Private ruling: Software development pool
Date of advice: 24 April 2026
Published: 6 July 2026
Ruling period: Income Tax Year ended 30 June 20XX
Date scheme commenced: 30 June 20XX

Ruling: Q1: Were in-house software development costs, incurred by Company B for the EP prior to the transfer of the EP IP to Company C through the execution of the Transfer Deed and that were not deductible under another provision, able to be allocated to software development pools in accordance with section 40-450 of Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Are the proceeds derived by Company B in respect of the transfer of the Company C Software included in the assessable income of Company B in the income year ended 30 June 20XX pursuant to section 40-460 of ITAA 1997? | A2: Yes | Q3: Did CGT event A1 happen for Company B when the Company C Software was transferred to Company C under the terms of the Transfer Deed? | A3: Yes | Q4: Will section 118-24 of the ITAA 1997 apply such that any capital gain realised by Company B in relation to the transfer of the Company C Software to Company C will be disregarded? | A4: Yes | Q5: Will section 118-20 of the ITAA 1997 apply such that any capital gain realised by Company B in relation to the transfer of the Company C Software to Company C will be reduced? | A5: No | Q6: Following the transfer of the Company C Software to Company C, will Company B continue to be entitled to deductions in respect of expenditure that was allocated to software development pools for the Company C Software prior to the transfer? | A6: Yes | Q7: Will Company B be entitled to a deduction under section 8-1 of the ITAA 1997 for the refund of the prior costs charged to Company C toward the creation of the Software? | A7: Yes

Relevant facts and circumstances: You have supplied us with the following documents, which we have considered in our analysis and decision process, and are incorporated into the relevant facts and circumstances of this ruling: • Deed of asset transfer between Company B and Company C (Transfer Deed) • Valuation of Asset prepared by independent valuer (Valuation). • Asset Agreement between Company B and Company C (Management Agreement) • Credit note issued from Company B to Company C (Credit Note) Company A Company A is the head company of an income tax consolidated group in Australia. Company A provides services in Australia and has a year end of 30 June. Company B is the main operating entity and a subsidiary of Company A. Company C is wholly owned by the Company A group. The entities which comprise the Company C group do not form part of the Australian tax consolidated group. Software Project The Software Project (Software) is a multi-year program of work which commenced in the year ended 30 June 20XX and was collaboratively developed by Company B and Company C. The Software has been co-developed by Company A and Company C to simplify and modernise technology capabilities of the group. The Software has been developed with the intention of benefitting the businesses of Company B, Company C and other entities in the group. Company B incurred all of the costs associated with the Software and has recharged certain costs (Prior Software Charges) to Company C, which has been included in the assessable income of Company B. Company A determined an amount referrable to the Australian component of the Software, and an amount referrable to the Company C component of the Software. Software Development Pool For income tax purposes, the Company A group previously made a choice to pool software development expenditure as provided for in Subdivision 40-E of the ITAA 1997. Costs in relation to the Software were allocated to the software development pool for tax purposes and accordingly Company A has claimed deductions under the software development pool rules. Software The Software comprises of core elements (i.e. foundational elements) developed across multiple releases. These foundational elements have the potential to be re-used, applied in the development of, and customised for subsequent Software releases for different products across divisions, entities and geographies. The foundational elements allow for such localisation to adapt the Software to the specific requirements and needs of each business division. The Software is made up of a complex set of software modules, configuration files, databases and related documentation (Modules). These modules fall into three categories: • Company C Modules: Developed specifically for Company C's business needs. • Company B Modules: Developed specifically for Company B's business needs. • Shared Software Modules: Provide core functionality used by both Company B and Company C. Most of the Modules are built on a shared code base, meaning a significant portion of the source code is common across all three categories. The Company B and Company C-specific modules also rely on the Shared Software Modules to function properly. Since copyright-protected code is embedded across all module types, Company A determined it was not feasible for Company C to own only the Company C Modules. None of the functionality of the Software extends beyond allowing customers to conduct business with Company B or Company C. Prior to implementation of the Transfer Deed, Company B was the legal owner of the copyright in the source code and the accompanying materials such that Company B holds the intellectual property rights in relation to the Software. Software Transfer (Transfer) To reflect the appropriate split of the cost of developing the Software between the parties, Company B and Company C entered into an agreement to formalise each parties' future ownership of the relevant intellectual property in the Software