Video games are a multi-billion dollar industry, and the federal government wants to incentive studios to invest in Australia. To this end, it has introduced the digital games tax offset (DGTO), which is a 30% refundable tax offset on Qualifying Australian Development Expenditure (QADE). This refundable tax offset is provided in addition to a tax deduction, and is therefore generally more generous than the R&D Tax Incentive (i.e. a tax offset instead of a tax deduction).
This article outlines the key rules of the game for studios looking to access financial support from the Australian government via the DGTO.
Rule number 1: you must be an Australian resident company with an Australian business number (ABN), or a foreign resident company that has a permanent establishment in Australia with an ABN.
Rule number 2: you must obtain one or more certificates from the Minister for the Arts. These can be a ‘Completion Certificate’ for the development of a new game, a ‘Porting Certificate’ for a game ported to a new platform, or an ‘Ongoing Development Certificate’ for the ongoing development of an existing game.
Rule number 3: you must have at least $500,000 of QADE.
Rule number 4: you can’t amend the tax return to include the DGTO, it needs to be included in the original tax return.
In terms of strategies for optimising the DGTO, consideration should also be given to the R&D Tax Incentive. There could be instances where a business could qualify for the DGTO and also for the R&D Tax Incentive for the same underlying expenditure, but the tax law allows the business to claim the tax offset through only one of the programs (not both). In these instances, there is no single strategy that will always result in the most favourable outcome for the business. Therefore, an understanding of the pros and cons associated with each program is required. Consider, for example, a pre-revenue business with a 25% company tax rate that spends $1M that could potentially qualify for the DGTO and also for the R&D Tax Incentive. There are three key potential strategies:
- Strategy 1 – the business doesn’t access either the DGTO or the R&D Tax Incentive. By doing this, it will carry forward a $1M tax loss into future years which, assuming that the business ultimately becomes tax-paying, will reduce a future income tax bill by $250K.
- Strategy 2 – the business accesses the R&D Tax Incentive. It receives a cash payment of $435K, but doesn’t have any tax loss to carry forward to future years to reduce future income tax bills.
- Strategy 3 – the business accesses the DGTO. It receives a cash payment of $300K, and will carry forward a $1M tax loss into future years which, assuming that the business ultimately becomes tax-paying, will reduce a future income tax bill by $250K.
Whilst the benefit achieved by accessing the DGTO (i.e. $550K in total) is greater than the R&D Tax Incentive (i.e. $435K in total), a business that is in desperate need of cash or that isn’t projecting to be tax-paying for a long time would likely be better off opting for the R&D Tax Incentive instead of the DGTO.
If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.
By Dave Corbin, Managing Director of Catalyst Solutions Australia.
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