Cap on internal-use software expenditure eligible for a credit (sections LH 9 to LH 13 and LH 17)

Examples: Definition of internal software development (main purpose of sale)

1. Company B is undertaking R&D to develop software which it will use internally. The cap applies, because Company B is developing the software with no purpose of sale. Company B may not claim credits in any year for more than $3million of its software development expenditure.
2. Company C is undertaking R&D to develop software which it will sell to Company D, its parent. The cap applies, because Company C is developing the software with a purpose of sale only to an associate.
3. Company E is undertaking R&D to develop software which it will use internally. The board members of Company E have also discussed the possibility of sale of the software to other large companies that are not competitors, to recoup some development costs. The board members have instructed a staff member to investigate the potential market for the software and to ensure that the software is easily customised. The developers have been advised that they need to build some flexibility into the design of the software. The cap applies, because Company E has a purpose of sale of the software, but does not have a main purpose of sale of the software. The purpose of sale is ancillary to the purpose of internal use.
4. Company F is undertaking R&D to develop software which it will sell to utility companies. It has signed contracts with three companies to supply the software and it is actively marketing to other interested parties. F will not be using the software in the internal administration of its business. None of these companies is connected in any way to Company F or to each other. In this case, the cap is unlikely to apply, since the main purpose of development is sale to multiple non-associates.

Examples: Definition of internal software development (internal use or use to provide services)

1. Company G is undertaking R&D to develop software which it will sell to utility companies. It has signed contracts with eight companies to supply the software and it is actively marketing to other interested parties. G's parent company will also be using the software to bill its customers. The cap applies, since there is a purpose of using the software in the internal administration of the business activities of an associate of G.
2. Company H is undertaking R&D to develop software to integrate a new enterprise resource planning package with its legacy information systems. Once it has done this, it intends to sell an integration package to other companies with the same legacy systems. The cap applies even though there is a purpose of sale of the software, because there is another purpose of using the software in the internal administration of the business.
3. Company J, a management consultant, is undertaking R&D to develop software that will allow its clients to view all work they have commissioned and all past communications between the client andJ. The software will run on J's web server. A portion of clients' fees implicitly entitles them to authenticated access to a website controlled by the software. The cap applies - clients are using the service mainly to obtain management consulting services they have commissioned, and not mainly to obtain the use of J's computer technology or software.
4. Company K, a telecommunications company, is undertaking R&D to develop software which will allow its customers to independently configure account settings, and add and remove lines and services. K plans to charge customers a licence fee for using the software. The cap applies because the software will be used by K's customers mainly to obtain a telephone service, and not mainly to obtain the use of K's computer technology or software.
5. Company L, a bank, is undertaking R&D to develop web-banking software. L plans to charge its customers a licence fee for using the software. The cap applies because the software will be used by L's customers mainly to obtain a banking service, and not mainly to obtain the use of L's computer technology or software.
6. Company M, a bank, is undertaking R&D to develop a computer game which simulates financial markets. The game is to be played on-line, and will run on the bank's servers. M plans to license access to the game to schools, and will not use the R&D for any other purpose. The cap is not likely to apply in this case, since schools which buy an access licence are doing so primarily to obtain the use of the software and not to obtain another (for example, banking) service.

Examples: Definition of internal software development (exception when integral to hardware

1. Company N develops a stand-alone video recorder for sale. Software is developed to run inside the recorder and remove offensive language or images from incoming video as it is recorded. Assume the software development meets the definition of R&D. The software is written specifically for the video recorder and the video recorder cannot operate without it. The video recorder is developed for sale to the public. The software is integral to the recorder, and the recorder is developed for sale to customers as part of N's business, so the cap does not apply.
2. Company P develops software to be used for conducting cash transfers between its customers over the internet. P also buys computer hardware and modifies it to prevent physical tampering. The software will run on the tamper-proof hardware, which will be administered by P's customer at its own premises. P intends to mass-produce the modified hardware and sell it to non-competitors who can use it to run their own security-sensitive applications. The software is not integral to the modified hardware and will not be supplied as part of the hardware when sold to external customers. It could also, with minor modifications, be run on other hardware. The software is subject to the cap, because it is not integral to the modified hardware and is not developed with the main purpose of sale.

Examples: Mechanics of internal software development groups

• ACo, BCo and CCo have the same internal software development controller (implying they undertake internal software development) and are therefore members of an internal software development group. ACo stops doing internal software development. Therefore, ACo no longer has an internal software development controller, and ACo is not a member of the group any longer. The group continues to exist, however, with BCo and CCo as members.
• DCo, ECo and FCo have the same internal software development controller and are therefore members of an internal software development group. DCo and ECo stop doing internal software development. Therefore, DCo and ECo no longer have an internal software development controller, and are not members of the group any longer. FCo no longer has any other person having the same internal software development controller, so the group ceases to exist.
• GCo and HCo both have the same, single shareholder, Carol. GCo undertakes internal software development, and Carol is GCo's internal software development controller. HCo does not undertake internal software development. HCo begins internal software development. Therefore, GCo and HCo are now the members of an internal software group.
• JCo and KCo are the members of an internal software development group, X, controlled by Mrs X. LCo and MCo are the members of another internal software development group, Y, controlled by Mr Y. Mr Y sells LCo and MCo to Mrs X. Group Y ceases to exist, and LCo and MCo become members of Group X.
• At the beginning of the year, NCo, OCo and PCo have the same internal software development controller and are therefore in an internal software development group, Z. OCo is sold to a non-associate in the middle of the year. QCo is purchased by PCo in the last quarter of the year. NCo, OCo, PCo and QCo are all members of Z at some time over the course of the year. NCo and PCo are members for the entire year, OCo is a member for the first half of the year and QCo is a member for the last quarter of the year

