ATO Interpretative Decision
ATO ID 2010/14
Income Tax
Capital Allowances: cost - computer software - annual licence feesFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Are the annual licence fees paid by the taxpayer for the use of tax and accounting software included in the cost of depreciating assets for the purposes of Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The annual licence fees for both the tax and accounting software are outgoings that the taxpayer can deduct under section 8-1 of the ITAA 1997. Accordingly, the rights to use the software are not items of 'in-house software' (as defined in subsection 995-1(1) of the ITAA 1997) and are not 'depreciating assets' (as defined in section 40-30 of the ITAA 1997).
Facts
The taxpayer incurred annual fees under two licence agreements: one agreement is associated with the use of tax software and the other is associated with the use of accounting software.
Tax Software
The taxpayer's outgoings were incurred to licence software used to produce tax returns for the purpose of carrying on their business.
Under the licensing agreement with the software developer, the taxpayer pays an annual licence fee and acquires the right to use the software developed for a particular income year for 12 months.
The software provided to the taxpayer for a given year is supplied as a software package. The software is able to produce returns for the current year and the previous 3 years. For example, software for the 2002-03 income year is able to produce tax returns for the 2002-03, 2001-02, 2000-01 and 1999-2000 years.
At the end of the 12 month licence period the software stops operating.
The taxpayer is not obliged to continue licensing the software after any 12 month licence period.
Computer disks containing the new income year's software and an updated user's guide are sent to the taxpayer if the new annual licence fee is paid.
All proprietary rights in the software remain vested with the software developer. The taxpayer does not acquire the software but only the rights to use the software for 12 months.
Payment of the annual licence fee also entitles the taxpayer to receive updates to the product and unlimited telephone support throughout the year.
Accounting Software
The taxpayer's outgoings were incurred to licence accounting software used to prepare financial reports for the purpose of carrying on their business.
Under the licensing agreement with the software developer, the taxpayer pays an annual licence fee and acquires the right to use the software for 12 months.
The taxpayer receives the software package in the first year that it licences the software.
The software is not developed for a particular income year and is capable of producing financial reports for all years up to the current year.
The taxpayer is not obliged to continue licensing the software after any 12 month licence period.
Payment of the following year's licensing fee entitles the taxpayer to continue using the software for a further 12 months.
If the taxpayer chooses not to continue licensing the software, it must return the software and documentation to the software developer.
Payment of the annual licence fee also entitles the taxpayer to receive updates to the software every 6 months. The updates ensure the software is compliant with changes to the relevant accounting standards.
Reasons for Decision
Subsection 40-30(2) of the ITAA 1997 provides that in-house software, that is not trading stock, is a depreciating asset. The definition of 'in-house software' in subsection 995-1(1) of the ITAA 1997 excludes computer software, or a right to use computer software, for which you can deduct amounts under a provision of the ITAA 1997 outside of Divisions 40 and 328 of the ITAA 1997. Therefore, where amounts can be deducted for software (or the right to use software) under another provision, such as section 8-1 of the ITAA 1997, the software is not in-house software and will not be a depreciating asset for the purposes of Division 40.
The software licence fees are incurred by the taxpayer in carrying on their business of providing accounting and tax services for the purpose of gaining assessable income. A loss or outgoing cannot be deducted under section 8-1 of the ITAA 1997 to the extent that it is a loss or outgoing of capital, or of a capital nature (paragraph 8-1(2)(a) of the ITAA 1997). The issue is whether the annual licence fees for the tax and accounting software are on capital or revenue account.
The lead Australian authority on this issue is the judgment of Dixon J in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; (1938) 1 AITR 403. Dixon J outlined the following three matters to be considered in distinguishing between revenue and capital outgoings at 363:
(a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it, that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.
The advantage sought by the taxpayer from paying the annual licence fees is to secure the rights to use the tax and accounting software in their business. To this end, the fixed licence period of 12 months applying to each software product suggests the expenditure is of a recurrent nature and does not provide any enduring benefit.
Further, the payment of the licence fee on a year-to-year basis represents a periodic outlay that covers the use of the software for a period that is commensurate with those payments. Each annual licence fee features all the traditional characteristics of an outgoing on revenue account, that is, it does not give rise to any enduring benefit for the taxpayer; and it is a recurrent, repeated or continual cost to the business rather than a final or 'once and for all' payment.
For these reasons it is considered that the annual software licence fees are not outgoings of capital or of a capital nature. The taxpayer is entitled to deduct the outgoings under section 8-1 of the ITAA 1997. Consequently, the taxpayer's rights to use the tax and accounting software are not items of in-house software (as defined in subsection 995-1(1) of the ITAA 1997) and are not depreciating assets (as defined in section 40-30 of the ITAA1997).
Date of decision: 2 September 2003Year of income: Year ended 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 8-1
paragraph 8-1(2)(a)
section 40-30
subsection 40-30(2)
subsection 995-1(1)
Case References:
Sun Newspapers Ltd v Federal Commissioner of Taxation
(1938) 61 CLR 337
(1938) 5 ATD 23
(1938) 1 AITR 403
Keywords
Cost of a depreciating asset
Depreciating assets
In-house software
Intangible depreciating assets
Second element of cost
Uniform capital allowances system
Date reviewed: 18 April 2017
ISSN: 1445 - 2782
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