Software development costs

Clauses 17 and 163

Issue: Ensuring legislative clarity

Submissions

(New Zealand Computer Society Inc., Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants)

While supportive of the bill as written, the submitters believe that clause 17 could be improved to provide certainty to taxpayers when a tax deduction is allowed. They suggest various minor amendments to new section DB 40B(1) of the draft legislation.

Comment

The provisions are intended to provide for expenditure on software that needs further development to become depreciable property. The important distinction is between software that can be depreciated if it is available for use and software that is not able to be used without further development. The provisions make it clear that a taxpayer may claim a deduction for expenditure on software development when the project is abandoned. The term “fit to be used” is referring to the state of development. While “availability” is not an equivalent term, the drafters will take into account the submitters’ suggestions in finalising the drafting of the provision.

Recommendation

That the submissions be noted.

Issue: The proposed rule should also apply to software acquired from another taxpayer

Submission

(Corporate Taxpayers Group)

The proposal should be extended to include situations when a taxpayer acquires partially completed software from another taxpayer. Currently, the proposal is limited to situations when the taxpayer has developed the software or has commissioned the development of the software. Whether a person is allowed a deduction for unsuccessful development should not be determined by whether a person develops the software themselves or whether they acquire it from another person.

Comment

The original policy applied to software developed in-house for use in a business or when a taxpayer commissioned software development from an external party.

Conceptually, a deduction could also be allowed when a person acquires an incomplete software development from another taxpayer if the acquirer should subsequently decide to abandon the project.

However, the submitter’s proposal to extend the policy would have a revenue cost to the Crown. Additionally, if the policy were to be extended, officials would also want to consider the current tax treatment of proceeds from the disposal of abandoned software development projects in the hands of the vendor. Accordingly, while this matter should not be progressed as part of the bill, it could be considered for inclusion in a future Tax Policy Work Programme.

Recommendation

That the submission be noted.

Issue: Division of responsibilities within Inland Revenue

Submission

(KPMG)

It is important that Inland Revenue, when reviewing old policy statements, should not only examine what the law is, but also what the law should be. If there is a divergence, there should be a process for resolution that gives taxpayers greater certainty.

Comment

Inland Revenue tries to ensure that its view of tax law is clear and well understood, and continues to seek improvement in the way that matters are co-ordinated across Inland Revenue to give greater certainty to taxpayers.

Recommendation

That the submission be noted.

Issue: Correction of application date

Submission

(New Zealand Institute of Chartered Accountants)

Proposed section DB 31B of the Income Tax Act should apply from the 2006–07 income year rather than 2007–08.

Comment

Officials recommend that the application date be amended to give effect to the policy of ensuring the Commissioner is time-barred from amending an assessment when a taxpayer has previously relied upon the Commissioner’s 1993 policy statement.

Recommendation

That the submission be accepted.