In-house software is computer software, or a right to use computer software (for example, a licence), that you acquire or develop (or have another entity develop) for your use in performing the functions for which it was developed and for which no amount is deductible outside the UCA.
Expenditure to develop software for exploitation of the copyright is not in-house software. The copyright is intellectual property which is a depreciating asset and the decline in value would be calculated using an effective life of 25 years and the prime cost method.
Any recoupment of the expenditure is included in your assessable income.
Units of in-house software
Expenditure incurred in acquiring in-house software will form part of the cost of the unit of in-house software acquired. It cannot be allocated to a software development pool.
Expenditure incurred on developing in-house software yourself (or having another entity develop it) may need to be allocated to a software development pool. If the expenditure cannot be allocated to a software development pool, it can be capitalised into the cost of a resulting unit of in-house software.
The general rules for depreciating assets apply to these units of in-house software. The decline in value is worked out using an effective life of 2 years and the prime cost method.
You can claim an immediate deduction for expenditure on in-house software (not allocated to a software development pool) in one instance. This happens if, despite the fact that you incurred the expenditure with the intention of using the software for a taxable purpose, you have not used it or installed it ready for use and decide that you will never use it or install it ready for use.
The termination value of a unit of in-house software you still hold but stop using and expect never to use again or decide never to use is zero.
Software development pools
The choice of allocating expenditure in developing in-house software to a software development pool was available before 1 July 2001 and continues under the UCA.
Under the UCA rules, you can choose to allocate to a software development pool expenditure you incur in developing (or having developed) in-house software you intend to use solely for a taxable purpose. Once you do allocate expenditure on such in-house software to a pool, all such expenditure incurred thereafter-in that year or a later year-must be allocated to a software development pool. A different pool is created for each income year thereafter for expenditure for that year.
Expenditure on developing in-house software you do not intend to use solely for a taxable purpose and expenditure on acquiring in-house software cannot be allocated to a software development pool, see Units of in-house software.
If you are entitled to claim a GST input tax credit in relation to expenditure allocated to a software development pool, the expenditure in the pool for the income year in which you are entitled to the credit is reduced by the amount of the credit. Certain adjustments under the GST legislation in relation to expenditure allocated to a software development pool are treated as an outright deduction or income. Other adjustments reduce or increase the amount of the expenditure that has been allocated to the pool for the adjustment year.
You do not get any deduction for expenditure in a software development pool in the income year in which you incur it. You are allowed deductions at the rate of 40 per cent in each of the next 2 years and 20 per cent in the year after that.
If you have allocated software development expenditure on a project to a software development pool and the project is abandoned, the expenditure remains to be deducted as part of the pool.
If you have pooled in-house software development expenditure and you receive consideration for the software (for example, insurance proceeds on the destruction of the software), you must include that amount in your assessable income unless you can choose for roll-over relief to apply and do so. Choice of roll-over relief is only available where a change occurs in the holding of, or of interests in, the software, see Roll-over relief.
If the receipt arises from a non-arm's length dealing and the amount is less than the market value of what it was for, the amount of the receipt is taken to be that market value.