Crash course in tax for game developers

Game development is now big business, with skilled designers and developers vying to present the fruits of their creative labours to an audience seeking ever more exciting games.

As a game developer, tax and legal issues are probably the last things you want to think about.

However, you do need to know about your legal obligations, and also be aware of the tax and other incentives that may help you build your game development empire.

Here’s what game developers need to know when it comes to tax:

Hobby vs business

Identifying whether your game development is a hobby or a business is the first step in establishing your tax obligation.

If your game development activities are at the hobby level, things are pretty simple. Any income you receive is not assessable for tax. However, you can’t claim any of your expenses as a tax deduction.

Once you get to a stage where you think your passion can be turned into a real business, some serious questions need to be asked. Are you ready to run a business? What business structure is best? Can you produce a realistic cash flow forecast from start-up through to profitability?

Business structure

This is a critical decision. It will affect your ability to raise investment funding and determine eligibility for various incentives.

In most cases, a company structure is the preferred option. It provides a flat rate of tax, (important when revenue is lumpy), protection of personal assets, and other advantages such as access to the R&D tax incentive.

It’s important to establish a shareholders’ agreement with co-shareholders right from the start. Personal funds and company funds need to be clearly separated, and it helps if you can differentiate your role as an owner from that as an employee.

Setting up

Early tax obligations of running a business include registering for a Tax File Number (TFN), an Australian Business Number (ABN), Goods and Services Tax (GST), Pay As You Go (PAYG) Withholding and possibly Fringe Benefits Tax (FBT).

If you need help getting your tax obligations set up, one of LDB’s friendly accountants can assist.

Incentives and assistance

There are a number of government programs that can help you turn your dream game into reality.

One is the R&D tax incentive. For businesses with a turnover of under $20 million this provides a refundable tax offset for the costs of eligible research and development activities. In other words, you can get money back from the tax office even if you don’t pay any company tax.

There are also tax incentives for early stage (angel) investors who invest in early stage innovation companies (ESICs). Export Market Development Grants (EMDGs) may be relevant to many companies in the game development industry, and it’s worth exploring the availability of grants from federal and state bodies such as Film Victoria.

Benefit from experience

There are many other tax issues facing game developers building a business. When are contractors deemed to be employees? How is overseas income treated? How can cash flow be managed for both business and tax purposes?

Instead of giving up your creative time to deal with all these issues, why not benefit from our expertise? At LDB, we’ve nurtured numerous businesses, including ESICs, as they’ve moved from start-up phase through to thriving enterprises.

We can help you with the things we’re good at so you can focus on what you’re good at. Click the button below to find out more, or give us a call on (03) 9875 2900, and let’s talk games.