Media Release - 30 June 2011
Senior Communications Manager
Ernst & Young
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30 June 2011
Tax deductions - software development
Well done Minister
Revenue Minister Peter Dunne’s promise of retrospective tax deduction legislation has averted a tax row over businesses being able to claim for failed software developments.
Going back as far as 1993, the Commissioner of Inland Revenue confirmed the costs of unsuccessful software development could be deducted for tax purposes.
In an apparent change of heart, the Commissioner issued a notice in April 2011 stating he now considered this view was wrong and the costs of unsuccessful software developments from the 2011/12 income year were no longer deductible for tax once they got past the feasibility stage.
This would mean the non deductible cost would fall within what is called "black hole" expenditure. Analyse this further and one would be tempted to agree with the Commissioner's view that the costs are non-deductible for tax.
The ensuing outrage from those in the industry highlighted both the inequity and the threat this change was to New Zealand’s software industry and its global competitiveness. They went so far as to highlight the IRD's own failed Student Loan software project that saw $21m of cost lost or put on hold. If IRD was a taxpayer then this would have seen its tax bill increase by $6.3m.
But the Revenue Minister stepped in to calm the troubled waters and provide assurances that the tax system is not there to inhibit or discourage productivity and innovation or create obstacles for taxpayers.
The result of this is backdated tax legislation being introduced in September to ensure the costs associated with failed software projects remain deductible for tax purposes.
“Hopefully, businesses can now get back to focussing on growing their businesses,” says Jo Doolan. Tax Partner.Ernst & Young. “Well done Minister.”
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