Digital Games Tax Offset

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What is the Digital Games Tax Offset?

The Digital Games Tax Offset is a 30% tax rebate for video game development.

Objective

The aim of the Digital Games Tax Offset is to support business growth and change to the way Australian businesses can claim depreciation of intangible assets like intellectual property and in-house software.

Background

Many of Australia’s game companies are independent studios, generating original IP. The massive global demand for games ensures a steady stream of work, including licensed property projects, ‘work for hire’ assignments, and multi-studio collaborations.

In 2021, a whopping 10% of games on Apple’s new Apple Arcade platform were crafted in Australia or New Zealand. Thanks to our timezone, Australian game development studios can keep the development wheels turning while North America and Europe rest, enabling a 24-hour development cycle.

Recent research reveals that the Australian video game development industry’s revenue has shot up to $226 million, a 100% increase since 2016.

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Rebate Calculation

Assuming your company meets the eligibility criteria for the Digital Games Tax Offset and you’ve expended $750,000 on valid game development activities, here’s how you can calculate your cash rebate, thereby improving your profitability:

• Identify Qualified Australian Development Expenditure (QADE): First, you must eliminate any expenditure that does not fall under the QADE. For instance, if $50,000 of the total expenditure was incurred on non-qualifying activities or was incurred outside Australia, your QADE for the tax offset would be $700,000 (that is, $750,000 minus $50,000).

• Compute the Cash Rebate: After determining the QADE, apply the current tax offset rate, which stands at 30%. Therefore, your company would be entitled to a cash rebate of $210,000 (30% of $700,000) on your qualifying game development expenditure.

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Is your game eligible?

The eligibility of a digital game under the Digital Games Tax Offset (DGTO) scheme can be determined based on the following detailed criteria:

1. Definition of the Game: The digital game includes all electronic content (like coding), audio content (such as sound effects and soundtrack), non-interactive elements (like opening credit sequences and “cut scenes”), and underlying game technology. This encompasses game engines, physics engines, lighting, anti-cheating controls, game-related payment system architecture, and user interfaces. All these elements are considered part of the game.

2. Availability over the Internet: Eligible games must be made available for use over the internet. This can be through digital download or online subscription, and includes games that are played through the internet, like streaming or browser-based games. If a game meets these criteria, it can still be eligible even if it also has a single player “offline” mode. The game being physically available (e.g., for sale by disc at traditional retail outlets) does not impact its eligibility.

3. Availability to the General Public: The game must be developed to be made available to the general public. Games that are not sold or otherwise made accessible to the public are not eligible for the DGTO. This includes games used exclusively as in-house training tools or games limited to a specific location (like a specific shopping center, zoo, or museum) making them not effectively available to the general public. Also, incomplete games that have not been released are not considered eligible.

4. Inclusion of Incomplete Games: However, if an incomplete game has elements that eventually form part of an eligible game that is released to the public, the expenditure incurred in developing those elements may be claimable. This includes expenditure on R&D, prototypes, or other eligible expenses in relation to the new eligible game. But, there should be sufficient documentation to reasonably show (in the opinion of the Arts Minister) that those elements were eligible expenditures.

These games are ineligible for the DGTO

Games that are ineligible for the Digital Games Tax Offset (DGTO) are defined based on the following criteria:

1. Gambling Services: Any game that can be considered a “gambling service” under the Interactive Gambling Act 2001 (IGA2001) is ineligible for the DGTO. The definition of a gambling service includes services related to betting, conducting a lottery, supplying lottery tickets, and conducting a game played for money or anything of value. This extends to games that may not technically qualify as gambling under the IGA2001 but substantially comprise gambling or gambling-like practices, such as betting and wager mechanisms, casino-style games, in-game gambling, and buying chance-based items.

2. Loot Boxes: Games that rely on or prominently feature certain types of “loot box” mechanics, wherein players can purchase unknown virtual items determined by chance and potentially cash out these items for real-world currency or assets, are likely to be considered as incorporating gambling-like practices and thus ineligible.

