Inland Revenue has slightly softened its stance on the tax deductibility of Y2K costs, but its updated draft ruling assumes an erroneous definition of a software bug.
The ruling, still only a discussion document, allows deductions to be made for diagnosis and for "training staff in the new four-digit programming methods" but not for "correcting or testing computer software". Strangely, the draft ruling does allow deductions to be made if a Y2K-compliant system is accidentally made non-compliant. However, the paper quotes a report which appears to confuse a bug with a virus. "A bug indicates a foreign body invading the system of its host. The Y2K problem was a design choice included as an integral part of a system," says the "Exposure Draft on Year 2000 Expenditure" (available at www.ird.govt.nz). The document is quoting from the select committee report into Y2K released in April of 1998.
"The revenue-capital distinction is notoriously difficult and the legislation is quite imprecise," says Martin Smith, Inland Revenue's general manager in charge of adjudications and rulings.
"It's really a question of whether the general provisions for deductibility apply and that's a matter of interpreting cases."
Smith says it comes down to whether Y2K expenditure is a capital expense ("of enduring benefit") or is a revenue expense, similar to a repair.
"Our view ... is that it is the bulk of this expenditure that is effectively providing an enduring benefit and not fixing something that has gone wrong through wear and tear or anything like that."
Australia, the UK, the US and Canada have all decided to class Y2K expenditure as a revenue item and allow it to depreciate immediately. Treating Y2K as a capital expense means companies must depreciate it at a much slower rate, over a number of years.
"It may not have been deliberately designed to go wrong in the year 2000 but it was a deliberate design choice when the software was written." Smith says that means Y2K isn't a bug. But Smith agrees it is a difficult call to make.
"A couple of other revenue authorities have taken a different view. We have analysed it pretty comprehensively, in our view. Some of the other authorities overseas haven't gone to the same sort of depth of analysis as we have."
Smith says it is the province of the policy advice division at IR to decide whether to recommend legislative changes to government. Robin Oliver, general manger of policy, was unavailable for comment as Computerworld went to press.