Key tax and GST issues for clients who ‘sell’ apps – Part 1
An ‘app’ is a software application or program that is used on a smartphone or mobile device. Some apps are designed purely for enjoyment (e.g., think Angry Birds) whilst others may serve a business purpose such as a weather app, school app or the Uber app and Airbnb app (discussed earlier in the notes). Note that, an app could also be a reference to an ‘online app’, but this type of app is not the focus of this section of the notes.
It is becoming increasingly common for taxpayers to create and launch their own apps (e.g., for the Apple or Android platforms). For instance, a developer may develop an app as a hobby outside work hours, or may even have turned app development into a full-time activity. In some cases, a business may develop an app (or employ a developer to
create an app) for use in the business (e.g., the app may assist internal processes, or be marketed to the customer base).
In most cases, an app is developed with a view to making money from that app, in one way or another. There are a number of ways that people can make money from apps. For example, rather than profiting directly from the ‘sale’ of an app, a business might create a free app to assist its customers in the hope of increasing brand awareness and boosting overall business profits.
The developer may instead choose, for example, to distribute the app on a third party platform, through, say, the iTunes App Store, where the developer can set the download price from anywhere between $0 and $999 and will receive 70% of that price, with Apple generally taking the other 30%.
However, even an app that is free to download can make money through the various ‘monetisation options’ that are generally available, such as:
- In-app purchases (i.e., where a free version of the app includes optional paid features);
- Auto-renewable subscription options for in-app purchases (this basically refers to paying for the content or features over a set amount of time); and
- In-app advertising, which can vary from app to app (size, position, placement). Advertising revenue varies markedly as advertisers pay differently for click-throughs, ‘impressions’, which countries the users are from, and the format of the ads (videos are typically worth more).
Of late, advisers have found themselves on the ‘front line’ in terms of fielding various questions from developers about their app developments including, most commonly, questions regarding the GST and income tax treatment of app income and development costs. The purpose of this section of the notes is to provide some general guidance that may assist in this regard.