Digital games tax offset introduced by Albanese

The Australian Government has announced its plans to enact the country’s first ever federal, “refundable tax offset” for the development of video games.  On 28 October 2022, the Albanese Labor Government announced its support for the digital games industry by proposing new legislation to develop a Digital Games Tax Offset (DGTO) in the near future.

If enacted in its present form, the DGTO will introduce a thirty (30) per cent refundable tax offset for eligible companies that spend a minimum of $500,000 on qualifying Australian development expenditure on eligible games.  This amendment will take effect from 1 July 2022.

The proposed new offset

According to the Exposure Draft Explanatory Materials – Income Tax Assessment Amendment (Digital Games Tax Offset) Bill 2021: Measure for Consultation (Explanatory Memorandum), the intention of the DGTO is to promote the growth and development of the digital games industry in Australia. The apparent reason for this is that there is recognised talent in this industry that has:

“transferrable digital capabilities that Australia could apply to a range of other sectors.”

The proposed DGTO will be implemented through amendments to the Income Tax Assessment Act 1997 (Cth) by the addition of a new Division 378.  The implementation is said to:

• strengthen the Australian digital games industry;
• expand employment opportunities for digital and creative talent; and
• enhance the industry’s international competitiveness and make Australia an attractive destination for foreign investment.

Section 378-2(1) of the Exposure Draft for the Treasury Laws Amendment (Measures for Consultation) Bill 2022: Digital games tax offset (Exposure Draft) defines the DGTO as:

“A refundable tax offset of an amount that is 30% of a company’s qualifying Australian development expenditure on:

(a)   completing a new digital game; and

(b)    porting a completed digital game to a new platform; and

(c)   ongoing development of completed digital games during an income year.”

Section 378-2(2) of the exposure draft provides:

“One of the requirements for entitlement to the digital games tax offset is that the company must be issued with a completion certificate, a porting certificate, or an ongoing development certificate, which state the amount of qualifying Australian development expenditure on which the offset will be determined.”

How does a Game developer get the Arts Minister to issue a certificate?

(a)        Completion certificate

The Arts Minister must issue a completion to a company for an income year in relation to a digital game if:

(i)         the game is completed in the income year;

(ii)        the company has made an application for a completion certificate in relation to the game;

(iii)       the total of the company’s qualifying Australian development expenditure incurred in completing the game is at least $500,000; and

(iv)      the Minister is satisfied that the conditions in subsections (7) and (8) are met.

(b)        Porting certificate

The Arts Minister must issue a certificate (a porting certificate) to a company for an income year in relation to a digital game if:

(i)         the game is ported in the income year;

(ii)        the company has made an application for a porting certificate in relation to the game;

(iii)       the total of the company’s qualifying Australian development expenditure incurred in porting the game is at least $500,000; and

(iv)      the Minister is satisfied that the conditions in subsections (7) and (8) are met.

(c)        Ongoing development certificate

The Arts Minister must issue a certificate (an ongoing development certificate) to a company for an income year in relation to the ongoing development of one or more digital games if:

(i)         ongoing development occurs in relation to the games in the income year;

(ii)        the company has made an application for the ongoing development certificate;

(iii)       the total of the company’s qualifying Australian development expenditure on the ongoing development of the games in the income year is at least $500,000; and

(iv)      the Minister is satisfied that the conditions in subsections (7) and (8) are met for each of the games.

Which entities are eligible for the DGTO?

According to clause 1.21 of the Explanatory Memorandum, only entities that are companies for tax purposes are entitled to this offset.  A company is entitled to the offset for an income year if:

• it is an Australian resident, or an Australian permanent establishment of a non-resident company when it lodges the income tax return and when the tax offset is due to be credited;
• the Arts Minister has issued to the company one or more certificates; and
• the company claims the offset in its income tax return for the income year.

Which games are eligible for the DGTO?

Clause 1.27 of the Explanatory Memorandum provides that a game will be eligible for the DGTO:

“if it is a digital game that has been primarily developed to be made available to the public for entertainment or education purposes.”

Further, there are three (3) requirements a digital game must satisfy in order to be eligible for the DGTO that are:

• the game must be made available for use over the internet;
• the game must be primarily played through the internet; or
• the game operates only when a player is connected to the internet.

It is said that the reason for the inclusion of these requirements is to ensure that the game is made widely available.

What constitutes development expenditure?

According to section 378-30(1) of the Exposure Draft, development expenditure on a digital game is expenditure that the company incurs in, or in relation to, the development of the game.  This includes the remuneration provided to employees employed by the company with the objective of developing the digital game.  These employees include, but are not limited to:

• software developers, programmers and engineers;
• game designers;
• writers;
• artists, animators and performers (for both voice and motion capture);
• musicians (including composers) and sound designers;
• project managers; and
• behaviour analysts.

Takeaways

The focus of the Albanese Government in making the DGTO only available for Game Developers who develop games to be used via the internet is interesting.  Game Developers need to take the DGTO into account in their product design process.  (Readers of this article may appreciate the irony that the image of the gaming machines that appears with this article would not be connected to the internet and therefore would not be eligible for the DGTO!)

Links and Further references

Legislation

Exposure Draft for the Treasury Laws Amendment (Measures for Consultation) Bill 2022: Digital games tax offset

Exposure Draft Explanatory Materials – Income Tax Assessment Amendment (Digital Games Tax Offset) Bill 2021: Measure for Consultation

Income Tax Assessment Act 1997 (Cth)

Further information about the digital games tax offset

If you are a Game Developer and would like assistance regarding the digital games tax offset, please contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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