Digital games tax offset | What does it mean?

On 23 June 2023, the Digital Games Tax Offset (DGTO) became law¹. The DGTO is intended to provide eligible video game developers with a 30% refundable tax offset for qualifying Australian development expenditure.

Whilst this is a flashy headline, what does it actually mean in plain English?

1. What is a refundable tax offset?

Typically, a tax offset is an amount of money spent by a company which can be used later to offset the tax you have payable.

In the case of the DGTO, it is a refundable offset. This means if you have $1,000 worth of tax but an offset of $2,000, the ATO will return $1,000 to you as a tax refund.

Effectively this can be a way for the government to contribute to and boost the development budget of a video game (you just have to spend the money first to then claim some of the budget back).

2. Who is entitled to claim the offset?

The following criteria must be met to claim the offset:

1. The applicant must be a company that is an Australian resident and hold an ABN or be a foreign resident that is permanently established in Australia with an ABN. This means if you are a sole trader, partnership or trust you are not eligible.
   [NB. To claim the offset you should ensure you have the correct legal structure in place.]
2. A minimum budget of $500,000 is spent in an income year on qualifying Australian development expenditure (see point d below).
3. The game is an original game.
   
   [NB: I am yet to see guidance as to what constitutes an 'original' game, this will be a matter for the Arts Minister. The Arts Minister has issued guidance2, however the issue of 'original' is largely not discussed, other than to rule out a port of a game or a part of a broader game. Our view is that the word 'original' does not to exclude sequels or adaptations.]
4. Development expenditure covers a variety of activities. The full list can be found here, but notably includes:
   • remuneration to persons (including independent contractors) who perform services for the development (including, project managers, designers, writers, software developers, testers and more);
   • research;
   • underlying game infrastructure (ie. game engines);
     It also notably excludes:
   • marketing and user acquisition;
   • travel and accommodation expenses;
   • land/premises (ie. rent);
   • acquiring copyright, a trade mark or image rights; and
   • computer hardware or services.
5. That the development expenditure is Australian, meaning that the goods or services are acquired in Australia.
   [NB. This may rule out some expenditure where it is acquired overseas. For instance, a US based artist is contracted to provide character designs.]

3. How much can I claim?

A company may claim up to 30% of all qualifying expenditure (ie. if you spend $1m then $300,000 may be claimed as an offset).

This is up to a maximum of $20m in one year.

This can also be claimed across multiple games being developed, however the cap of $20m remains. For example, if you developed 3 games with a budget of $30m each (ie. a total budget of $90m), the maximum offset is still $20m. The ATO guidance is that $66.7m is the approximate limit of a game's budget that can be claimed.

[NB. The Government groups related companies. For example, if you are developing two games from two separate companies, the ATO will note this and will add the total expenditure of each company together for the purposes of applying the cap.]

4. I need a certificate, right?

Yes. Prior to filing an offset claim with the ATO, you will require a certificate (being a: completion, porting or on-going certificate) from the Arts Minister.

The Arts Minister is tasked with verifying the above requirements and the certificate is issued once verification is complete.

5. What counts as a video game?

The definition under the act is broad and covers video games in the ordinary meaning. But specifically, under the act, a 'digital game' is a game in electronic form that is capable of generating a display on:

1. a portable electronic device; or
2. a computer monitor, television screen, liquid crystal display or similar medium.

Key takeaway

My initial takeaway is that the DGTO is likely to benefit larger developers far more than indie developers.

The minimum threshold of $500k development expenditure will rule out a lot of independent studios, particularly when you consider the expenditure that is ruled out from 'qualifying'. So even a game with a $500k+ budget may not qualify.

Footnotes

¹  Treasury Laws Amendment (2022 Measures No.4) Bill 2023

²  https://www.arts.gov.au/publications/digital-games-tax-offset-dgto-guidelines

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.