As part of the Australian Government’s Digital Economy Strategy announced in the 2021-22 Federal Budget, details of the proposed Digital Games Tax Offset (DGTO) have now been released. The intent of the DGTO is to promote growth of the Australian digital games industry by providing eligible companies with a 30% refundable tax offset for qualifying Australian development expenditure.
Should the proposed measures be passed in their current form, the DGTO will apply to expenditure incurred on or after 1 July 2022.
This article is intended to provide a high-level summary of the DGTO. For further information about the DGTO and how it interacts with other tax provisions such as the R&D tax incentive, please contact us at William Buck.
Key eligibility criteria
To qualify for the DGTO, there are several key conditions that businesses must satisfy:
- The taxpayer is an Australian company or a foreign company with a permanent establishment in Australia
- During the income year, the company completed a digital game, ported a digital game, or carried on ongoing development of a digital game
- The company incurs at least $500,000 of qualifying Australian development expenditure, and
- The Arts Minister has issued one or more certificates to the company in respect of the digital game.
Eligible digital games
As a starting point, the business must be developing a ‘digital game’ which is defined as ‘a game in electronic form that can generate a display on a computer monitor, television screen, liquid crystal display or similar medium that allows for the playing of an interactive game’.
Further, the digital game must be made available to the public over the internet for entertainment or education purposes. However, the following types of games won’t be eligible for the DGTO:
- Games that substantially comprise of gambling activities
- Games refused classification under the Classification (Publications, Films and Computer Games) Act 1995
- Games primarily developed for industrial, corporate or institutional purposes, or
- Games primarily developed to advertise or promote a product, entity or service.
Certificates for the DGTO
To claim the DGTO in its tax return, the company must first apply to the Arts Minister for one or more of the following certificates:
- Completion certificate
- Porting certificate
- Ongoing development certificate.
A completion certificate is for the development of a new game that is first released for sale, or otherwise made available to the general public, during the income year.
A porting certificate is for the porting of a completed game onto a new platform. The game will be considered ported when it is first released for sale, or otherwise made available to the general public, during the income year on the new platform.
An ongoing development certificate is for activities undertaken during the income year in relation to the ongoing development of one or more completed digital games. These activities can include updating, expanding or improving a digital game such as the addition of new levels, maps, characters, vehicles or storylines, addressing bugs or porting the game to new platforms.
Companies must submit an application to the Arts Minister requesting one of the above certificates to be issued to the company. Details of the application form are yet to be released.
Qualifying Australian development expenditure
If the Arts Minister has issued the company with at least one of the above certificates in relation to an income year, then the company may be entitled to the DGTO provided it has incurred at least $500,000 of qualifying Australian development expenditure under that certificate.
The following table summarises what types of expenditure would be eligible or ineligible for the offset:
|Qualifying Australian Development Expenditure||Ineligible Expenditure|
|Direct employee game development costs (e.g. software developers, UX and game designers, artists and animators, musicians, writers)||Incidental employee game development costs (e.g. social media managers, forum administrators and moderators)|
|Contractors engaged in game development||Any subcontractors|
|Research||Employees and contractors that are not Australian tax residents|
|Prototyping||General business overheads|
|User testing and collecting user data||Sales, marketing and advertising|
|Debugging||Computer hardware or computer servers|
|Game updates||Finance costs (e.g. interest)|
|Game adaptations||Costs claimed under the R&D tax incentive|
|Any related-party expenditure|
|Work permits and visas|
The DGTO provides the company with a refundable tax offset of 30% for qualifying Australian development expenditure, with a maximum offset of $20 million per year.
Timing of qualifying Australian development expenditure
The digital games tax offset is proposed to apply to expenditure incurred on or after 1 July 2022.
Depending on which certificate the company applies for, the company may be eligible to claim expenditure across multiple income years.
For completion certificates and porting certificates, the company applies once for the certificate in the income year the game is completed or ported. However, the company can claim all qualifying Australian development expenditure in relation to that certificate across multiple income years prior to the game being completed or ported. For example, if the company applies for a completion certificate for the year ended 30 June 2024, the company can claim the DGTO on eligible expenditure from 1 July 2022 – 30 June 2024.
For ongoing development certificates, the company must apply for these each income year, meaning the company can only claim the eligible expenditure for that income year. However, unlike the other two certificates, the ongoing development certificate allows companies to:
- Claim ongoing development costs for games completed or ported before 1 July 2022 (with the eligible expenditure still being costs incurred after that date), and
- Claim ongoing development costs for multiple digital games (completion and portion certificates limit the expenditure to one digital game only).
Given the DGTO is a tax measure that has a direct link with the R&D Tax Incentive and other tax provisions, companies should obtain appropriate tax advice in considering whether to apply for the offset.
Please contact us if you would like to know more about the DGTO, the R&D Tax Incentive or other government grants that may be available for game developers and technology businesses.