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Computer software

Last updated 12 February 2020

After 10.00am (by legal time in the ACT) on 11 May 1998, expenditure you incur on software is to be depreciated, subject to certain modifications, under the depreciation provisions that apply to plant. Before that date expenditure on software, in accordance with Taxation Ruling IT 26 - Computers-depreciation, investment allowance, was generally an allowable deduction in the year you incurred the expenditure, even though most software had a reasonably long life. The ruling was withdrawn on 11 May 1998.

In applying the depreciation provisions to software, the references to 'its cost to you' for plant are to be read as references to 'your expenditure on software'.

If you can claim software costs under the software depreciation provisions then you cannot deduct the costs under any other provision. There are, however, 3 exceptions to this.

  • the provisions do not apply to expenditure on software if it is or is part of trading stock, or
  • you can get a more favourable deduction under another capital allowance provision-for example, under the mining exploration and prospecting provisions
  • the provisions do not apply to manufacturers, distributors or developers of software whose principal purpose is to sell or license the software unless they are not able to obtain a deduction under any other provision or section.

Meaning of software

Software means a right, including a licence, to use software. Expenditure on software includes expenditure you incur on acquiring or developing software or in having another person develop software principally for you to use to perform the functions for which you acquired or developed the software.

Expenditure on software for depreciation purposes excludes expenditure that does not involve substantial improvements to the software. Under the software depreciation provisions, you cannot claim a deduction for expenditure on maintenance, testing, code reviews, minor alterations or modifications or remedying defects. Such expenditure is considered for deduction under the general deduction provisions.

Where you acquire software with or attached to other items of plant such as units of hardware and the software does not have a specific value, you can claim a deduction for expenditure that is reasonably attributable to the software.

Depreciation of software

The general depreciation provisions applying to plant are modified for expenditure on computer software. The modifications include the following:

  • You must use the prime cost method for calculating the depreciation claim.
  • The effective life of all software is 2½ years and the depreciation rate is 40 per cent.
  • Expenditure in relation to software projects is capitalised and depreciated from the time you use the software or install it ready for use.
  • The low-cost limit of $300 continues to apply to units of software unless the total cost of that unit of software and any other substantially identical software acquired in the same income year exceeds $300.
  • Information under the heading What happens if you no longer own an item of plant explains what happens to plant which is sold, lost or destroyed. A deductible adjustment is also available for software where you permanently cease to use it and do not have it installed ready for use.
  • If you have a right to use software, the deductible adjustment occurs if it is reasonable to expect that you will never obtain a subsequent right to use the underlying software. The termination value will generally be nil unless you receive consideration as a result of the termination.
  • Software can be pooled but not under the pooling provisions that apply to general plant.
  • You can claim an immediate deduction for the unrecouped expenditure on software (not in the software pool) that you will never use or install ready for use, to the extent that, when you incurred the expenditure, the software was to be used or installed ready for use to produce assessable income.

Pooling software

You can use the software pooling method only for expenditure you incur in developing software or having another person develop software for your own use and wholly to produce assessable income. Once you elect to use this method it will apply to all software development expenditure incurred in the income year for which you elected the pooling method and later years. You cannot revoke the election.

You cannot pool expenditure on low-cost software that can be claimed immediately.

Under the pooling method you cannot depreciate software in the year you incur the expenditure. You are allowed deductions at the rate of 40 per cent in each of the following 2 years and 20 per cent in the third year.

Software development expenditure on a project that is abandoned continues to be depreciated as part of the pool. There is no balancing adjustment. You include in assessable income any consideration received for software for which expenditure has been pooled. Examples include consideration received for:

  • disposal of software
  • granting of a licence to use the software
  • loss or destruction of software-insurance proceeds.