Tax change threatens software development

Posted on: May 18th, 2012 by nbyfleet No Comments

A tax change could stifle software development and innovation, warns an industry expert.

Inland Revenue said last month that companies can no longer deduct money spent on unsuccessful software projects for tax purposes.

This practice had been allowed since 1993.

The tax department said the change was made because failed software is not directly part of the income-earning process.

Tax specialist at KPMG Communications Adrian Michael said the rule meant companies would think twice about investing in new software.

“If you have a more risky project which might have a more uncertain outcome you might have second thoughts on it if you want to go down that road because if it goes wrong, you have this double whammy — no outcome and no tax deduction.”

Michael said that although the IRD did not consult the industry, it had been raising its view on the deductions during audits.

“[The IRD] have been aware of this for a while and had qualms about it, they have been raising it on audits but that was contrary to their published view,” he said.

“Now they’ve sought to publish the view so when they go to audit, they won’t have taxpayers telling them they’re saying one thing and doing another.”

Chief executive of NZICT Group Brett O’Riley said the move would harm innovation, which was the opposite of what government should be trying to do.

While discussing the changes at its last board meeting O’Riley said one of the questions the group raised was how the tax department would decide if a project was unsuccessful.

“One of the things with any innovation, whether it’s software or not, is quite often development is undertaken but then picked up by other people. There’s plenty of examples of software being developed for one purpose, stopped and then picked up for another,” he said.

“When you’re trying to develop an innovation eco-system in New Zealand, what you need is less rules, not more. We should want to remove the barriers for innovating and increasing incentives.”

O’Riley was surprised that a change to tax like this had not been more widely publicised.

Minister of Science and Innovation Wayne Mapp said he asked his office for a briefing after the Herald alerted him to the matter.