Inland Revenue finalise guidance on computer software acquired for use in a taxpayer’s business
Tax Alert - June 2016
By Emma Marr and Brad Bowman
Given the prevalence of computer software in most New Zealand businesses, the deductibility of the cost of this software is a question that almost all businesses will face at one point or another. Inland Revenue have recently updated their guidance on this, issuing Interpretation Statement (“IS 16/01”), Income Tax – Computer software acquired for use in a taxpayer’s business. IS 16/01 updates and replaces a 1993 Policy Statement on the income tax treatment of computer software.
As a starting point, IS 16/01 only provides guidance in relation to software purchased, leased, licenced, developed or commissioned for use in their business. It is important to note that IS 16/01 does not cover software developed for sale or licence (although we understand that Inland Revenue are currently considering this).
Deloitte made a submission and liaised with Inland Revenue with respect to IS 16/01. A number of Deloitte submission points were incorporated into IS 16/01, including comments in relation to periodic payments for the right to use or access software.
As a general guide, the income tax treatment of the computer software depends on how the business acquires the software. The main types of software expenditure covered by IS 16/01 are as follows:
- Software purchased: Where software is acquired for use in a business, the software purchased will generally be a capital asset and depreciated accordingly (the depreciation rate for software is 50% using the diminishing value method and 40% using the straight line method). Where the cost of the software purchased is less than $500 the software may be fully deductible in the year of acquisition. As with any asset, maintenance costs should be deductible when incurred, whereas upgrades should be capitalised and depreciated.
- Periodic payments for the right to use or access software: Such payments are generally deductible when incurred for tax purposes. This would cover payments for cloud based software services, such as Xero.
- Software developed in-house: Expenditure incurred in developing software in-house will likely be capital in nature and capitalised as a software asset. Amounts capitalised would be depreciated in the same manner as software purchased (that is, once the software is available for use). Despite that, expenditure incurred prior to the commencement of the software project may be deductible immediately as “feasibility expenditure”. There are also special deductibility rules regarding expenditure incurred in software developments which are ultimately abandoned.
IS 16/01 also considers expenditure on software commissioned by a taxpayer for use in its business (which is treated in the same way as software developed in-house) and the lease of software where the lease is a finance lease for tax purposes (in which case the normal finance lease rules apply).
Computer software which a taxpayer uses in their business can be leased, purchased outright, developed in-house or commissioned. The software may even be a service provided by cloud based software service providers. It is important for taxpayers using computer software in their business to fully understand the tax treatment that may follow as a result of the way in which it is acquired.
If you have any questions in relation to the deductibility of computer software expenditure, please contact your usual Deloitte advisor.