Australia’s digital economy is rapidly evolving, and one sector benefiting significantly is the gaming industry. With the introduction of the Digital Games Tax Offset (DGTO), Australia is positioning itself as a competitive player in the global gaming landscape. This blog will explore what the Digital Games Tax Offset is, why it’s crucial for the gaming industry, and how it impacts startups and businesses in Australia.
What is the Digital Games Tax Offset?
The Digital Games Tax Offset is a government initiative introduced in 2021 as part of Australia’s Digital Economy Strategy. Aimed at promoting digital growth and innovation, this initiative provides a 30% refundable tax offset at the time of writing this article to Australian gaming companies that meet specific criteria. The DGTO is one of the ways the government is supporting the local economy by encouraging the development of video games, making it more affordable for startups to thrive in Australia.
Why Was the Digital Games Tax Offset Introduced?
The Australian government introduced this measure after years of lobbying by the Interactive Games and Entertainment Association (IGEA). Before the DGTO, local game developers found it challenging to compete on the global stage due to high costs and a lack of local funding. With the introduction of the tax offset, the government is:
- Reducing financial barriers for Australian game developers.
- Attracting foreign investment to support local companies.
- Creating more job opportunities in the digital economy.
- Supporting small businesses and startups to establish themselves in Australia.
The tax offset took effect on 1 July 2022 and has already started making an impact by driving economic growth and positioning Australia as a destination for innovative game development.
Australia’s Growing Game Industry
The Australian gaming industry has immense potential. Many small startups are emerging, and established game developers are expanding. Companies like Mighty Kingdom and PlaySide Studios have seen a surge in their growth and visibility. The DGTO allows these businesses and others to make high-quality games for both the local and international market.
According to recent data, the Australian video game industry has experienced steady growth since the DGTO’s implementation. This boom is particularly evident in states like Victoria and South Australia, where tax incentives and local government support are encouraging a rise in game development studios. By reducing costs, the offset helps developers allocate more funds towards hiring talent, acquiring better tools, and enhancing their marketing efforts.
How the Digital Games Tax Offset Benefits Startups and SMEs
For startups and small-to-medium enterprises (SMEs), the DGTO provides a valuable cushion against high production costs. Game development is not only expensive but also requires diverse talent, from coders to artists to marketers. Here’s how the DGTO makes a difference:
- Lower Entry Barriers
Small businesses and startups are often limited by budget constraints. With the DGTO, eligible companies can save up to 30% on qualifying expenses, making it more affordable to create new games. - Increased Investment Potential
The DGTO makes the Australian market more attractive to investors. Knowing there’s government support, foreign and local investors are more inclined to back Australian game studios. - Enhanced Job Creation
By reducing costs, game studios can hire more people. This means new jobs in fields like animation, coding, music production, and writing, contributing to Australia’s overall digital economy. - Focus on Innovation
With reduced financial pressure, companies can take creative risks. This incentive allows developers to experiment with innovative gameplay and cutting-edge technologies, making Australian games stand out in the global market.
Eligibility Requirements for the DGTO
To qualify for the DGTO, Australian game developers must meet certain criteria:
- Minimum Spending: Companies need to spend at least $500,000 on qualifying expenses within Australia.
- Types of Games: The offset applies to a wide range of games but excludes those involving gambling elements or those unable to obtain a classification.
- Australian Ownership: The game development company must be an Australian entity or have a significant base in Australia.
If your business is uncertain about qualifying, consulting a commercial lawyer or accountant can help clarify eligibility.
How Australian Startups Can Benefit Long-Term
The DGTO not only provides immediate financial relief but also sets Australian startups up for long-term success. Here’s how:
- Support for Overseas Expansion
The offset encourages companies to create games for international audiences. With global demand for digital entertainment, Australian studios now have a real chance to export their games overseas and expand internationally. - Encouraging Local Talent
By offering tax incentives, the DGTO helps nurture homegrown talent. Australian universities are increasingly focusing on gaming and digital media courses, and with the DGTO, graduates can find employment in a growing local industry instead of moving abroad. - Building a Global Reputation
A thriving game industry in Australia helps build the country’s reputation as a creative hub. This reputation attracts talent from all over the world, further enriching the local industry.
What Are the Key Agreements and Contracts Needed?
For startups planning to raise venture capital or secure investments to make the most of the DGTO, certain agreements are essential:
- Term Sheet: Outlines investment terms and conditions.
- Shareholders Agreement: Defines rights and obligations of shareholders.
- Subscription Agreement: Specifies the terms of share purchase by investors.
- Founders’ Agreement: Clarifies roles and ownership structure among founders.
- Employment Contracts: Ensures team stability, especially when attracting investors.
- Intellectual Property Assignment: Protects the company’s IP, crucial in game development.
- Convertible Note Agreement (if applicable): Sets terms for debt conversion to equity.
Having these agreements in place ensures a smooth investment process, helping you secure funding and maintain control over your business as it grows.
The Future of the Digital Games Tax Offset and Australia’s Game Industry
The DGTO is expected to continue benefiting the Australian gaming sector in the years to come. As the government sees the positive impacts, there may be further expansions or additional funding for the digital economy. With global demand for gaming on the rise, Australian startups have the opportunity to play a significant role in the industry.
By creating a supportive environment for game development, the DGTO not only strengthens local businesses but also aligns with the government’s broader goals for digital innovation and job creation.
Need Help Navigating the DGTO?
Understanding the eligibility requirements and applying for the DGTO can be complex. At Allied Legal, we stay up-to-date with the latest industry changes so we can assist you in making the most of the tax offset and other startup opportunities. Whether you’re just starting or looking to expand, our team can provide expert guidance to help your business succeed in the digital economy.
For more information, reach out to us on 03 8691 3111 or via email at hello@alliedlegal.com.au.
