In-house software is computer software, or the right to use computer software that you acquire, develop or have someone else develop for your business use, not for sale.
It does not include commercial off-the-shelf software if the software has an effective life of one year or less, or periodic payments made to use software in your business. These costs are deductible in the year incurred.
In-house software is only deductible under the uniform capital allowances (UCA) rules or the simplified depreciation rules for small business entities.
Deductions for in-house software may be claimed in a number of ways depending on the circumstances:
If you’re a small business you can use the simplified depreciation rules for the purchase and development of software that is installed and ready to use.
If the expense was less than the instant asset write-off threshold, you may be able to claim a deduction for the expenditure in the year you incurred it. If the expense is equal to or more than the instant asset write-off threshold, you can depreciate it under the general small business pool rules.
If the software is still in development and is not ready for use, you can use the software development pool rules.
If you can’t or have chosen not to use the simplified depreciation rules or a software development pool, you can depreciate the value of the software using the prime cost method. The depreciation of the in-house software depends on when you started to hold it:
- five year effective life if you started to hold it on or after 1 July 2015
- four year effective life if you started to hold it between 7.30pm AEST on 13 May 2008 and 30 June 2015.
Software development pools
You can allocate expenses you incur for the development of in-house software, which you intend to use solely for income producing purposes, to a software development pool. This includes expenses incurred before the in-house software is installed and ready for use.
Once you make the choice to allocate these expenses to a software development pool, you must allocate all later in-house software expenses to a pool. A different pool is created for each income year in which you incur development expenses.
In-house software that is allocated to a software development pool is depreciated at the following rates:
- For expenditure incurred from 1 July 2015
Year 1 – Nil
Year 2 – 30%
Year 3 – 30%
Year 4 – 30%
Year 5 – 10%
- For expenditure incurred up to 30 June 2015
Year 1 – Nil
Year 2 – 40%
Year 3 – 40%
Year 4 – 20%
If you’re entitled to claim a GST input tax credit for the expense, the amount allocated to the software development pool does not include the credit.
Disposal of in-house software
If you have allocated software development expenses from a project to a software development pool and the project is abandoned, the amounts remain part of the pool.
If you receive consideration for software in a software development pool, you must include the consideration in your assessable income unless you choose rollover relief to apply. An example of consideration would be insurance proceeds on the destruction of the software.
If you stop using in-house software that has not been allocated to a software development pool and you never expect to use it again, you can claim an immediate deduction for the cost of the software at that time.
You can also claim an immediate deduction for expenses on in-house software that have not been allocated to a software development pool if you:
- haven’t used the software and decide that you will never use it
- had it installed ready for use and decide that you will never use it.
The amount you can deduct is your total expenses for the software less any amount you receive for the software, or a part of it.
Expenses for in-house software may be deducted in a number of different ways depending on the circumstances.