As has been reported extensively in previous editions of Newsline, back in April 2011 Inland Revenue revoked its long standing position on the deductibility of failed software expenditure, meaning discontinued software would no longer be tax deductible.

After outrage from a number of parties including NZCS, software developers, customers and tax advisors, a sensible decision was made to change the law to match what has been the operational practice since at least 1993.

That law change was included in the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill released in September 2011.  Since that time the Bill has been put out for public consultation and considered by Parliament's Finance and Expenditure Committee (FEC).

NZCS and a number of taxpayers submitted that the words of the legislation needed to be tinkered with to ensure that the legislation achieved its intended effect.

Last week the FEC reported back on the legislation and the great news is, they listened to the suggestions from submitters and have recommended a few changes.

Before delving into the tax technical information, what you really need to know is that the changes should provide certainty for taxpayers that deductions are available if ultimately a software project commissioned from a developer or developed in-house does not get completed.

While it is not quite law yet, it is highly unlikely that the legislation will deviate from what the FEC has recommended.  The Bill now awaits its second and third readings before being enacted.  We would expect these rules to be law by around August this year, subject to other Parliamentary priorities.  The rules will be retrospective back to the 2006/07 income year to ensure that Inland Revenue auditors can't question previous tax positions.

So what will the law say?

A tax deduction should be available in the year a software project is abandoned if the following test is met:

(1) This section applies when a person incurs expenditure in the development of software for use in the person's business if-

(a) the development of the software is abandoned when the software is not depreciable property of the person; and

(b) the software would have been depreciable property of the person if the development had been completed.

This wording should make it clear that provided the business is undertaking their own in-house software development or is paying someone to develop software for them, a deduction will be available if the project would have been a depreciable business asset if it were completed. 

For taxpayers in the business of developing software this change will not directly affect your own tax positions as deductions would have been available in any event, but it will mean that your customers will no longer have a tax disincentive for trying to develop software solutions. 

While it is unfortunate that this ever became an issue, it's great to see the matter being resolved in a business, software developer and taxpayer friendly way. 

Robyn Walker is National Technical Director of Tax at Deloitte. You can follow the latest tax news at @DeloitteNZTax

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