3. Classification: A game that has been refused or is unlikely to obtain an Australian classification is not eligible for the DGTO. Classification can be refused based on elements like the promotion or instruction of crime or violence, depictions of actual or simulated sexual activity, and instruction or promotion of drug use. If a game hasn’t yet received its classification, the applicant may be required to provide additional information or obtain classification before a DGTO certificate can be issued.

4. Promotional Games: Games that are primarily developed to advertise or promote a product, entity, or service, despite being released to the general public, are ineligible for the DGTO. The determination of whether a game primarily serves a promotional purpose is based on a case-by-case assessment. Factors such as a lack of revenue stream might contribute to this assessment, but are not decisive.

Has your game actually been released?

To be eligible for the Digital Games Tax Offset (DGTO) under a Completion Certificate or a Porting Certificate, the digital game or port must be released to the general public, excluding for testing purposes.

The release must be genuine and accessible, such as through a digital store or subscription service.

• Self-published Games: For games published by the applicant company, the DGTO can be claimed for the income year in which the game or port was released to the public, excluding for testing purposes. A game released for testing, such as an open beta, is considered complete after 12 months. No Quality Australian Development Expenditure (QADE) can be claimed after the actual or deemed release date.
• Third-party Published Games: For games published by a third party, the applicant company becomes eligible for the DGTO under a Completion Certificate or a Porting Certificate when it first provides a version of the game to the third party that is ready to be released to the public.
• Ongoing Development: Ongoing Development Certificates apply to games that have already been released. Games released before 1 July 2022 are still eligible for the DGTO, but only development expenditure incurred from 1 July 2022 will be eligible. A game doesn’t need to have received completion or porting certificates under the DGTO to be eligible for ongoing development. The relevant income year for claiming the DGTO is the year in which the ongoing development occurred.
• Limited Releases: Pre-orders, limited pre-releases, or simply making game files available for download do not constitute a valid release to the general public.

What happens with the R&D tax incentive?

There exists an opportunity to claim both the Research and Development (R&D) tax incentive and the Digital Games Tax Offset, assuming that the activities claimed under each program are distinct and meet the respective eligibility criteria.

R&D Tax Incentive

The R&D Tax Incentive accommodates several kinds of activities, including:

• Technical enhancements to existing game engines or development of new ones
• Research into innovative hardware or software technologies for potential use in game development
• Creating unique algorithms or methodologies applicable to game development
• User research or playtesting aimed at improving game mechanics, design, or user experience
• Technical problem-solving during game development
• Development or refinement of game physics systems and multiplayer networking solutions
• Advancement of AI systems for game characters and VR or AR technologies for games

Digital Games Tax Offset

When it comes to the Digital Games Tax Offset, your company’s development expenditure on a digital game can encompass:

• Employee and independent contractor remuneration for those working on the game’s development. This can include software developers, UX designers and testers, game designers, writers, artists, animators, performers, musicians, sound designers, project managers, behaviour analysts, and quality assurance testers.
• Expenses related to research, prototyping, user testing, debugging, updating, and collecting user data for 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

What can you claim under the DGTO?

When calculating Qualifying Australian Development Expenditure (QADE) for the Digital Games Tax Offset (DGTO), it’s crucial to distinguish between eligible and ineligible expenditure.

Eligible Expenditure includes:

• Software developers.
• Game designers.
• Content writers.
• Artists contributing visual elements.
• Musicians creating soundtracks.
• Project managers.
• Behaviour analysts studying user interaction.
• Quality assurance testers.
• Research activities.
• Creating game prototypes.
• The game testing phase.
• Bug fixing.
• Collecting user data.
• Updating the game.
• Obtaining a classification under the Classification (Publications, Films and Computer Games) Act 1995.
• Maintaining a classification under the Classification (Publications, Films and Computer Games) Act 1995.
• Adapting the game to specific platforms.
• Animators creating motion sequences.
• Performers contributing to voice and motion capture.
• Sound designers enhancing the game’s audio.

