types of digital expenses

1. Operating expenses

2. Capital expenses

FREE Business Health Check

Small Business Technology Investment Boost

Software expenses

Grow Your Business with QuickBooks

Calculating your claim

How QuickBooks can help

FAQs

Related Articles

Looking for something else?

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