Ruling Compendium

Recognition that capital expenditure may be incurred in creating copyright in software, and that copyright may be the relevant intangible depreciating asset, is now included at paragraphs 49 and 50. Copyright is also referred to in paragraphs 18, 46 and 51 and in Examples 3 and 4.

It would be inconsistent with the definition of 'in-house software' to include all software that is exploited for profit by sale or licence to a customer on the basis that no rights are granted over the source code.

As a depreciating asset, the meaning of 'in-house software' must be consistent with a capital asset used within the operation of a business and would exclude software that is exploited for profit by sale or licence. While the structure of former Division 46 of the ITAA 1997 differs from the current provisions of Division 40 of the ITAA 1997 for in-house software, the intention is the same. The Explanatory Memorandum to the Taxation Laws Amendment (Software Depreciation) Bill 1999 which accompanied the introduction of former Division 46 explained that the new provisions were intended to apply to software acquired or developed for use within a business and not where the exploitation of the software was the business. Where there was a dual purpose, the principal reason for the acquisition or development was a question of fact (see paragraphs 31 and 32).

The terms of the definition of 'in-house software' indicate that the same legislative intent applies in the application of Division 40 of the ITAA 1997 to in-house software, which superseded former Division 46 of the ITAA 1997 with effect from 1 July 2001.

In the Ruling we have taken the position that some degree of exploitation of software for profit (that is, its use by a customer to obtain an independent benefit) can be consistent with in-house software. This is where the use of the software by the business is 'mainly for performing the functions for which the software has been developed' notwithstanding that it is incidentally provided to customers for a fee. See Example 23 'Sites@Work'. Typically this will occur where the customer has access to the software only online and in the context of an ongoing engagement with the business.

In-apps (apps within apps that provide access to premium content or other benefits) should be treated as second element cost base to any original app asset, even where the original app was developed for free to customers with only in-apps being charged for a fee. Of course, the assessment of the original app must be made on a case-by-case basis as to whether the app was developed for commercial distribution/exploitation or to enable customer transactions to be completed (such as Example 19 the Argent Bank app). The point here is that in many cases, the original app is free for customers to download and the app is likely to be treated as in-house software (like the Argent Bank app). However, where in-apps require customers to pay for a premium service or bolt-on, if this was considered a separate asset, then the fact that customers now need to pay to access the in-app may be considered copyright and not in-house software, which we believe would be the wrong conclusion.

The nature of apps and 'in-apps' can vary significantly. An app may be provided free of charge as a shell to support further software additions (in-apps) which are intended to be a source of revenue to the app provider. This may result in an in-app having a different character to one provided as a basic service supporting advertising and where the user may choose to purchase the 'no ads' version or premium content.

See item 8.8 below regarding the removal of former Example 19 'Argent Bank'.

1.

sale of goods - that is the CD or DVD containing the program

2.

the copyright is sold, or

3.

merely the provision of services.

Note that TR 93/12 Computer software addresses the income tax implications arising from the development and marketing of computer software, including when computer software is trading stock. Note that TR 93/12 is currently under review.

a)

'including on-costs' be appended to the first dot point of paragraph 12, and

b)

the meaning of 'on-costs', including examples, be covered in paragraph 145 and/or 147.

Microsites are now covered under new subheadings at paragraph 19 of the Ruling and paragraphs 182 and 183 of the Explanation. Example 8 illustrates the tax treatment of expenditure on a microsite of significance to the business structure.

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in relation to the criteria at paragraph 22

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in relation to whether content has independent value to the business and is not part of the website and not in-house software, and

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illustrating the capital-revenue distinction in the context of businesses that operate only online.

Note: the repositioning of paragraphs and addition of new examples has resulted in the reordering and renumbering of Examples in the final Ruling.

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what is meant by 'providing it mainly for the user's own benefit'

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why the example refers to two versions of the website-building tool, and

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references to 'application' software in paragraphs 115 and 118.

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(now Example 23 'Sites@Work')) The expression 'user's own benefit' has been changed to 'user's independent benefit'. Example 24 'BigSystems' provides further clarification of the principle.

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Free 'basic' and paid 'fully featured' versions reflect a common business model which make web-based DIY application software available to users.

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Words have been added to clarify that the same tax treatment applies to the application software in its basic and fully featured versions.

As noted at item 3.1, mobile apps raise a number of different issues from websites.

'Section 40-880 will generally not apply to commercial websites because capital expenditure on software development will usually be 'in-house software' and, if not, it would likely in any case be part of the cost base of a CGT asset.'