R&D tax plans remain murky

If the government was hoping its statement last week on taxing R&D would clear up the issue for software developers, it's in for disappointment.

If the government was hoping its statement last week on taxing R&D would clear up the issue for software developers, it's in for disappointment.

The proposed changes are getting a mixed response with some developers positive and others saying they could be detrimental.

Under the proposal put forward by Treasurer Michael Cullen, all research expenditure would be deductible.

Development expenditure would be deductible unless it fulfills criteria set out in accounting standards which would mean it has to be capitalised.

The government is preparing a discussion paper for wider consultation which is expected out in December. Those who wish to continue with the status quo will have that option.

The main issue appears to be working out the point when software (whether developed for inhouse use or for sale) becomes an asset.

Cullen’s tax adviser, David Carrigan, says the changes would clarify when software becomes an asset which must be capitalised.

“Currently the point at which an idea is judged to have become an asset and to no longer automatically qualify for immediate R&D deductibility as a business expense is a grey area in tax law,” says Carrigan.

“The definition for accountancy purposes is much clearer, and tends to occur further on in the product development process. The effect, therefore, of bringing the two codes into alignment will be to introduce more certainty into the system.”

But critics say the changes could see companies declaring software an asset before need be.

KPMG national tax director Craig Macalister says at present it is possible to work within the tax law to maintain deductibility of ongoing development costs. However, that’s not likely to be the case under the approach suggested by the government.

“You might start capitalising expense for development earlier than you do now. It’s really a timing issue.”

John Blackham, director of software development company xsol, says the proposed changes are potentially bad for the software industry.

Blackham, who attended last week’s government and business forum, says bringing tax law into line with accounting standards might mean people are less able to deduct than they can now.

He fears that by following accounting practices people will end up paying more tax and says it would be simpler if all R&D activity was deductible. He is urging the software industry to get together over the discussion paper.

More positive is Eagle Technology head Trevor Eagle, also an attendee at last week’s forum.

“I don’t think it’s a big deal. It’s something that needed doing and it normalises what everyone was doing anyway. There are no taxation benefits and it costs the government nothing. I think we’ve got to do something more on the R&D front to attract people here. It might not be a taxation break. People at the forum said they would go away and think about it.”

Advantage Group head Greg Cross, also at the forum, says it’s a move in the right direction.

Ernst & Young tax partner Richard Carey says a more relevant debate is to compare us to trading partners. “Under the changes there will still be a proportion of development which is treated as an asset. Let’s look at it and see if we can urge it along another step. Give us 100% deductibility for all development expenditure.”

The government is looking to introduce legislation next year, most likely taking effect from April 1, 2002.

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