Revenue Minister Peter Dunne has announced an amendment is to be made to tax law, clarifying that businesses will be able to claim tax deductions on failed software developments.
The matter was thrown into doubt in April this year by a notice from IRD reversing an earlier decision from 1993, and disallowing deductions in respect of such expenditure. The logic was that work towards developing a software asset contributed to the value of that asset and should be recouped by its depreciation. If there was no final product, no tax deduction could be claimed.
To handicap a project in this way would inhibit productivity and innovation and would be at variance with government objectives, says Dunne’s latest statement.
The statement reads: “Essentially the government wants business to help drive the economy forward, and this move is about clearing obstacles to them doing that.
“Software development can represent a significant investment for any business, and not allowing an immediate deduction if a project fails simply discourages businesses from undertaking the kind of innovation that could lead to increased growth and productivity.
“The government recognises that if such expenditure is not tax deductible, it is effectively an inhibitor to business taking such steps.
“We do not want the fear of the undue financial cost of a software project failure to stop growth and innovation."
Paul Matthews, CEO of the NZ Computer Society, who was among the critics of the IRD’s position in April, applauds the latest decision.
“The Society sees this as a very important step in ensuring New Zealand’s economy continues to be strengthened on the back of innovation and investment in technology,” he says.
The Society recently highlighted the IT sector’s very serious concerns with the recent announcement that failed software projects could lose their tax deductibility,” Matthews says “and we absolutely congratulate the minister and IRD for acting on this so promptly, thereby providing certainty to the sector and New Zealand”.
“This is not a minor matter – this decision has the effect of safeguarding investment in software which will see our economy grow through increased innovation, efficiency and productivity”, Matthews says. “It’s excellent that the Minister has heard the concerns of the technology and business sector and acted promptly to retain deductibility”.
Accountants also came out against the April decision: “This treatment has the potential to create a material black-hole expenditure issue for taxpayers who scrap unsuccessful software projects,” said a Deloitte bulletin, going on to make the point that it was inconsistent with government’s “focus on innovation [and] productivity” - an argument that Dunne has clearly now accepted.
Law firm Minter Ellison Rudd Watts acknowledged at the time of the April decision that the IRD was correct in law and any change to the position would require an amendment.
Dunne says such an amendment, confirming that expenditure on failed software is deductible, will be in tax legislation due to be introduced in September and will be backdated to ensure that expenditure incurred this year is deductible.