Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Taxation Treatment of Software
Software
Amends the income tax law to :
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- allow taxpayers to depreciate over 2 years expenditure incurred in acquiring, commissioning or developing software; and
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- allow an immediate deduction for expenditure on acquiring new software (including upgrades) or substantially rebuilding current software which has the predominant nature of ensuring Y2K compliance.
Date of Effect: The amendments will apply to expenditure incurred after 10 am legal time in the Australian Capital Territory on 11 May 1998.
Proposal Announced: 1998-99 Budget, 12 May 1998 (Treasurers Press Release No. 52 of 1998). Further changes were announced in Assistant Treasurers Press Release No. 48 of 14 December 1998.
Financial Impact: The cost to the revenue has been estimated at $30m in 1998-99, $205m in 1999-2000, $295m in 2000-01 and $520m in 2001-02.
Cost of Compliance Impact: The nature of compliance costs for depreciation of software is similar to that for all other capital expenditures. Taxpayers compliance costs will increase marginally as taxpayers will need to keep records of the acquisition and development costs of software as well as deductions claimed in respect of that software until at least five years after the deduction is claimed. The Government has recognised the additional compliance costs for these taxpayers who develop in-house software and will have to track expenditure for each individual software project. These taxpayers and others who commission the development of software projects will be able to choose to depreciate expenditure under a pooling method which does not require the allocation of expenditure to particular projects.
Summary of the Regulation Impact Statement
Impact: Medium
Main Points: In common with the impact of many other taxation provisions, compliance costs are likely to be most onerous for smaller businesses without dedicated accounting personnel.
Policy Objective: The Government announced several measures concerning the taxation treatment of software expenditure. The depreciation amendments will improve the equity of the taxation system by aligning the true economic life of the asset to the income it generates.
The Y2K amendments will address uncertainty concerning the treatment of millennium bug expenses and ensure that taxation arrangements are consistent with the Governments desire to encourage business to achieve Y2K compliance.