Games Tax Table of Contents
The digital games and interactive entertainment sector is the largest creative sector in the world and one of the fastest-growing industries worldwide. The global digital games industry is worth around $250 billion and in Australia, it grew 22% between 2020 and 2021, generating $226.5 million in income and employing over 1,300 full-time workers. And, it’s an industry the Government wants to support with a new games tax offset.
The Digital Games Tax Offset is equal to 30% of the company’s total qualifying Australian development expenditure incurred from 1 July 2022. Companies can claim up to $20 million per company (or group of companies) per year (to reach the cap a company would need to spend around $66.7 million in eligible expenditure).
State-based games tax incentives are also available in South Australia, Victoria, and New South Wales offering an additional 10%, and Queensland offering 15% on top of the federal support. Globally, a 40% tax offset is standard for this industry, so the games tax offset brings Australia back into a competitive position.
Who is Eligible?
Companies that are Australian tax residents or foreign tax residents with a permanent establishment in Australia can qualify for the games tax offset.
To access the offset, the company needs a certificate issued by the Arts Minister following the completion of a new digital game, the porting of a digital game to a new platform, or for ongoing development of one or more existing digital games during the income year. This certificate then determines the offset claimed in the tax return with the Minister determining the amount of qualifying expenditure. More information will be available on the arts.gov.au website in early July 2023.
The company’s qualifying Australian development expenditure incurred needs to be at least $500,000 (which could be over multiple years) to be eligible for the games tax offset.
What is Development Expenditure?
The way the rules work is that any expenditure that a company incurs in relation to the development of the qualifying game is eligible expenditure…unless it is specifically excluded. A company develops a game by doing any of the activities necessary to complete, port, update, improve, or maintain an eligible game.
The legislation takes a further step by specifically including employee remuneration or independent contractors engaged by the company to carry out work on the development of the game (excluding bonuses linked to the performance of the company or the game). Prototyping is also specifically included, as is underlying game technology.
Employees that are not developing the game, for example, admin staff or overseas contractors, are excluded. As are corporate costs like business overheads, marketing, travel, entertainment, etc. These exclusions ensure that the games tax offset is focused on direct development costs.
What Games are Eligible?
A digital game that can receive a classification and is made available to the general public over the internet qualifies for the games tax offset (i.e., games developed for in-house purposes don’t qualify). The game does not include gambling or gambling-like elements (loot boxes are likely to make a game ineligible if, for example, the virtual items can be sold for currency) nor is it used for advertising or for commercial purposes.
Australian Digital Games Successes
Australia has seen significant success in the digital games industry, with many companies benefiting from the games tax offset. These incentives have helped foster innovation and growth, making Australia a competitive player in the global market. By supporting local developers through the games tax offset, the government aims to continue this trend and encourage more companies to invest in the Australian digital games sector.
The Future of the Digital Games Industry in Australia
The introduction of the games tax offset is a significant step towards bolstering the digital games industry in Australia. As the industry continues to grow, it is expected to create more job opportunities and contribute significantly to the economy. The games tax offset not only provides financial relief to companies but also encourages them to invest in new and innovative projects.
Moreover, the games tax offset aligns with global standards, making Australia an attractive destination for international game developers. This could lead to increased foreign investment and collaboration, further boosting the industry’s growth. The government’s commitment to supporting the digital games sector through the games tax offset demonstrates a recognition of the industry’s potential and its importance to the creative economy.
Challenges and Considerations
While the games tax offset offers numerous benefits, companies must navigate various challenges to maximize its potential. Ensuring compliance with the eligibility criteria and accurately documenting qualifying expenditures are crucial. Companies must also stay informed about any updates or changes to the games tax regulations to avoid potential pitfalls.
Additionally, the competitive nature of the global digital games industry means that Australian companies must continuously innovate and adapt to stay ahead. Leveraging the games tax offset effectively can provide the necessary resources to develop cutting-edge games and technologies, but it requires strategic planning and execution.
Case Study: Fruit Ninja
Remember Fruit Ninja? Fruit Ninja, founded by HalfBrick, became a sensation in 2015 with over 1 billion downloads. Who knew a game that slices fruit with a sword would capture so much attention. Anyone with kids would have seen Crossy Road developed by Melbourne based Hipster Whale. Ninety days after it release it had 50 million downloads, earning over $10m. The Sims Freeplay was created by a merger of Melbourne studios Iron Monkey and Firemint when they were purchased by EA Games. Then there is Melbourne based Big Ant Studios, one of the world’s biggest sports game developers and known for games such as the Tennis World Tour Game, Cricket 22 and an upcoming Rugby World Cup 2023 game.
If you’re unsure about your tax eligibility speak to our team of experts.
