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AJML Accountants Update – April 2019

Summary of income tax and GST implications for taxpayers who ‘sell’ apps – Part 5

The following paragraph summarises some of the key income tax and GST issues to be mindful of when dealing with a taxpayer who develop apps.

A. General Issues

The most important issue to be aware of when dealing with clients who develop and make money from apps is that there is no ‘one-size-fits-all’ approach to determining the tax implications of this type of activity. There are a myriad of ways that apps can be developed and exploited and the nature of the arrangement and the contractual agreements between the parties must be thoroughly understood before the tax and GST implications can be ascertained.

Furthermore, even the simplest of cases often involves offshore dealings, royalties and intellectual property thus making the analysis particularly difficult.

 B. Income tax issues

  • How is the app developer exploiting the app? For example, is the app being distributed for download on a third party platform, or is the developer assigning an interest in the software copyright to a third party (for them to exploit).
  • What contractual arrangements exist between the parties? The contractual arrangements vary from one developer to the next and it is these arrangements which underpin the way in which the arrangement should be taxed.
  • What income has the app developer derived? For example, income from app downloads advertising, in-app purchasers or perhaps a lump-sum or on-going payment for the grant of an interest in the copyright.

The nature of the income and the contractual arrangements will determine what provision is relevant from a tax perspective. For example, the income may be a royalty under S.15-20, or ordinary income under S.6-5 and/or the income may form part of the termination value for the balancing adjustment event that arises where the developer grants or assigns an interest in the software copyright under Division 40.

  • Does the activity amount to a hobby only? In this case, income derived is not assessable and no deductions can be claimed.
  • What expenses has the developer incurred? A deduction cannot be claimed for a notional amount representing the taxpayer’s labour however, if, for example, an amount has been paid to have the app developed then, depending on the circumstances, deductions may be available for the decline in value of the intellectual property under Division 40 or Division328 (for SBCs), or a deduction for in-house software or for research and development.

 C. GST issues

The app developer may have to remit GST on supplies where the developer is registered or required to be (the developer is eligible to apply the $75,000 turnover test). Supplies made offshore however, are not generally subject to GST. Once again, the contractual arrangements will need to be consulted to determine whether GST has been considered.