and to transfer the portion of the Software which relates to Company C's business units to Company C. Under the Transfer Deed, Company B transferred the Company C Software to Company C for market value consideration on the Transfer Date. The Company C Software is defined in the Transfer Deed to mean "the portion of the Intellectual Property corresponding to the proportion of the Software developed to meet the requirements of the Transferee's operations". At present, Company B does not intend to actively seek or enter into third party licensing or distribution arrangements for any software included in the Software. Valuation of Software and consideration payable from Company C to Company B The Transfer Deed sets the Consideration payable from Company C to Company B. The Valuation for the Company C Software is intended to reflect an appropriate split of the development risk between Company B and Company C. Prior Software Charges A verbal agreement existed between Company B and Company C at the time of the Transfer that Company B would refund the amounts previously contributed by Company C toward the creation of the Software (Prior Software Charges). The Prior Software Charges were recharge amounts specific to the development of the Software, as part of recharge amounts calculated by Company A. All Prior Software Charges were costs toward development of the Software, or amortisation of the Software, with these costs duplicated in the value of the Consideration received. Company A refunded the Prior Software Charges by issue of the Credit Note. The cost associated with the reversal of the Prior Software Charges was recognised as an expense for accounting purposes in the Company A income statement for the income year the Transfer occurred in. Assumption All Software was intended to be used solely for a 'taxable purpose', as defined in subsection 40-25(7) of the ITAA 1997.

Relevant legislative provisions: Copyright Act 1968 section 10 | Copyright Act 1968 section 31 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 40-25 | Income Tax Assessment Act 1997 section 40-30 | Income Tax Assessment Act 1997 section 40-115 | Income Tax Assessment Act 1997 section 40-295 | Income Tax Assessment Act 1997 section 40-340 | Income Tax Assessment Act 1997 section 40-450 | Income Tax Assessment Act 1997 section 40-460 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 108-5 | Income Tax Assessment Act 1997 section 118-24 | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 section 118-24 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 40-450 of the Income Tax Assessment Act 1997 (ITAA 1997) permits expenditure incurred on developing in-house software to be allocated to a software development pool where the expenditure is not otherwise deductible and is incurred with the intention that the software be used solely for a taxable purpose. Expenditure on acquiring computer software, or a right to use computer software, cannot be allocated to a software development pool. In-house software 'In-house software' is defined in section 995-1 of the ITAA 1997 as computer software, or a right to use computer software, that is mainly for the taxpayer's use in performing the functions for which the software was developed, and for which amounts cannot be deducted under a provision outside Divisions 40 and 328. The Software was developed to modernise and enhance Company A's core service technology. The Software comprises a suite of integrated software systems developed to support the business conducted by Company A and its subsidiaries. The Software consists of multiple types of software modules, with some modules being used exclusively by Company B or Company C, and some modules shared between Company B and Company C. All module types share 'foundational' software elements that are shared between final modules. Company A determined that maintaining a separate asset for Company C prior to the Transfer was not feasible due to the shared intellectual property embedded in all software Modules. All module types designed for use within the Company B and Company C businesses (and not developed for licensing or sale to third parties). Where software is developed for conjunctive use within a company group, it may qualify as in-house software (per the Commissioner's view in ATO ID 2014/16 Income Tax Capital Allowances: depreciating asset - in-house software ). Accordingly, software developed for use by Company B, or for joint use by Company B with Company C, satisfies the requirement that the software be mainly for use by Company B. | Detailed Reasoning - Taxable Purpose: Subsection 40-450(3) provides that expenditure can only be allocated to a software development pool where the taxpayer intends to use the software solely for a taxable purpose. Relevant to the present circumstances 'taxable purpose' is defined in subsection 40-25(7) to be 'the purpose of producing assessable income'. Where software is intended to be used to generate non-exempt non-assessable income (in this case, software to be used to generate foreign revenue but not Australian assessable income), the software expenditure does not qualify for allocation to a software development pool. To the extent that the Software includes consumer-facing application software, all consumer applications within the Software were created solely to facilitate customer interaction with the Software and do not provide independent functionality or functionality beyond that purpose. Consistent with the Commissioner's view in Taxation Ruling 2016/3 Income Tax: deductibility of expenditure on a commercial website , such software does not constitute a separate asset and therefore will retain the character of in-house software. The