Income Tax Assessment Amendment (Digital Games Tax Offset) Bill 2021: Measure for Consultation

On 21 March 2022, Treasury released Exposure Draft legislation to enact the proposed 30% refundable Digital Games Tax Offset (DGTO) to promote the growth of the digital games industry and attract games development in Australia. This will help expand employment opportunities for digital and creative talent, enhancing the Australian industry’s international competitiveness and encouraging foreign investment in Australia.

The DGTO will be enacted as new Division 378 in the Income Tax Assessment Act 1997, and is intended to apply to eligible Australian development expenditure from 1 July 2022.

Key features

A company will be entitled to the DGTO for an income year if it is an Australian resident company or an Australian Permanent Establishment of a foreign company with an active ABN.

The company must be primarily responsible for undertaking activities necessary for the development of the digital game, and it must develop the game as an original game. Or, if the game is a completed game, it owns or controls the rights to develop the game, or has been engaged to develop the game by the entity who owns or controls the rights to develop the game.

The DGTO is calculated on a company’s total ‘qualifying Australian development expenditure’ as certified by the Arts Minister on completing, porting or the ongoing development of a digital game.

Development expenditure on a digital game is generally defined as expenditure that the company incurs in, or in relation to, the development of the game. The rules specify an extensive list of eligible development expenditure, including expenditure on remuneration to employees or independent contractors who work on the development of the game who are software developers, testers, designers, artists, musicians, behavioural analysts, and expenditure on the research, prototyping, testing, adapting, updating and classification of the digital game.

The rules also specify an equally extensive list of ineligible expenditure, including expenditure claimed for the R&D offset and Division 40 tax depreciation.

The DGTO will be available for a minimum annual spend of $500,000 per income year and capped at $20 million per income year. The cap will apply to cumulative amounts that a group of related companies would be entitled to, and there will be integrity measures to ensure the cap remains effective across connected and affiliated companies, and consolidated groups.

An eligible digital game is one that is to be made available for the public for entertainment or education purposes. The digital game must be available for use over the internet or operating only when connected to the internet.

Ineligible games include those that constitute a gambling service, are likely to be refused a classification for public release, are developed for promotional purposes, or are not made for the purpose of entertainment or education. Further, development expenditure cannot be claimed on eligible games that are complete but not sold, or made available to the general public, such as in-house training games or games only used on-site.

Unlike the R&D offset, the DGTO is in addition to the deductibility of the qualifying Australian development expenditure for income tax purposes, and will not give rise to deferred franking debits.

Consultation on the draft legislation will close on 18 April 2022.

Eligible companies

Companies who expect to be eligible for the DGTO should carefully consider the draft rules to see if it would be worthwhile making submissions before the deadline. As a threshold question, eligible companies should also determine if it will be more worthwhile to seek the DGTO compared to other available concessions, ie the R&D offset. If passed in the current form, the proposed rules will require eligible companies to carefully record their DGTO claims, including maintaining details of their eligible and ineligible expenditure.

To discuss your eligibility – or to assess if this concession is the best one for your business – get in touch with our team.

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