Does Anyone Know If Capital Gain Tax Applies To a Website Sale

I was just wondering if anyone knew how the sale of a income producing website is judged for tax purposes if it is built from the ground up?

Chris,

Can you provide more information.

Is it a sale of a web based business?

Or are you in the business of creating websites and selling them off for profit?

Are you likely do build up another one and then sell it off down the track?

How long since you first started the site until when you sold it (or plan to sell it)?

Thanks

I guess that depends on how you define web based business? and I'm not sure what needs to be occurring on or around the site for it be considered a web based business.

Also I manage quite a number of sites, 10+ (and that number is always increasing) so my decision to sell is not a reflection of me selling my entire business or anything, just one website that I operate.

The majority of the sites I run main source of revenue is advertising. Though the selling point of these sites won't be their advertising revenue it will be the traffic they produce which is more leveragable by other businesses than myself.

Not at the moment, but if I was to start selling some more of these smaller sites I had you could argue that I was, but once again all the websites I produce will also produce advertising revenues that would justify them being held as assets.

I'll really only be looking to sell these sites if I can get good offers for them, but I expect that I probably will given the those in the industries I service would profit a lot more out of the traffic of my sites than I would.

The short answer is yes, but not in the same industry.

I'd imagine it'd be a minimum of 6 - 12 months before they were sold.

I hope these responses help. If you have any further questions please feel free to ask.

Thanks for your prompt and articulate responses Chris!

OK, based on the information supplied I believe if you sell off one of your websites that you are selling an asset.

This I believe is in contrast to someone like a franchisor who sells franchises and the sale of them is normal income (i.e. not a capital gain from the sale of an asset). Based on your answers selling the website is currently outside the normal course of business thus should be treated as the sale of an asset.

The sale of the website asset will be a CGT event in my opinion.

This is good - you should be able to access CGT concessions

Assuming the website came into existence more than 12 months ago, you will be entitled to the general 50% CGT discount on the profit on the sale. As the website would also be considered an 'active asset' in your business, you will get an additional 50% discount.

So if bought it for $0, sold it for $20k your gross capital gain will be $20k. Less 50% discount = $10k, less another 50% active asset discount = $5k. The $5k will be added onto your taxable income.

But wait - there's more!

You can elect to defer the capital gain for up to 2 years under the provision that you will buy a replacement asset (i.e. under the provision you will purchase a replacement website to redevelop and earn money from). If you don't end up buying one, then 2 years later you pay the tax in that year.

If you do replace it (which may be impossible to find something to replace it with if it is unique) the the CGT is deferred until that asset is sold.

It gets a little complex correctly completing the CGT schedules on your business tax return - so ensure your tax agent knows what they are doing.

DISCLAIMER:
The above answer is my opinion. I have not done anything more than basic research on the specifics of the sale of a website and can only go on the information you have provided.

I would love to hear alternate opinions - I know these types of questions are favourites of tax studies at unis and CA / CPA programs. Maybe there is some guru who can shed some light on this area?

SM

WOW! Thanks for the awesome response! You really are the barer of good news!



That said, I do have a couple of follow up questions.

At what point (as in how many of these websites sales would it take) do these "assets" stop being interpreted as asset sales that are taxed as a CGT event and begin to be taxed as a normal part of business?

Also, do you have to buy a replacement website after the the sale, or can you buy one before?

Also what happens if you sell a couple of assets can you offset the gains of those sales against the purchase of one big website purchase? and vice versa?

Hi Chris

It's great advice from Superman ... but I would also suggest you talk with your accountant about the aim of your business.

The reason I say that is we are in a similar business and run a number of traffic-generating websites. We've been made offers for some of them in the past, for the same reason you've outlined you might sell yours.

None of these sales would attract CGT in our case - the websites are not an asset - they are the equivalent of buying an ad in the Yellow Pages and then later selling the rights to the ad to another party (or letting them have your phone number).

The site was never an asset, but a well-devised advertisement designed to get someone to do something. The domain name to which the website is attached is also not owned by anyone - you simply lease the right to use the name, but more recently are allowed to sell that right to another party. You don't own the infrastructure over which the ad is delivered. In fact, your 'rights' to the site are pretty temporary and will completely expire if you don't pay a domain registrar or webhost to keep the package alive.

Unless you are at the very high end of the industry (think DBS that owns 550,000 domain names !) , I would suggest looking at such sales as a CGT event you could be setting yourself up for a lot of expensive administration and confusion.

If however you sell a business, which happens to include a domain name and website, the 'business' portion would be a different kettle of fish.

Cheers
Carl

Thanks for your response Carl, but now I'm confused.

So are you saying that you would pay no tax on the money earned from their sale?

So then what does this mean?

What would this imply?

Capital Gains Tax applies when you make a capital gain. What I'm saying is that there is no CAPITAL gain. Of course you'll pay tax on income, as a good corporate citizen should

You don't own much, except the concept and some content. The domain name is not yours, you 'lease' it, for all intents and purposes. You don't depreciate the website, it's not an asset in that way (at least the way we operate them, they aren't)

If you sell a business and make a profit my understanding is that would trigger a capital event. The distinction is whether running a simple website and selling ads is a business, and in a lot of cases it's simply an advertising vehicle you have the rights to for a period of time, as per the examples above.

Cheers

LOL - so your saying that all the moneys derived from the sale of a website are taxable given that it isn't a CGT event.

However the argument is then, what is for sale. If you are just selling a domain name then arguably you are not selling an asset you own, but with all the websites I'd sell there would be a reasonable amount of content included (ie the files that make up the site) and these are not leased from anyone, I created them from the ground up. They are the main part of any website purchase most of the time anyway. Sure a pretty domain name is nice and all but without the files you don't have a website... and lets not imply that with a domain name and web host you have yourself a successful "advertisement billboard".

Anyway so how do you find out how the ATO would rule on a case like this? Surely there would have to have been some precedents set in Australia in the not too distant past.

Mate if I was you I'd engage an accountant and explain your operation. If you can't decide if you're developing a growth asset or earning income, it's gonna be hard for the ATO to rule anything. Because of course, yes, all monies derived from the sale of anything are taxable, one way or another Personally I think by bringing capital gains into the equation you are creating yourself a messy accounting nightmare, but I could be (and often am) wrong