ruling relies upon an assumption that all the Software satisfies the 'taxable purpose' requirement in 40-450(3). Accordingly, as the expenditure incurred on developing Software meets the definition of in-house software and is intended to be used solely for a taxable purpose, it is eligible for allocation to a software development pool under section 40-450 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 40-460(1) of the ITAA 1997 provides that where expenditure on in-house software is, or has been, allocated to a software development pool, the taxpayer's assessable income includes any amount derived as consideration in relation to that software. Subsection 40-460(2) excludes this treatment only where roll-over relief under subsection 40-340(3) applies. Subsection 40-340(3) applies only where a balancing adjustment under subsection 40-295(2) arises in relation to a change in holding of interests in a partnership asset. As no part of the Software constitutes a partnership asset, subsection 40-295(2) has no application and roll-over relief is not available. Under the Transfer, Company B receives Consideration for software it developed, the expenditure for which was allocated to software development pools from the 20XX income year onwards. Accordingly, subsection 40-460(1) applies and the consideration received in relation to the transferred software is included in assessable income. As a recoverable debt arises in the income year ended 30 June 20XX, the full amount of the proceeds is taken to be derived and included in the assessable income of Company A in the income year ended 30 June 20XX. | Detailed Reasoning - Detailed reasoning: Subsection 104-10(1) of the ITAA 1997 provides that CGT event A1 occurs when a taxpayer disposes of a CGT asset. A disposal is taken to occur where there is a change in ownership of the asset from the taxpayer to another entity. Section 108-5 of the ITAA 1997 defines a CGT asset as any kind of property, or a legal or equitable right that is not property. Under the Transfer Deed, the asset transferred (the Company C Software) is defined as the proportion of the Software developed to meet the requirements of the Transferee's operations. The combination of property and rights held by Company B in the Software constitutes one or more CGT assets for the purposes of the ITAA 1997. The Transfer results in a change of ownership of the Company C Software from Company B to Company C. Accordingly, CGT event A1 will occur for Company B on the Transfer Date. A capital gain will arise to the extent that the capital proceeds received exceed Company B's tax cost base in the Software. This gain will be assessable in the income year the Transfer occurred. | Detailed Reasoning - Detailed reasoning: Section 118-24 of the ITAA 1997 disregards a capital gain or capital loss where a CGT event is also a balancing adjustment event and the asset is a depreciating asset whose decline in value was worked out under Division 40. None of the exclusions in subsection 118-24(2) apply in these circumstances. The Software comprises in-house software and is not trading stock. In-house software is a depreciating asset under paragraph 40-30(2)(d). The transfer of the Company C Software from Company B to Company C involves the assignment of an interest in intellectual property. The rights transferred include the right to use, reproduce, adapt, commercialise and enforce rights in the Software. These rights are consistent with copyright, as defined for 'computer software' in subsection 10(1) and Section 31 of the Copyright Act 1968 , which is an item of intellectual property for the purposes of subsection 995-1(1). Under subsection 40-115(3), the grant or assignment of an interest in an item of intellectual property is treated as the taxpayer having stopped holding part of the depreciating asset. Accordingly, Company B is taken to have stopped holding part of the Software asset. This gives rise to a balancing adjustment event under subsection 40-295(1). As the balancing adjustment event relates to a depreciating asset to which Division 40 applies, section 118-24 operates to disregard any capital gain or capital loss arising from the corresponding CGT event. | Detailed Reasoning - Detailed reasoning: Section 118-20 of the ITAA 1997 serves as an anti-overlap provision designed to prevent double taxation of the same economic gain. Specifically, it reduces or eliminates a capital gain arising from a CGT event if the gain (or part of it) is already included in a taxpayer's assessable or exempt income under another provision of the Act. This ensures that income is not taxed both as ordinary income and as a capital gain. Subsection 118-20(2) operates to reduce a capital gain to zero if the gain does not exceed the amount already included in a taxpayer's assessable or exempt income due to the same CGT event. Under 40-460(1), the full amount of consideration received by Company B for the Software is included in assessable income. However, as the application of 118-24 (per the detailed reasoning for Question 4 above) means that any gain from CGT event A1 will be reduced to zero, section 118-20 will have no application in this case. | Detailed Reasoning - Detailed reasoning: Section 40-455 of the ITAA 1997 sets out the deduction schedule for expenditure on in-house software that has been allocated to a software development pool under Subdivision 40-E. The provision applies to all expenditure incurred in a particular income year, and the deductions are spread over five years. There is no provision that allows a taxpayer to reduce the pool balance directly due to disposal or partial transfer of rights. The pool will continue to be written down according to the fixed