What expenses can you not include in the DGTO?

Under the Digital Games Tax Offset (DGTO), there are specific categories of costs that are not eligible for classification as development expenditure:

1. Subcontracting Costs: Any expenditure on subcontracting by the entity engaged to develop the game
2. Incidental Activities: Expenses on activities that are incidental to, but not directly attributable to, the development of the game, such as engaging social media managers, sales and marketing professionals, forum administrators, and moderators
3. General Business Overheads: The company’s overall business overheads
4. Non-Development Related Personnel: Expenditure on, or in connection with, engaging employees or contractors whose roles are not related to the development of the game, such as administrative employees, or those who were not Australian residents at the time the expenditure was incurred
5. Travel and Hospitality: Expenditure on travel, accommodation, catering, entertaining, or hospitality
6. Marketing and Advertising: Expenditure on marketing, advertising, publicity, or promotion for the game or company
7. Hardware or Server Costs: Expenditure on computer hardware or servers, or the rights to access computer hardware or servers
8. Land or Premises Use: Expenditure on the use of land or premises
9. Intellectual Property Acquisition: Expenditure incurred to acquire copyright or a trademark, or a licence in relation to copyright or a trademark, other than in relation to engaging employees or contractors
10. Financing Costs: Expenditure incurred by way of, or in relation to, the financing of the game
11. Professional Services: Expenditure incurred in relation to insurance, audit services, accounting services, human resources, recruitment services, and legal services
12. Double-Dipping with Other Offsets: Any expenditure claimed for the purposes of another tax offset, including for the purposes of section 355 100 (tax offsets for R&D)
13. Notional Deductions: Expenditure that gives rise to notional deductions for the purposes of section 355 205 (deductions for R&D expenditure)
14. Application Costs: Expenditure incurred in relation to applying for the DGTO, or any assistance programs administered by the Commonwealth or the States
15. Non-Independent Entity Costs: Expenditure incurred in relation to an entity that is not wholly independent from the company
16. Non-Arm’s Length Transactions: Expenditure incurred in connection with a transaction in which the company and another party to the transaction did not deal with each other at arm’s length
17. Game Distribution: Expenditure on distributing the game
18. User Acquisition: Expenditure on acquiring users for the game
19. Software Acquisition or Licensing: Expenditure on acquiring or licensing software

How should you undertake apportionment?

When you’re managing your expenditures across different projects or activities, it’s important to only attribute relevant expenditures to the game or activity that’s subject to the Digital Games Tax Offset (DGTO) application. Here are some key guidelines to follow:

• Contracted work across multiple games: If you’ve contracted an artist to create content for multiple games, you’ll need to split the total expenditure among the games. The amount allocated to each game should be reflective of the work done for that specific game in your DGTO application.

• Employee tasks that include development and non-development activities: When an employee performs both development (qualifying as QADE) and non-development tasks, their expenditure should be apportioned between QADE and non-QADE activities for the purposes of the DGTO application.

Remember, you must keep adequate records (work orders, schedules, internal project management system reports, etc.) to support your apportionment. You can upload these documents in the Additional Information section of the application form.

Also, note that if an employee or independent contractor spends 90% of their time on activities that qualify as QADE, you don’t need to apportion their expenditure. For instance, if an employee spends 90% of their time developing an eligible game and the rest on general administrative duties, you can claim 100% of their expenditure.

Can you claim on-costs and overheads?

When evaluating expenditures for the Digital Games Tax Offset (DGTO), it’s also crucial to consider the inclusion of fringe benefits and compensation. Here are some key points to understand:

• Fringe Benefits as QADE: If an eligible employee receives fringe benefits as part of their remuneration package (like a car instead of salary or wages), these may be considered as QADE.

• Government Fees, Fines, Taxation: Any governmental fees, fines, penalties, taxation or similar payments (including Fringe Benefits Tax) are not deemed as ‘remuneration’ or ‘expenditure’. Therefore, they are not considered as development expenditure or QADE.

