Last week the IRD released an issues paper for consultation on the treatment of software development expenditure (IRRUIP10) for those taxpayers developing software for the purposes of commercial exploitation as part of a business or other income-earning activity carried out by them. It also applies to software that has “an independent form” as opposed to those that form part of an asset.

Currently software developed for sale or licence is treated for income tax purposes as trading stock. This means that taxpayers can expense relevant costs at balance date but the value of any software on hand is trading stock.

The issues paper discusses several issues being:

  • When does software development expenditure give rise to “trading stock”? Is the current treatment outdated?
  • What treatment should apply where software development expenditure does not give rise to trading stock?
  • How/will the R&D provisions apply?

While no decision has been made on what the final treatment will be the Commissioner’s initial view is that software development expenditure is not the cost of producing trading stock where software is being developed for use in providing software as a service or non-exclusive licensing. In the above cases it is similar to a depreciable asset.

The paper confirms that the Commissioner will continue to apply the current treatment until a final decision is made. Any change in position will be applied prospectively.

Comments can be made by the 25 August 2016.