Tax treatment of expenditure on unsuccessful software development

Section DB 40B of the Income Tax Act 2007

The amendment allows an immediate deduction for expenditure incurred on unsuccessful software development projects in the year that the development is abandoned.

Background

On 4 April 2011 the Commissioner of Inland Revenue issued a general notice advising taxpayers that they should not rely on certain parts of a 1993 Policy Statement, "Income Tax Treatment of Computer Software". The 1993 statement indicated that capital expenditure incurred on developing unsuccessful software would qualify for an immediate tax deduction. The 2011 general notice indicated that this was no longer the Commissioner's view of the law, and advised that this part of the 1993 statement should be treated as being withdrawn, from the beginning of the 2011-12 income year.

As a consequence of the Commissioner's revised view of the law, it is possible that some expenditure on unsuccessful software development may never be deductible (either immediately or over time). The non-deductibility of unsuccessful capital expenditure would be akin to "blackhole" expenditure. Disallowing a deduction for this expenditure could discourage firms from undertaking otherwise sensible investment.

Key features

The change allows a deduction when a person incurs expenditure with the intention of developing software for use in their business and the development of this software is abandoned.

The person will be allowed a deduction for the expenditure incurred in the development of the software to the extent that no other deduction has been allowed for the expenditure under New Zealand law.

The deduction will be allowed in the income year that the software development project is abandoned.

Application date(s)

The amendment applies for the 2008-09 and later income years. The application date is retrospective to ensure the tax position of taxpayers who have previously claimed a deduction for the costs of unsuccessful software development.