ATO ID 2003/931: Capital Allowances: Cost - enhancement and support fees for in-house software
Date of decision: 31 January 2003
Year of income: Year ended 30 June 2002
Business line: Private Groups and High Wealth Individuals

Issue
Do separate monthly fees, paid specifically for the provision of any enhancements or support necessary for in-house software to remain current, form part of the second element of cost of the in-house software as worked out under Subdivision 40-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Monthly fees, paid for the supply of any enhancements necessary for in-house software to remain current and any technical support required, that are not capital in nature do not form part of the second element of cost of in-house software.

Facts
The taxpayer purchased a software licence for use in its business. Multiple changes to regulations in the taxpayer's industry required the software to be modified regularly in order for it to perform its function in the taxpayer's business. The taxpayer also paid, under a separate agreement with the software provider, an ongoing monthly fee for regular updating of the software and technical support in the use of its software licence.

Reasons for decision
Summary: In-house software is defined in subsection 995-1(1) of the ITAA 1997 as computer software, or a right to use computer software (ie a licence) that you acquire or develop (or have another entity develop), that is mainly for your use in performing the functions for which the software was developed, and for which no amount is deductible outside Divisions 40 and 328 of the ITAA 1997. Paragraph 40-30(2)(d) of the ITAA 1997 provides that in-house software, that is not trading stock, is a depreciating asset. The taxpayer's software licence is within the definition of in-house software and is therefore a depreciating asset. The second element of a depreciating asset's cost is the amount the taxpayer is taken to have paid for each economic benefit that has contributed to bringing the asset to its present condition and location from time to time since the taxpayer started to hold the asset (section 40-190 of the ITAA 1997). In some circumstances, the enhancement and support fees may provide an economic benefit and would be included in the second element of cost. However, section 40-220 of the ITAA 1997 reduces the cost of a depreciating asset by any portion of it that is not of a capital nature. The regular payment of the fees and particularly the temporary advantage obtained from the payment of the fees, led to the determination that these expenses are not of a capital nature. As such, section 40-220 of the ITAA 1997 excludes these expenses from the second element of cost of a depreciating asset. Generally, these types of expenses are deductible under section 8-1 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 8-1 paragraph 40-30(2)(d) section 40-190 section 40-220 Subdivision 40-C subsection 995-1(1)
Subject references: Cost of a depreciating asset Depreciating assets In-house software Intangible depreciating assets Second element of cost