ATO Interpretative Decision
ATO ID 2014/16
Income Tax
Capital Allowances: depreciating asset - in-house softwareThis ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does computer software developed by the taxpayer for conjunctive use within its company group satisfy the definition of in-house software in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes, the computer software developed by the taxpayer does satisfy the definition of in-house software in subsection 995-1(1) of the ITAA 1997.
Facts
To improve group-wide business performance, the taxpayer developed a single, fully integrated series of software applications for use by itself and all the other entities of the company group of which it was a member. The aim of the software was to allow the group businesses to leverage off each other through common processes metrics. The software ensured that the group's master data was common and that appropriate group reports, compliance requirements and key performance indicators could be developed. In this context, a conjoint use of the software and its function was necessary in order for the software to perform the functions for which it was developed. The software was not developed for the purpose of licencing to others.
Reasons for Decision
In-house software is defined in subsection 995-1(1) of the ITAA 1997 as computer software, or a right to use computer software, that you acquire, develop or have another entity develop that is mainly for you to use in performing the functions for which the software was developed and for which you cannot deduct amounts outside Division 40 and Division 328 of the ITAA 1997.
The functions of the computer software developed by the taxpayer provide a single integrated series of software applications necessitating a conjoint use of the software and its functions by all entities of the company group of which the taxpayer was a member. The question arises as to whether the development of the software for the conjoint use by all the entities of the company group is development mainly for the taxpayer to use in performing the functions for which it was developed.
The meaning of in-house software is consistent with the type of software that was treated under former Division 46 of the ITAA 1997. Paragraph 1.18 of the explanatory memorandum to the New Business Tax System (Capital Allowances) Bill 2001 explained that the treatment of 'in-house software' was not intended to be an in-substance change from the way software was treated under former Division 46. Paragraph 31 of the explanatory memorandum to the Taxation Laws Amendment (Software Depreciation) Bill 1999 provided the following explanation:-
New Division 46 is intended to apply to software which is acquired or developed for use within the business. It is not intended to extend to situations where software development for exploitation is the business.
In this case, the software and its functions were not developed for a separate or distinct use by the taxpayer. It was equally not developed for separate or distinct use by other entities of the company group. Rather, the taxpayer developed the computer software and its functions to be embedded into the common business practices of itself and of the entities within its company group. The software was not developed for the purpose of licencing to others.
In the context of the intended treatment of in-house software within Division 40, the Commissioner is of the view that in-house software is software that is developed, by or for an entity, to be mainly for the entity to use within its organisation in performing the functions for which the computer software was developed. A conjunctive use of the computer software by other members of the company group is consistent with the software being mainly used by the taxpayer as the use by the other members assists the taxpayer's use of the software within its business organisation.
Accordingly, the computer software developed by the taxpayer satisfies the definition of in-house software in subsection 995-1(1) of the ITAA 1997.
Date of decision: 21 March 2014Year of income: Year of income ended 30 June 2014
Legislative References:
Income Tax Assessment Act 1997
Division 40
Division 46 (repealed as of 1 July 2001)
Subsection 995-1(1)
Other References:
Explanatory memorandum to the Taxation Laws Amendment (Software Depreciation) Bill 1999 (Cth)
Explanatory memorandum to the New Business Tax System (Capital Allowances) Bill 2001 (Cth)
Keywords
Computer software
Depreciating assets
Depreciation of software
In-house software
Uniform capital allowance system
ISSN: 1445-2782
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
