Capital Allowances: depreciating asset - in-house software

Does computer software developed by the taxpayer for conjunctive use within its company group satisfy the definition of in-house software in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes, the computer software developed by the taxpayer does satisfy the definition of in-house software in subsection 995-1(1) of the ITAA 1997.

To improve group-wide business performance, the taxpayer developed a single, fully integrated series of software applications for use by itself and all the other entities of the company group of which it was a member. The aim of the software was to allow the group businesses to leverage off each other through common processes metrics. The software ensured that the group's master data was common and that appropriate group reports, compliance requirements and key performance indicators could be developed. In this context, a conjoint use of the software and its function was necessary in order for the software to perform the functions for which it was developed. The software was not developed for the purpose of licencing to others.

In-house software is defined in subsection 995-1(1) of the ITAA 1997 as computer software, or a right to use computer software, that you acquire, develop or have another entity develop that is mainly for you to use in performing the functions for which the software was developed and for which you cannot deduct amounts outside Division 40 and Division 328 of the ITAA 1997.

The functions of the computer software developed by the taxpayer provide a single integrated series of software applications necessitating a conjoint use of the software and its functions by all entities of the company group of which the taxpayer was a member. The question arises as to whether the development of the software for the conjoint use by all the entities of the company group is development mainly for the taxpayer to use in performing the functions for which it was developed.

The meaning of in-house software is consistent with the type of software that was treated under former Division 46 of the ITAA 1997. Paragraph 1.18 of the explanatory memorandum to the New Business Tax System (Capital Allowances) Bill 2001 explained that the treatment of 'in-house software' was not intended to be an in-substance change from the way software was treated under former Division 46. Paragraph 31 of the explanatory memorandum to the Taxation Laws Amendment (Software Depreciation) Bill 1999 provided the following explanation:- New Division 46 is intended to apply to software which is acquired or developed for use within the business. It is not intended to extend to situations where software development for exploitation is the business.

In this case, the software and its functions were not developed for a separate or distinct use by the taxpayer. It was equally not developed for separate or distinct use by other entities of the company group. Rather, the taxpayer developed the computer software and its functions to be embedded into the common business practices of itself and of the entities within its company group. The software was not developed for the purpose of licencing to others.

In the context of the intended treatment of in-house software within Division 40, the Commissioner is of the view that in-house software is software that is developed, by or for an entity, to be mainly for the entity to use within its organisation in performing the functions for which the computer software was developed. A conjunctive use of the computer software by other members of the company group is consistent with the software being mainly used by the taxpayer as the use by the other members assists the taxpayer's use of the software within its business organisation.

Accordingly, the computer software developed by the taxpayer satisfies the definition of in-house software in subsection 995-1(1) of the ITAA 1997.