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Edited version of your private ruling
Authorisation Number: 1012527946281
Ruling
Subject: Annual software licence fee
Question
Are you entitled to a deduction for an annual licence fee paid for the use of software used in your business operations?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts and circumstances
You are purchasing a software licence.
There is an annual licence fee to use the software.
You do not own the software although it is needed to run your business operations.
The right to use the software is based on 12 month periods.
If you do not pay the licence, you lose the ability to operate.
At the end of the 12 month licence period the software stops operating.
You are not obliged to continue licensing the software after any 12 month licence period.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income or a provision of the taxation legislation excludes it.
You will incur an annual software licence fee for the purpose of carrying on your business activities. We need to determine if the annual licence fee for the software is of a capital or revenue nature.
The guidelines for distinguishing between capital and revenue outgoings were laid down in Sun Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 23; (1938) 1 AITR 403. There it was pointed out that expenditure in establishing, replacing and enlarging the profit-yielding (ie business) structure itself was capital and is to be contrasted with working or operating expenses. The test laid down contained the following three elements, although none in itself is decisive:
(a) the nature of the advantage sought
(b) the way in which it is to be used or enjoyed, and
(c) the means adopted to get it.
The advantage you seek by paying the annual licence fee is to secure the rights to use the software in your business. To this end, the fixed licence period of 12 months suggests the expenditure is of a recurrent nature and does not provide any enduring benefit.
Further, the payment of a licence fee on a year-to-year basis represents a periodic outlay that covers the use of the software for a period that is commensurate with that payment. The annual licence fee features all the traditional characteristics of an outgoing on revenue account, that is, it does not give rise to any enduring benefit for you, and it is a recurrent, repeated or continual cost to the business rather than a final or 'once and for all' payment.
For these reasons it is considered that the annual software licence fee is not an outgoing of capital or of a capital nature. You are entitled to deduct the annual licence fee under section 8-1 of the ITAA 1997.