Labour and Greens question tax write-off for failed software

Political parties argue whether discontinued software projects should be tax deductible

Should failed software projects be tax deductible?

That’s the question posed by the Labour and Green parties in a parliamentary debate during the first reading of the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill.

Section 17 of the Bill, if passed unchanged, would mean business could treat the development of failed software projects as a tax expense. But Labour finance spokesman David Cunliffe questioned the move during the parliamentary debate.

Cunliffe asked: “Why, on first principles basis, would the Government allow people to write off a failed software project? Why is that distinctly different from any other business proposal?," he said.

Labour MP Stuart Nash told Parliament that he thought that section 17 “may be a bit self-serving”, noting that earlier this year the Inland Revenue Department abandoned a $21 million software project as part of its overhaul of the student loan scheme.

“There is no doubt that increasing productivity is the only way forward for this country, and software systems help that. But when everyone knows that the Inland Revenue Department wrote off $20 million, I wonder whether this is slightly self-serving.”

Green Party co-leader also questioned section 17, calling it “a bit strange.”

“One could well argue that there is a case for the special tax subsidies for unsuccessful software development. But we then have to ask why we do not have an across-the-board research and taxation support, rather than picking particular kinds of industries for which to provide tax subsidies.”

Maori Party MP Rahui Katene was supportive of section 17. "We have always seen it as important to incentivise small businesses to grow by reducing unnecessary compliance costs, and the proposals around software development and simplifying the tax filing requirements should be received positively by small-business owners," she said.

Arguing strongly in favour of section 17 will be the New Zealand Computer Society. In a draft submission forwarded to Computerworld, it points out that section 17 “restores what has been accepted current practice since at least 1993”.

However, when IRD reviewed the policy earlier this year, it noted this practice could be inconsistent with current tax law, hence the requirement for it to be specifically written into law.

The NZCS submission notes that to discontinue the current and prior treatment by not passing Section 176, “would amount to an additional “tax grab” and have a chilling effect on investment in software technology.

“This change would act as a major deterrent to developing software in New Zealand and result in a reduction in the uptake of bespoke software, significantly impacting the technology sector in New Zealand and resulting in more importation of “off the shelf” technology rather than investment in New Zealand developed products and services,” the submission reads.

NZCS also notes that, in its view, section 17 doesn’t provide a Research and Development tax credit for software.

The Bill, which was introduced into Parliament on September 27, has been referred to the Finance and Expenditure Select Committee. It is unlikely to be discussed until after the general election on November 26, when a new Committee will be formed.

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Tags inland revenue departmentnz computer societypaul matthewsdavid cunliffeTaxation (Annual RatesReturns Filingand Remedial Matters) Bill

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