Australia: Tax treatment of software development costs

Australia: Tax treatment of software development costs

Because expenditures relating to software development can be substantial, identifying the correct tax treatment from commencement of a project may be critical.

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When determining the appropriate treatment, consider the following questions or steps: 

  • Is there “in-house” software? The definition remains the same as (former) Division 46 and is relatively broad because it includes not only developed software but also acquired software and “the right to use” software.
  • If there is “in-house” software, consider the benefits and limitations of a software development pool. Subdivision 40-E measure from the time of “incurred” (rather than installed, ready for use) and is a once-in, all-in standard. A recent change from four years, to five years may make this option less appealing.
  • Pooling is not required; there is still the option of a four-year period for in-house software, if the software was used (ready for use) prior to 1 July 2015.
  • Taxpayers may want to consider whether a portion could be considered outright deductible (section 8-1) as maintenance, testing, code reviews, and others.
  •  Consider how the views of the Australian Taxation Office (ATO) in ATO ID 2011/42 (salary and wages, and self-construction of depreciating assets) could interact with Division 40. The ATO can view software as a “capital asset.”
  • Determine whether the tax base has been reset by the tax consolidation rules, either through Subdivision 716-G or as a depreciating asset.
  • Investigate whether the software could qualify for research and development (R&D) incentives.
  • If there is decision to not use the software, or it has been “shelved” for a new upgrade, there may be an outright deduction to be claimed, through a variety of balancing adjustments.

 

Read an October 2015 report prepared by the KPMG member firm in Australia: Choose your own adventure – software tax treatment 

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