Huge Boost to Australian Game Development With 30% Digital Games Tax Offset

With ever-increasing mobile phone use and the creation of associated content, as well as the emergence of new social spheres like the Metaverse, the development of digital games is a thriving part of the economy. Recognising that the talent in the gaming sector has transferrable digital capabilities that Australia could apply to a range of other sectors, the previous Federal Government had drafted legislation for the Digital Games Tax Offset (DGTO) as part of its Digital Economy Strategy. After a consultation process, the legislation has been incorporated into Schedule 1 of the Treasury Laws Amendment (2022 Measures No. 4) Bill 2022 and introduced into the House of Representatives on 23 November 2022. The DGTO will provide a 30% refundable tax offset for eligible businesses that spend a minimum of $500,000 on the development of eligible digital games, for qualifying Australian development expenditure incurred on or after 1 July 2022. This measure is expected to support companies with $34.9 million of payments over the 4 years from 2021-22.

According to Ron Curry, CEO of the Interactive Games and Entertainment Association (IGEA), Australia will now have some of the most aggressive video game industry incentives available globally, and the IGEA expects to see many multinational companies expand their operations to Australia and contribute to a thriving and sustainable game development ecosystem.

The use of the word “digital” for the purposes of the DGTO can be better understood from the following conditions that must be met, as stated in the Bill:

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

The new offset is being implemented via amendments to the Income Tax Assessment Act 1997 (ITAA1997), through the creation of a new Division 378.

Companies that are either Australian residents or foreign residents with a permanent Australian establishment can claim the DGTO for digital games (not including games that are a gambling service or substantially comprise gambling or gambling-like practices) that are developed to be made available to the general public.

To fully appreciate the extent of the financial support being offered through the DGTO, consider the following: Offsets of up to a maximum of $20 million can be claimed, based on a company (or group of related companies) incurring $66.7 million of qualifying Australian development expenditure in an income year.

Notably, the DGTO is 30% of a company’s total qualifying Australian development expenditure on new or existing (see “Ongoing development certificate” below) digital games. The amount of the company’s qualifying Australian development expenditure on a digital game is determined by the Arts Minister through issuing of three types of certificates. A company is eligible for a certificate in relation to an eligible game when the company is primarily responsible for the actual development of the game. In other words, this would be a company that owns or controls the rights to develop the digital game and that itself undertakes the development of the game.

The three types of certificates that the Arts Minister will issue are:

• Completion certificate (for development of new games);
• Porting certificate (a digital game is “ported” when a game that has already been completed is first made available to the general public on a new platform);
• Ongoing development certificate (for updating, expanding, or improving a digital game that has already been completed).

Without limiting the general test for development expenditure, in order to provide companies an increased level of certainty regarding the expenditure they can claim, the legislation for the DGTO has “specific inclusions” for development expenditure, and includes items such as:

• remuneration provided to employees and independent contractors;
• expenditure on research for the game;
• expenditure on prototyping for the game;
• expenditure on user testing, debugging, and collecting user data for the game;
• expenditure on updating the game;
• expenditure on obtaining or maintaining a classification under the Classification (Publications, Films and Computer Games) Act 1995.
• expenditure on adapting the game for use on particular platforms.

There are also specific exclusions from the DGTO, many of which are designed to maintain the integrity of the policy; for example, employees and contractors involved in developing the games have to be Australian tax residents at the time expenditure on them was incurred —this promotes employment in Australia, which is a key policy objective of the GTO.

One particularly important exclusion concerns any expenditure (even if it satisfies the general test listed in Section 378-35 of the new legislation) that is claimed for the purposes of another tax offset (e.g., the R&D Tax Incentive, specifically in relation to sections 355-100 and 355-205 of ITAA 1997). However, it is worth noting that there are many types of expenditure that are eligible for the DGTO (listed above this article) but would not be eligible for the R&D Tax Incentive, due to the latter having specific requirements regarding the creation of new knowledge and following principles of established science.

On 24 November 2022, the Senate referred the provisions of the Bill, to the Economics Legislation Committee for inquiry and report by 25 January 2023. Submissions to the inquiry can be made until 7 December 2022.

Fullstack Advisory is proud to help Australian businesses developing digital games and conducting various types of R&D, ensuring they continue moving onward and upward. Contact us today to leverage our expertise and knowledge of Australia’s tax incentives and the grants landscape in general.