schedule per the operation of section 40-455, regardless of whether the software is still held or used. | Detailed Reasoning - Detailed reasoning: Section 8-1 of the ITAA 1997 allows a deduction for losses or outgoings to the extent they are incurred in gaining or producing assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income (the positive limb). However, under subsection 8-1(2) a deduction is denied to the extent the loss or outgoing: • is capital, or of a capital nature • is of a private or domestic nature • is incurred in relation to gaining or producing exempt or non-assessable non-exempt income, or • is prevented from being deductible by another provision of the Act (the negative limbs). Whether the outgoing is incurred in carrying on a business The term incurred is not defined in the legislation. Taxation Ruling Taxation Ruling 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions sets out the relevant principles derived from case law. In particular: • an outgoing may be incurred even if it has not been paid, provided the taxpayer is definitively committed to the liability • a presently existing liability may exist even if it is defeasible, and • whether such a liability exists is a question of law having regard to the facts of each case. The outgoing must also be properly referable to the income year in which the deduction is claimed. Application to the outgoing made to Company C The payment from Company B to Company C recognises that Company C had previously contributed amounts to Company B for the creation of the Software in the form of the Prior Software Charges made between the 20XX and 20XX financial years (inclusive). The economic benefits of the Software were to be shared by both parties. Broadly, the Prior Software Charges consisted of non-capitalised labour costs and software amortisation expenditure. The Prior Software Charges were included in Company B's assessable income when received. Under the Transfer Deed, Company C was required to pay Company B the full replacement value of the Software (proportionate to its share of use of the Software) as determined by the Valuation, and later Updated Valuation. The valuation made no adjustment for the Prior Software Charges. As a result, on face value the consideration payable under the Transfer Deed duplicated amounts previously paid to Company B by Company C, and that has already been included in Company B's assessable income. Company B and Company C made an agreement that the Prior Software Charges would be refunded, and this was completed through the issue of a credit note from Company B to Company C in the year of the Transfer. By issuing a credit note to Company C for the Prior Software Charges, Company B became definitively committed to the outgoing. The Commissioner accepts that the purpose of the payment is to rectify the duplication of contribution payments made by Company C toward the creation of the Software, and for no other purpose (such as for use of the Software by Company C prior to the Transfer). Although the outgoing is calculated by reference to the earlier contributions and described as a refund or reversal of the Prior Software Charges, the payment to Company C was made necessary and incurred in the income year ended 30 June 20XX because Company B received corresponding unadjusted consideration under the Transfer Deed in the same income year as the amounts being returned to Company C. As both the original payments made by Company C in contribution to the creation of the Software and the consideration received under the Transfer Deed have been included in Company B's assessable income, there is a sufficient nexus between the outgoing and the derivation of assessable income. Whether the outgoing is capital in nature In G.P. International Pipecoaters Pty Ltd v FC of T [1990] HCA 25, the High Court held that the character of an outgoing is determined by reference to the advantage sought by making the expenditure. The purpose of the outgoing is to correct the total consideration effectively received from Company C (taking into account both the earlier contributions and the consideration under the Transfer Deed) so that the total amounts received by Company B are representative of Company C's relative share in the creation of the Software. Both the earlier contributions and the consideration under the Transfer Deed have been included in Company B's assessable income, rather than received as a capital contribution. The outgoing by Company B does not secure an enduring benefit for Company B and does not relate to the acquisition or enhancement of a capital asset. Accordingly, it is not capital, or of a capital nature. Other negative limbs As the outgoing is incurred in relation to the production of assessable income, it is not incurred in relation to gaining or producing exempt income or non-assessable non-exempt income. No other provision of the Act operates to deny the deduction.

Reasons for decision: The consolidation provisions of the Income Tax Assessment Act 1997 (ITAA 1997) allow certain groups of entities to be treated as a single entity for income tax purposes. Under the single entity rule (SER) in section 701-1, the subsidiary members of an income tax consolidated group are taken to be parts of the head company. | The meaning and application of the SER is explained in Taxation Ruling TR 2004/11 Income tax: consolidation: the meaning and application of the single entity rule in Part 3-90 of the Income Tax Assessment Act 1997 . | As a consequence of the SER, the actions and transactions of the subsidiary members of the Company A group are treated, for income tax purposes, as having been undertaken by Company A, as the head company of the Company A group.