DGTO TLDR – TechLever’s summary

March 30, 2022 by Ben Thompson

The Digital Games Tax Offset (DGTO) is aimed at promoting the growth of the digital games industry in Australia and attracting games development to Australia. Draft legislation was released to consultation this week. Deadline for feedback to government on the proposed legislation is 18 April 2022.


Promoting the growth of the digital games industry in Australia has potential spillover benefits as the talent in the gaming sector is transferable to a range of other sectors.

Who can DGTO?

Aussie companies, or international companies with an AU setup, that are developing a digital game that is for public release over the internet or playable online.

What is DGTO?

It is a 30% refundable tax offset for companies that spend at least $500K on new or existing game development. The offset goes to the company that is primarily responsible for undertaking development activities for the game (ie studios who develop under contract could get DGTO; you don’t need to own/control the rights). The offset is capped at a maximum of $20M. You can claim expenditure from 1 July 2022 onwards.

In practice this means that for every $1 a company spends on qualifying Australian development expenditure:

  • If in loss;  there is an after-tax benefit of 30c realised as a cash refund
  • If in profit;  there is an after-tax benefit of 5c realised as less tax to pay (30% DGTO minus 25% company tax rate)
  • If DGTO reduces tax bill to $0 then any remaining offset comes back as a 30c cash refund
  • (DGTO reduces franking credits)

How is DGTO?

You have the choice of the following certificates:

  • Completion – for new games, can claim costs across multiple years
  • Porting – for newly ported games, can claim costs across multiple years
  • Ongoing  – for ongoing dev of a game (or multiple games) already released/ported, can claim costs in a single year only

The Arts Minister will only issue a completion or porting certificate after a game has been released or handed over in a ready-to-release state.

The DGTO benefit is received once a certificate has been issued and the offset has been included in the tax return for the financial year that matches what’s on the certificate.

Where is DGTO?

DGTO legislation (as Division 378) will live within the Income Tax Assessment Act 1997 (ITAA 1997) along with related offsets such as Division 355 that covers R&D and Division 376 for film’s offsets. They are interesting when compared side-by-side to DGTO; particularly with respect to expenditure that’s OK for film but disallowed in  games.

Expenditure that is OK

Qualifying Australian development expenditure (QADE) is expenditure incurred (not necessarily paid) in respect to development of the game. To help give an applicant certainty as to what is OK to claim the draft legislation has a specific inclusions list:

  • Remuneration provided to employees and independent contractors who have the following roles;
    • Software developers, programmers and engineers
    • UX designers, QA testers, behaviour analysts
    • Game designers and writers
    • Artists, animators and performers (both voice and mocap),
    • Musicians, composers and sound designers
    • Project managers (ie Producers)
  • Research and prototyping for the game
  • User testing, debugging and collecting user data 
  • Updating the game
  • Obtaining or maintaining classification
  • Adapting the game for use on particular platforms
  • Historical development expenditure, from other companies, is treated as inherited by the DGTO applicant (ie the offset can be greater than actual out-of-pocket dev costs)

Expenditure that is NOT ok

Draft legislation has a list of expenditure that is specifically excluded from being claimed:

  • Costs for anyone who isn’t an Australian resident at the time costs were incurred
  • Subcontracting someone else to develop the game
  • Costs not directly attributable to development of the game; which includes costs such for social media managers, forum admins and moderators and general business admin peoples
  • Costs for financing, distribution, user acquisition, marketing, advertising, publicity or promotion
  • Travel, accommodation, catering, entertainment or hospitality costs
  • Costs for copyright or a trademark, image or likeness rights or obtaining an endorsement
  • Costs associated with applying for DGTO or other government assistance programs
  • Expenditure claimed as part of another tax offset (eg R&D Tax)
  • Transactions that weren’t handled at arm’s length

More expenditure that is NOT ok (but should be in my opinion)

  • Business overheads (not even a portion); which includes rent or premises lease costs, insurance, audit or accounting services, HR, legal, recruitment, visas or work permit costs
  • Computer hardware, servers or any depreciating asset costs (not even a portion)
  • Acquiring or licensing software (not even a portion)
  • Any costs associated with entities that aren’t whole independent (not even a portion)

My issues with draft legislation

Inconsistent expenditure exclusions

DGTO’s specific exclusions list is entirely inconsistent with comparable parallel tax offsets such as film’s PDV which allows a portion of the four bullets above to be included as qualifying expenditure to the extent they were related to the production.

  • What is it about game development that explicitly precludes any amounts to be claimed for hardware, cloud infrastructure, the purchase or licence of software, depreciation of assets, business overheads or related party costs?
  • Why can’t an audited and verifiable amount (in full or a portion) be considered qualifying Australian development expenditure when the same expenditure items are permissible in film’s PDV offsets?

DGTO should promote the growth of the digital games industry for ALL makers

The explanatory memorandum says that costs for “computer hardware and servers is excluded as it does not directly contribute to employment in the games development industry” (1.69 EM). However, the EM doesn’t explain why software is excluded.

Given the intent of DGTO is to promote growth of the digital games industry in Australia, software (or hardware) that is Australian made and owned should not be excluded expenditure.

There are Aussie owned-and-made software and online services which are part of the game development industry’s supply chain (eg https://mod.io/ and https://mightygamesgroup.com/services/).

R&D Tax has Research Service Providers in its legislation for promoting collaboration and enabling access to specialist expertise, resources and capability.

DGTO would benefit greatly from a similar certified system (eg Game Development Service Providers) to maximise the investment of time and money to further increase the growth of the digital games industry – which extends beyond those who release games.

Why ‘wholly independent’ and not connected or affiliated entities?

DGTO specifically excludes expenditure between entities that are not ‘wholly independent’ – which the explanatory memorandum notes is undefined. It’s bizarre that undefined terminology would be used in a section critical as integrity measures when there are already existing definitions in ITAA 1997 that cover such instances. Connected and affiliated entities referenced in many divisions of ITAA 1997 – most obviously in DGTO (1.15 and 1.16).

  • Why does DGTO introduce ‘wholly independent’ when definitions for connected and affiliated entities reference the same underlying principles?
  • Should DGTO’s reference to ‘wholly independent’ be interpreted as distinct from those preexisting definitions, if so – to what extent and why?

DGTO is missing bits

Draft legislation is missing a lot of detail that other comparable tax offsets such as film and R&D have documented in their relevant Divisions of ITAA 1997 (Division 355 and Division 376 respectively). Without being exposed to the guidelines or rules, it’s hard to know where things are headed with respect to:

  • Expectations for justification of development activities
  • Justifying the scope and breadth of a title and how far you can pivot from prior years’ of development and how much historical costs you can claim
  • What constitutes public release of a game, how long does it need to be available, any requirement for sales, does the game need to be playable/work
  • If a game is certified, then subsequently modified to the extent it would have been deemed ineligible (eg Melbourne Metro’s ‘Dumb Ways To Die’), is this grounds for the Minister to revoke a certificate; how long does a game need to remain in an eligible state to avoid revocation – a week, months, years
  • In what timeframe does a game need to be submitted to the National Film and Sound Archive, is their copy used as the basis for rulings in the event that a game changes post-certification
  • What is the timeframe for the Minister to make a judgement on certification, over what time period can they revisit a previous decision – is the Arts Minister the sole judge and jury or will there be an administrative body to assist them – why isn’t such a body mentioned in legislation like for film or R&D tax offsets