We look at the accounting, depreciation and tax outcomes for owning versus licencing your website and CMS.
The IRD states that "The cost of software is a capital expense and must be depreciated. The cost includes paying for rights to use, purchasing upgrades and developing in-house packages." As such, your website should be entered as an asset, and depreciated annually via either straight line or diminishing value methods.
Irrespective of the mandatory ruling to enter website development as an asset rather than an expense, we would recommend that you capitalise and depreiate as it does represent a very real cost. Your website is unlikely to be on-sold to another party, and we suggest that any website has a shelf-life of between three and five years depending on your industry and marketing emphasis.
The depreciation rate for diminishing value is 50%, as against 40% for straight line depreciation, whereby both rates are for New Zealand only. With straight line, your website asset will therefore be written down to zero by the end of thee years, whereas it will take more than five years to achieve this with diminishing value.
We've looked at two scenarios whereby the website CMS is either purchased outright or used under licence. In both cases we ran comparisons between diminishing value and straight line depreciation, whilst factoring in the monthly base costs of both. In Scenario (a) the website build is $8000 and the CMS purchase is $3000, with hosting commencing at $29.95 per month. Scenario (b) has a website build of $8000 but the CMS is used under licence at $49.95 per month with no additional hosting charge.*
The 'better' outcome will depend on your relative circumstances, but the graph should be used bearing in mind that the asset values at the end of each period are not represented, so this should be used in conjunction with consideration to the effect on the Balance Sheet also. Cashflow effects also need to be factored in hen making any decision about owning versus using a CMS under licence.
Please note: Your handling of depreciation is best advised by your Accountant. He/she will factor in your overall tax position, the expected shelf-life of your website and your future plans for your business. For example, if you were planning to sell your business it would be advantageous to have a high profit/loss position, but otherwise you may take a low profit/loss position to minimise your tax obligations. We certainly don't state the advise above as information on which to base decisions without discussion with a professional in this area.
* Hosting and licence values have used bases for illustrative purposes. In real life, facilities, functions and storage may increase these monthly costs.