Example: Credit for internal software development when not in a group

ACo undertakes internal software development. For the first 73 days of the year, ACo is not under common control with any other developer. However, on 13 June2008, BCo - also a developer - purchases 100 percent of ACo. For the purposes of claiming a credit, ACo adjusts down its eligible expenditure on internal software development, for the period it was not in any group, to a maximum of $3 million multiplied by 73 divided by 365 = $600,000. If ACo's eligible expenditure for the period in the absence of section LH 10 is $300,000, ACo will be able to claim a credit for $300,000. If ACo's actual eligible expenditure for the period in the absence of section LH 10 is $700,000, ACo will only be able to claim a credit for $600,000

Examples: Allocation of the cap

• ACo and BCo are members of an internal software development group. ACo and BCo have the same (standard) income years, and are members of the group for the entire year. ACo would have eligible expenditure relating to internal software development expenditure of $2.2 million for the year, in the absence of sections LH 9 to LH 13. BCo would have eligible expenditure of $1.5 million. ACo and BCo may share credits for eligible expenditure of $3 million. The allocation may be made as the parties see fit, as long as ACo receives credits for no more than $2.2 million and BCo receives credits for no more than $1.5 million.
• CCo and DCo, which have standard income years, are not members of any internal software group, but are under common control. CCo and DCo begin internal software development on 1 July 2008. Therefore, they are the members of an internal software development group from 1 July. The group exists for 274 days of the incomeyear (1 July 2008 to 31 March 2009), and CCo and DCo are members for this entire period. CCo would have eligible expenditure relating to internal software development of $4 million in the absence of sections LH 9 to 13. DCo would have eligible expenditure of $5 million. CCo and DCo can share credits for eligible expenditure of $3 million multiplied by 274 divided by 365 = $2,252,054 (see subsection LH 11(5)). This can be shared in any way.
• ECo and FCo are members of an internal software development group. ECo and FCo have the same (standard) income years, and are members of the group for the entire year. ECo would have eligible expenditure relating to internal software development of $2.2 million for the year, in the absence of sections LH 9 to 13. FCo would have eligible expenditure of $1.5 million. GCo, an internal software developer with a standard income year, is bought by FCo on 1 July 2008, so is a member of the group for 274 days of the year. In the absence of sections LH 9 to 13, GCo would have eligible expenditure relating to internal software development of $1 million for the first 91 days of the year, and $3 million for the other 274days. GCo calculates that the group can allocate up to $3 million multiplied by274 divided by 365 = $2,252,054 to it for the period it is a member (according to section LH 11). ECo and FCo calculate that the group can allocate up to $3 million to the pair for the full-year period they are members (again according to section 11). Assume GCo has received a credit for the full $2,252,054 available for the period it was a member. Then of the $3 million of eligible expenditure allocable to the group over the (full-year) period of ECo and FCo's membership, $747,946 is left for distribution to ECo and FCo. This distribution may be made as the pair see fit. GCo is also entitled to a credit for $3 million multiplied by 91 divided by 365 = $747,945 for eligible expenditure relating to internal software development incurred during its time outside the group.
• HCo and ICo are members of an internal software development group. HCo and ICo have the same (standard) income years, and are members of the group for the entire year. HCo would have eligible expenditure relating to internal software development of $2.2 million for the year, in the absence of sections LH 9 to 13. ICo would have eligible expenditure of $1.5 million. JCo, an internal software developer with an income year ending 31 December 2008, is bought by ICo on 1July 2008, so is also a member of the group for 184 days of its income year. In the absence of sections LH 9 to 13, JCo would have eligible expenditure relating to internal software development of $2 million for the first 181 days of the year and $2 million for the other 184 days. HCo and ICo share credits for an eligible amount of $3 million (according to subsections LH 12(3) and (4)). The allocation may be made as the parties see fit, as long as HCo receives no more than $2.2 million and ICo receives no more than $1.5million. JCo receives no credit for the internal software expenditure incurred while a member of the group, because it is a member for less than its full income year (see subsection LH 12(2)). JCo is, however, entitled to a credit for $3 million multiplied by 181 divided by 365 = $1,487,671 for the eligible expenditure relating to internal software development incurred during its time outside the group (section LH 10).
• KCo and LCo are members of an internal software development group. KCo has an income year ending 31 March and LCo has an income year ending 30 April. KCo would have eligible expenditure relating to internal software development of $2.2 million for the year, in the absence of sections LH 9 to 13. LCo would have eligible expenditure of $1.5 million. KCo is liquidated on 30 November 2008, and the group ceases to exist on this date. KCo and LCo are members of the group for only part of their 2008-09 income years and have different income years, so receive no credit relating to internal software development expenditure incurred while members of the group. LCo is entitled to credits for such expenditure incurred after the group dissolves, according to the formula in section LH 10.