• Compulsory Worker’s Compensation: If a person’s remuneration qualifies as QADE, any mandatory worker’s compensation associated with that remuneration and payable by the applicant company is also considered QADE.

Can you claim associate costs?

When considering the Digital Games Tax Offset (DGTO) and the treatment of costs associated with entities that are linked to the applicant company, the following aspects need to be understood:

• Exclusion of Associate Costs: As a general rule, any expenditure relating to an entity that is an associate of the applicant company does not qualify as development expenditure and thus cannot be claimed as QADE.

• Limited Exception: However, there is a limited exception to this rule. A company may claim up to $65,000 per income year under the DGTO for each influential employee or individual that performs work or services directly for the company, and these services are attributable to the development of the game. For instance, if a director, founder, or CEO of a game development studio also undertakes development work on a game applied for under a stream of the DGTO, up to $65,000 of their salary per income year can be claimed.

• No Apportioning or Separating: Even with this limited exception, there’s no mechanism for apportioning or separating such expenditure to determine the amount of expenditure if the transaction had taken place between parties that are not associates.

• Definition of Associate: An associate of a company is defined by section 318 of the Income Tax Assessment Act 1936 (ITAA36). Legal advice should be sought regarding associates of your company before submitting your application.

Attachments to your DGTO application

To apply for the Digital Games Tax Offset (DGTO), you’re required to submit several key documents that are mandatory, with additional optional documents that can substantiate your Qualified Australian Development Expenditure (QADE) claim:

Mandatory Attachments:

1. ASIC Extract: An ASIC company extract needs to be provided to verify that the applicant company is an Australian resident company, or a foreign resident company operating through a permanent establishment in Australia. This information should include the Australian Business Number (ABN) and details of the registered address.

2. Affiliates: Upload a list of all companies likely to be ‘connected with’ or ‘affiliates of’ the applicant at the time of lodgement of the relevant tax return, highlighting any particular ‘related companies’ that may also intend to claim an amount under the DGTO.

3. Associates: Include a list of all associates or potential associates with whom transactions have been undertaken relevant to QADE and, for potential associates, the rationale that has been used to determine the company is not an associate.

4. QADE Statement: Upload a statement of total QADE, ideally in the form of a general ledger.

Optional Attachments:

Additional documents can be submitted to support your application and further substantiate your QADE claim. These might include:

• Employment Contracts: These contracts detail the relationship between your company and its employees. They often include information about the role, responsibilities, and compensation of the employee. For DGTO claims, these contracts can substantiate your expenditure on remuneration for game developers and other related roles in your company.
• Payroll Summary Details: A summary of your company’s payroll can give a clearer picture of how much you’re spending on employee wages. This can be especially relevant when demonstrating the costs associated with key roles in game development such as game designers, programmers, artists, animators, and producers.
• Invoices and Change Orders: These documents can provide a clear account of specific costs incurred during the development of the game. This could include expenditures related to research, prototyping, user testing and debugging, game updates, and platform adaptation.
• Letters of Engagement: These are typically used when your company contracts services from a third party. A letter of engagement outlines the understanding between your company and its service providers, including terms, conditions, and fees. In the context of a DGTO claim, this could include costs related to voice recording, music composition, or cut scene creation.
• Schedules, Timesheets, and Attendance Sheets: These documents can provide evidence of the work completed on the project and the time spent on the work. This could support your claim by verifying the hours devoted to research, game development, and other relevant activities.
• Relevant Quotes: Quotes can help support the valuation of goods or services provided in the course of game development. For instance, a quote for specific hardware or software necessary for the project can substantiate associated costs.
• Letters of Authorisation: These documents can demonstrate approval for certain actions or expenditures. For instance, if you have a letter of authorisation from a classification board, it can substantiate your expenditure on obtaining or maintaining a game classification.
• Foreign Currency Calculations: If your company has incurred any expenditure in a foreign currency, calculations or receipts showing the exchange rate applied at the time can be useful. This can help to accurately reflect the AUD equivalent of such expenditure in your claim.
• Major Service Providers’ Full Quotes and/or Budgets: Detailed quotes or budgets from major service providers can provide a more comprehensive understanding of your costs. This could include costs for major services like platform adaptation or unique game features development.

