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Edited version of your written advice
Authorisation Number: 1013100714664
Date of advice: 3 October 2016
Ruling
Subject: In-house software
Question 1
Is your in-house software a depreciating asset?
Answer
Yes
Question 2
Are you entitled to include the market value of the software development into the cost base?
Answer
No
Question 3
Is it sufficient to keep software developers' timesheets of hours and descriptions of work performed as the evidence for the cost of in-house software?
Answer
Not applicable
This ruling applies for the following period:
Year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You developed the software internally.
The software is for your internal use.
The software is not for re-sale purposes.
The software is developed by your software developers.
The software developers are the owners of the company.
The software developers do not receive salary from the company
Their time is charged out for custom software development to third party clients.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Division 900
Income Tax Assessment Act 1997 Subsection 995-1(1)
Reasons for decision
Subsection 40-25 (1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year. A depreciating asset is defined in section 40-30 of the ITAA 1997 and excludes an intangible asset unless it is an item of intellectual property or in-house software.
Subsection 995-1(1) of the ITAA 1997 states that in-house software is 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.
In your case, you developed the software internally. The software is for internal use, and not for re-sale purposes. These satisfy the definition of in-house software under subsection 995-1(1) of the ITAA 1997. The in-house software is a depreciating asset under section 40-30 of the ITAA 1997. Therefore, it is deductible under Division 40 of the ITAA 1997.
Cost of a depreciating asset
The cost of a depreciating asset consists of two elements, first and second element, and is worked out under Subdivision 40-C of the ITAA 1997. The first element of cost is worked out as at the time when the asset starts to be held. The second element of cost is worked out after that time.
Subsection 40-180 (3) of the ITAA 1997 states the first element of cost includes an amount you paid or are taken to have paid in relation to starting to hold the depreciating asset if that amount is directly connected with holding the asset.
Paragraph 44 of the Draft Tax Ruling TR 2016/D1 Income Tax: deductibility of expenditure on a commercial website states where expenditure is incurred on in-house software; capital allowance is available when the expenditure on in-house software is incurred on developing computer software.
Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the Commissioner's views on the meaning of incurred. There is no statutory meaning of 'incurred'. In order to claim a deduction, an expense must be incurred by the taxpayer in the course of gaining or producing their assessable income. Generally, you incur an expense at the time you owe a present money debt that you cannot escape.
In your case, the in-house software is developed by your software developers. The software developers are the owners of the company. They do not receive salary from the company. Therefore, no expenses were incurred by you in relation to the in-house software. Therefore, you are not entitled to include the market rate for software development into the cost base of the in-house software.
Record Keeping
Guide to depreciating assets 2016 sets out the requirement of record keeping for a depreciating asset:
• The first and second elements of cost
• The opening adjustable value for the income year
• Any adjustments made to cost or adjustable value
• The date you started holding the asset and its start time
• The rate or effective life used to work out the decline in value
• The method used to work out the decline in value
• The amount of your deduction for the decline in value and any reduction for use of the asset for a non-taxable purpose
• The adjustable value at the end of the income year
• Any recoupment of cost you have included in assessable income, and
• If a balancing adjustment event occurs for the asset during the year, the date of the balancing adjustment event, termination value, and adjustable value at that time, the balancing adjustment amount, any reduction of the balancing adjustment amount and details of any rollover or balancing adjustment relief.
You must also keep:
• Details of how you worked out the effective life of a depreciating asset where you have not adopted the effective life determined by the Commissioner
• If you have recalculated the effective life of an asset, the date of the recalculation, the recalculated effective life, the reason for the recalculation and details of how you worked out the recalculated effective life, and
• Original documents such as suppliers' invoices and receipts for expenditure on the depreciating asset.
Section 40-215 of the ITAA 1997 states each element of the cost of a depreciating asset is reduced by any portion of that element of cost that you have deducted or can deduct, or that has been or will be taken into account in working out an amount you can deduct, other than under Division 41 and Division 328.
In your case, you are not entitled to include the market rate for software development into the cost base of the in-house software; therefore, the question three is not applicable. However, if you incurred any other expenditure that is not deductible under other sections, you are required to keep records based on the Guide to depreciating assets 2016.
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