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Software expenditure.

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I am releasing today a draft of proposed amendments to the Income Tax Assessment Act 1997. These amendments will introduce rules to provide for expenditure on systems and application software to be amortised at 40 per cent per year (ie. over 2½ years).


The amendments were foreshadowed in the Treasurer’s Press Release No 52 of 1998 which issued on 12 May 1998. The amendments incorporate several changes to the measures as announced:




The Government has agreed to include this method in the proposed legislation following submissions from taxpayers and consultations with the business community. The Government sees the advantages through reduced compliance costs of allowing expenditure incurred on software developed in house to be written off from the year after it is incurred rather than being written off over 2½ years from the time each project is completed.


Taxpayers who incur expenditure on developing software will be able to make a once only election to ‘pool’ that expenditure. Once the election has been made, all expenditure incurred in developing software in an income year is to be pooled and written off at 40% in the following two years and 20% in the third year. There will be a transitional arrangement whereby taxpayers who elect to pool for the first income year after 11 May 1998 will be able to elect out of the software pooling method in the second income year after 11 May 1998.




The announcement on 12 May 1998 stated that where a non-renewable licence had an effective life of less than 2½ years, the expenditure could be written off over that shorter period. The draft legislation will apply a 2½ year write off to all software expenditure. However, when software is no longer installed and used, a balancing adjustment equal to the undeducted expenditure can be claimed as a deduction at that time.


Example: A taxpayer acquires a non-renewable licence to use software on 1 June 1998 for $1000. In the 1998 income year, $33 depreciation can be claimed ($1000 x 40% x 30/365 days). On 30 June 1999, the licence expires and the taxpayer ceases to use the software. In the 1999 income year the taxpayer may claim a further $400 depreciation ($1000 x 40%) and a balancing adjustment of $567.




The Budget announcement stated that software purchases of up to $300 will be immediately deductible and that bulk purchases of software, summing to more than $300 but individually valued at up to $300, will have to be depreciated under the proposed amendments. If such a rule depended on the software being acquired in bulk, the rule could be easily avoided by purchasing the same software under different invoice numbers or at different times. Therefore, the draft legislation includes a multiple purchase rule so that an immediate write off of expenditure is only available where the total expenditure on identical software in an income year is $300 or less.


The provisions and an explanatory memorandum can be accessed from the ATO’s World Wide Web page on ‘’ or by phoning (02) 6216 1681.



14 December 1998



Contact officers


Penny Farnsworth Assistant Treasurer’s Office  (02) 6277 7360

Christopher Sheehan Assistant Treasurer’s Office (02-621 61990)

Colleen Reichert  Assistant Treasurer’s Office  (02-621 62789)