These documents, while not mandatory, can provide more substantial evidence for your QADE claims and might help streamline the review process.

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How long does it take to get a DGTO certificate?

 The process for application assessment, including consideration by the Advisory Board, may take approximately 16 weeks. 

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What can we do to help?

Bulletpoint can assist you in maximising your benefits from the R&D tax incentive and Digital Games Tax Offset:

For the R&D tax incentive:

1. Help you identify eligible R&D activities and expenses that can be claimed under the scheme.
2. Provide guidance on the documentation required to support your R&D claim.
3. Assist you in calculating your R&D tax offset or refund and determining the applicable tax rate.
4. Provide support in the event of an audit or review by the ATO.
5. Keep you updated on changes to R&D tax incentive legislation and regulations.

For the Digital Games Tax Offset:

1. Help you identify eligible games development activities and expenses that can be claimed under the scheme.
2. Provide guidance on the documentation required to support your claim, including the cultural test and expenditure calculation.
3. Assist you in calculating your tax offset and determining the applicable tax rate.
4. Provide support in the event of an audit or review by the ATO.
5. Keep you updated on changes to Digital Games Tax Offset legislation and regulations.

In addition, we can help you accurately split your costs and activities between the two schemes to ensure that you maximise your benefits from both. We can also provide advice on other government grants and incentives that may be available to you, depending on your specific circumstances.

Eligible Companies

A company is entitled to the digital games tax offset)for an income year if:

• the Arts Minister has issued one or more certificates to the company 
• the company claims the offset in its income tax return for the income year

To be eligible for the Digital Games Tax Offset you will need to be:

• limited to games on which at least $500,000 of qualifying expenditure has been spent
• capped at $20 million in claims per annum
• an Australian resident companies or foreign resident companies with a permanent establishment in Australia
• available in the year when the qualifying expenditure has ceased on a game

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How to claim the DGTO?

To claim the Digital Games Tax Offset (DGTO), you must hold a certificate issued by the Minister or their delegate. This certificate confirms that your game meets the requirements of Division 378 of the ITAA97.

Key eligibility criteria include:

• The applicant is an eligible entity.
• The digital game/s applied for is/are eligible.
• The game has been completed or ported in the relevant income year, or ongoing development has occurred, depending on the certificate type sought.
• The Qualifying Australian Development Expenditure (QADE) meets the relevant threshold for the certificate type.

The certificate will detail the applicant company name, game title/s, QADE amount, and the income year for claiming the offset. You can then claim the DGTO in your tax return for that year. The Australian Taxation Office (ATO) will apply the DGTO against any existing tax liabilities and refund the remainder.

Choosing the Right DGTO Certificate

When applying for the Digital Games Tax Offset (DGTO), consider the following to choose the appropriate certificate:

• Completion Certificate: Choose this if you’re developing a new game and have incurred or will incur at least $AUD500,000 in Qualifying Australian Development Expenditure (QADE). This applies even if you’re only developing a part of the game, as long as the entire game is completed and released to the public.

• Ongoing Development Certificate: Choose this if you’re further developing one or more already released games and have incurred or will incur at least $AUD500,000 in QADE in a single income year. This includes activities to maintain, update, expand, or improve a completed digital game.

• Porting Certificate: Choose this if you’re porting a completed game onto a new platform and have incurred or will incur at least $AUD500,000 in QADE. This is suitable when no other development work is being undertaken that would be eligible under another certificate.

How Bulletpoint Can Assist You with DGTO Certificates

We are a Melbourne-based consultancy, specialising in navigating the intricacies of various grants. With a decade of experience and a proven track record of over 500 successful R&D claims, we’re well-equipped to guide game developers through this complex process.

