About in-house software and claiming a decline in value deduction under UCA.
What is in-house software
In-house software is computer software, or a right (for example, a licence) to use computer software that you acquire or develop (or have another entity develop):
- that is mainly for your use in performing the functions for which it was developed, and
- for which no amount is deductible outside UCA or the simplified depreciation rules for small business entities.
If expenditure on software is deductible under the ordinary deduction provisions of the income tax law, the software is not in-house software. A deduction for such expenditure is allowable in the income year in which it is incurred.
Expenditure to develop software for exploitation of the copyright is not in-house software. The copyright is intellectual property, which is a depreciating asset, and the decline in value would be calculated using an effective life of 25 years and the prime cost method.
Under UCA, expenditure on in-house software may be deducted using the prime cost method in the following ways.
- The decline in value of acquired in-house software, such as off-the-shelf software, is worked out using an effective life of
- four years (if you started to hold the in-house software under a contract entered into after 7.30pm AEST on 13 May 2008 or otherwise started to hold it after that day), or
- five years (if the in-house software is first used or first installed ready for use on or after 1 July 2015).
- Expenditure incurred in developing (or having developed) in-house software may be (or may need to be) allocated to a software development pool.
- If expenditure incurred in developing (or having another entity develop) in-house software is not allocated to a software development pool, it can be capitalised into the cost of a resulting unit of in-house software. Its decline in value can then be worked out under the prime cost method, from the time the software is first used or first installed ready for use, using an effective life of
- four years (if the development started after 7.30pm AEST on 13 May 2008), or
- five years (if the in-house software is first used or first installed ready for use on or after 1 July 2015).
- If in-house software costs $300 or less and it is used mainly for producing non-business assessable income, an immediate deduction may be allowable see Immediate deduction for certain non-business depreciating assets (costing $300 or less).
The termination value of in-house software that you still hold but stop using and expect never to use again or decide never to use is zero. As a result, you can claim an immediate deduction for the cost of the software at that time.
You can also claim an immediate deduction for expenditure incurred on an in-house software development project (not allocated to a software development pool) if you have not used the software or had it installed ready for use and decide that you will never use it or have it installed ready for use. The amount you can deduct is your total expenditure on the software less any amount you derive for the software or a part of it. Your deduction is limited to the extent that, when you incurred the expenditure, you intended to use the software, or have it installed ready for use, for a taxable purpose.
For information on the deductibility of website expenses, see TR 2016/3 Income tax: deductibility of expenditure on a commercial website.
From 7.30pm AEDT on 6 October 2020 under temporary full expensing, you deduct the business portion of the cost of eligible assets first held and first used (or installed ready for use) for a taxable purpose from 7.30pm AEDT on 6 October 2020 to 30 June 2023. This could include in-house software if it is not allocated to a software development pool. If it is not eligible for temporary full expensing, or you have chosen not to apply temporary full expensing, you should apply the prime cost method.
Software development pools
Under UCA, you can choose to allocate to a software development pool expenditure that you incur on developing (or on having developed) in-house software that you intend to use solely for a taxable purpose. Once you allocate expenditure on such in-house software to a pool, you must allocate all such expenditure incurred in that year or a later year to a software development pool. A different pool is created for each income year in which you incur expenditure on developing (or on having developed) in-house software.
Expenditure on developing in-house software that you do not intend to use solely for a taxable purpose and expenditure on acquiring in-house software cannot be allocated to a software development pool.
If you are entitled to claim a GST input tax credit for expenditure allocated to a software development pool, the expenditure in the pool for the income year in which you are entitled to the credit is reduced by the amount of the credit. Certain adjustments under the GST legislation for expenditure allocated to a software development pool are treated as an outright deduction or income. Other adjustments reduce or increase the amount of the expenditure that has been allocated to the pool for the adjustment year.
You do not get any deduction for expenditure in a software development pool in the income year in which you incur it. For expenditure incurred in an income year starting on or after 1 July 2015, you are allowed deductions at the rate of 30% in each of the next three years and 10% in the year after that.
If you have allocated software development expenditure on a project to a software development pool and the project is abandoned, the expenditure remains to be deducted as part of the pool.
If you have pooled in-house software development expenditure and you receive consideration for the software (for example, insurance proceeds on the destruction of the software), you must include that amount in your assessable income unless you make the choice for rollover relief to apply and do so. Choice of rollover relief is only available in this context where a change occurs in the holding of, or of interests in, the software; see Rollover relief.
You must also include any recoupment of the expenditure in your assessable income.
If the receipt of consideration arises from a non-arm’s length dealing and the amount is less than the market value of what the receipt was for, you are taken to receive that market value instead.
Continue to: Common-rate pools