Level up! New offset boost for gaming sector

What is the Digital Games Tax Offset?

The Digital Games Tax Offset (DGTO) is a new, non-competitive incentive program intended to bolster the Australian video games industry. The DGTO offers significant tax offsets to the sector and is jointly administered by the Australian Taxation Office and the Office for the Arts.

The purpose of the DGTO is to:

  • Incentivise large game studios to invest in the Australian market
  • Boost the global profile of independent and local Australian game developers
  • Create employment for local talent in the Australian gaming sector.

What are the DGTO rules and what offset is available?

Game studios located in Australia (resident or foreign) that incur a minimum of $500,000 eligible development spend can receive a 30 per cent refundable tax offset on Qualifying Australian Development Expenditure (QADE).
The expenditure can be claimed when the Arts Minister assesses a company’s application (including eligibility of the relevant Digital Game(s) and QADE), and issues one of three certificate types:

  • Completion Certificate for the completion of a new game
  • Porting Certificate for the porting of a completed game to a new platform
  • Ongoing Development Certificate for updating/improving an existing game (or multiple games).

A Completion or Porting Certificate will entitle eligible companies to receive the tax benefit on a minimum of $500,000 QADE incurred over multiple years (to a commencement date of 1 July 2022), until the completion or porting of the game. An Ongoing Development Certificate will entitle claimants to an offset only on a minimum of $500,000 QADE incurred during the relevant financial year. As the expenditure remains deductible for tax purposes, the DGTO offers a generous and additional benefit.

Notably, companies cannot access other tax offsets (such as the Research and Development Tax Incentive) for the same expenditure that they claim under the DGTO.

Applications for certificates are now open via the Office for the Arts website.

What expenditure qualifies for the DGTO?

The legislation sets rules for the types of expenditure that will be assessed as part of a company’s QADE. In general, any expenditure incurred by a company in relation to the development of an eligible game is QADE unless specifically excluded. This includes:

  • Remuneration paid to employees or independent contractors who carry out work in connection to the development of the game
  • Expenditure on research and prototyping for the game, as well as underlying game technology, user testing, debugging, etc.

Notably, only the first $65,000 of the salary of associates of the company who are influential employees – for example, major shareholders or office holders - is counted as QADE.

There are also specific exclusions from a company’s QADE, including expenditure incurred on activities not directly attributable to the development of the game, such as:

  • Administrative employees
  • Marketing costs
  • Licensing or purchasing software
  • General business overheads
  • Remuneration paid to employees or contractors who are not Australian tax residents.

For a comprehensive list of QADE, see the DGTO legislation.

What doesn’t qualify for the DGTO?

The DGTO rules specifically outline the types of digital games that are not eligible for the program, including:

  • Gambling services, or digital games that substantially comprise gambling or gambling-like practices
  • Games containing elements that are likely to lead to the game being refused classification under the Classification (Publications, Films and Computer Games) Act 1995
  • Games that are primarily developed for industrial, corporate or institutional purposes
  • Games that are primarily developed to advertise or promote a product, entity or service.

A working example of a DGTO claim

Studio X has developed two games:

  • Sports game, expenditure $800,000, developed between July 2022 and October 2023
  • Action game completed December 2021, but Studio X incurred $750,000 between December 2021 and June 2023 to improve and update the game.

Under the DGTO, Studio X can claim development expenditure for both games. The sports game will receive a Completion Certificate from the Arts Minister in November 2023. Development expenditure (incurred during both the 2022/23 and 2023/24 financial years) is claimable until October 2023, when the game is completed.

Let’s break down Studio X’s sports game expenditure of $800,000:

  • $50,000 licensing/purchasing development software
  • $150,000 electricity, cloud storage, hardware purchases
  • $400,000 wages for developers and artists
  • $200,000 outsourcing motion capture and voice acting.

Only the last two points are QADE, so of the $800,000 spent, only $600,000 qualifies for the incentive. As the refundable tax offset is 30 per cent, the value of the offset would be $180,000. This would offset any tax payable for Studio X, with any remaining balance to be cashed out as a refund.

Let’s look at the action game, which is live but requires ongoing improvement. Studio X has been updating, adding new content and improving the game since its release in December 2021. However, the legislation only allows for expenditure incurred from 1 July 2022 onwards to be claimed. Studio X must also determine its eligible spend on these specific activities for the year and cannot include any expenditure counted as QADE for the Completion Certificate for its Sports game. The studio determines it has spent over $500,000 QADE on the action game during the 2022/23 financial year and is therefore eligible to apply for the Ongoing Development Certificate for this work for the year.

BDO Comment

While we welcome the DGTO, the government’s approach to eligibility is disappointing. Developers can only apply (and access the cash benefits) once they have completed a game - which can take multiple years of development. Our preferred approach would be to follow a similar model to the R&D Tax Incentive, where companies can apply for any income year in which they conduct eligible activity. While this would mean a little more compliance work, it would allow businesses to access the offset during cash-critical stages of development.

Need help with your DGTO application?

Our grants and incentives team specialises in providing tailored support to businesses looking to access government incentives. Contact us to discuss how we can help you navigate the challenges and uncertainties of the DGTO and maximise the success of your application.