Here’s how we can assist:

• Expert Guidance: We simplify the jargon, helping you understand the government’s definition of games and the specific requirements for each DGTO certificate – Completion, Ongoing Development, and Porting.

• Uncovering Opportunities: Our clients often praise us for revealing grants they wouldn’t have otherwise known about. We can help identify your eligibility for the DGTO and ensure you meet the $500,000 QADE threshold.

• Stress-Free Process: We aim to make the process less stressful, handling the complexities while you focus on game development.

• Continuous Improvement: We learn from every piece of feedback, striving to improve our services. Our commitment to excellence is reflected in our average rating of 4.8 stars from over 250 Google reviews.

At Bulletpoint, we blend professionalism with personality, providing accessible expertise to ensure your journey through the DGTO process is not just successful, but also enjoyable.

More Information

• Digital Games Tax Offset – Guidelines
• Digital Games Tax Offset – Application Form
• Digital Games Tax Offset – General Ledger

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Timing

The Digital Games Tax Offset opens from 1 July 2022. 

Case Studies

These are some case studies provided by the government:

• Sledgehammer Games – Sledgehammer Games, creators of the renowned Call of Duty franchise, has successfully established its first development studio outside the US, right here in Australia. Since its launch in 2019, the company swiftly grew from just six people to over 80 talented developers and creatives. Chief Operating Officer, Andy Wilson, credits Australia’s supportive atmosphere and outstanding talent pool for facilitating this impressive growth. Keen on giving back, Sledgehammer Games is committed to cultivating Australia’s gaming industry through internships and mentoring programs. They’ve also nurtured relationships with both industry and government bodies to further support game development. With their ongoing growth plans and proactive approach to supporting the industry, Wilson envisions a bright future for Sledgehammer Games in Australia.
• Extradimensional Enterprises – Extradimensional Enterprises, originally based in London, eyed Australia as a promising locale for expansion. With the country’s deep talent pool and strong infrastructure, it seemed a natural fit. Harnessing the advantages of the Digital Games Tax Offset, the international gaming company set up an office in Australia. This move attracted talented professionals like Leo, an Australian programmer who returned home to work in the exciting gaming industry. Their significant investment in a new augmented reality game and platform has not only proved successful but has also facilitated local health research related to mobility in older Australians.
• Mighty Kingdom – South Australian gaming company, Mighty Kingdom, is a creator of games for a roster of the world’s leading entertainment brands, including Disney, LEGO, and Sony. Listed on the Australian Securities Exchange in 2021, they are a prominent player in the gaming industry, employing 120 people. As they navigate the global gaming market, projected to reach US$200 billion by 2023, Mighty Kingdom is also keen on bolstering Adelaide’s games ecosystem, contributing to skills development and attracting both local and international investors.
• House House – House House, an independent studio based in Melbourne, made global headlines in 2020 with their hit creation, Untitled Goose Game. The game quickly became a sensation, selling over a million copies in its first three months, and clinching major international awards including the DICE Game of the Year and the BAFTA Award for Best Family Game.

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What other info might you have to provide?

The applicant company must provide the following to the NFSA upon request, after a final certificate under the DGTO is issued:

• Launch Copy: A launch copy of the game in an accepted format as outlined on www.classification.gov.au.

• Gameplay Footage: At least 30 minutes of gameplay footage from the published version of the game, supplied in the highest resolution format available.

• Soundtrack: The game’s soundtrack delivered as uncompressed files.

• Physical Release Materials: If applicable, physical game release materials including collectors’ editions and published soundtracks.

• Publicity Material: This could include trailers, development diaries, production documentaries, and high-resolution game and box art.

• Press Kit: A press kit that details the game’s features and production.

• Game Credits and Biographies: Game credits, and biographies of key production personnel, if not already included within the press kit, supplied as PDF(s).

• Behind-The-Scenes Material: This could include concept or storyboard art.

• Promotional Material or Merchandise: Any additional promotional material or merchandise associated with the game.