Private ruling: Work related expenses
Date of advice: 21 January 2016
Published: March 2016
Ruling period: Year ended 30 June 20WW
Date scheme commenced: 1 July 20VV

Ruling: Q1: Can you claim a portion of the IT services costs in the 20VV-WW year despite not paying them until the 20WW-XX year? | A1: Yes. | Q2: Can you claim a portion of the software developer costs in the 20VV-WW year despite not paying them until the 20WW-XX year? | A2: No. | Q3: Can you use a software development pool for the portion that is not associated with your employment? | A3: No.

Relevant facts and circumstances: You were contracted to create software for your employer. You outsourced the task of creating software and incurred costs for both IT services and software development costs. You received invoices for the IT services costs in the 20VV-WW year yet paid them in the 20WW-XX year. You received an invoice for the software development costs in the 20VV-WW year and are holding off payment until you are satisfied with the software. A portion of the expenses were related to your employer however you also incurred expenses in making the software adaptable for your uses outside of your current employment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1, | Income Tax Assessment Act 1997 division 40, | Income Tax Assessment Act 1997 subsection 40-30(2), | Income Tax Assessment Act 1997 subsection 40-95(7) and | Income Tax Assessment Act 1997 section 995-1.

Reasons for decision: Detailed Reasoning - Question 1 and 2: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. Incurred Taxation Ruling TR 97/7 provides the commissioner view of when an expense is incurred and the timing of deductions. The courts have been reluctant to attempt an exhaustive definition of a term such as 'incurred'. The following propositions do not purport to do this; they help to outline the scope of the definition. The following general rules, settled by case law, assist in most cases in defining whether and when a loss or outgoing has been incurred: (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; (b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others; (c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities); (d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise; (e) in the case of a payment made in the absence of a presently existing liability(where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid. Application to your circumstances The costs incurred for the software developed for use in relation to your employment are deductable under section 8-1 of the ITAA 1997. The costs incurred for the software developed for you to use or your future employment to use are capital in nature and are not deductable under 8-1 of the ITAA 1997. Therefore, your expenses must be apportioned accordingly. You incurred IT service costs in the 20VV-WW year as you had a presently existing liability to pay those expenses. At the time you receive a bill or invoice that you are liable for and must pay; even if you don't pay until after the end of the income year. These costs must be apportioned. You have software development costs which were not incurred in the 20VV-WW year as your liability to pay is contingent on the quality or otherwise of the software. These costs become incurred in the financial year in which you must pay. These costs must be apportioned. | Detailed Reasoning - Question 3: An expense will usually be capital in nature where it is incurred with the intention to create an asset or advantage of a lasting and enduring nature ( British Insulated & Helsby Cables Ltd v. Atherton (1926) AC 205; (1926) 10 TC 155 ). Capital expenditure often produces an enduring benefit, that is, the structure of the advantage or asset. Revenue expenditure is often repetitious or recurring in nature and often does not produce assets or advantages of an enduring nature. Division 40 of the ITAA 1997 allows a taxpayer to claim the cost of a depreciating asset used for taxable purposes over the asset's effective life or a period specified in the legislation. Subsection 40-30(2) of the ITAA 1997 provides that in-house software, that is not trading stock, is a depreciating asset. In-house software is defined in section 995-1 of the ITAA 1997 as computer software, or a right to use computer software that you acquire or develop (or have another entity develop) for your use in performing the functions for which it was developed and for which no amount is deductible outside of Divisions 40 and 328 of the ITAA 1997. Application to your circumstances The software developed for your own purposes is a capital asset that will provide an enduring benefit and is a depreciating asset for the purposes of Division 40 of the ITAA 1997. The software developed does not meet the definition of in-house software under section 995-1 of the ITAA 1997 and subsequently you are not eligible for a software development pool deduction. No deduction is currently available under Division 40 of the ITAA 1997 for the cost of the software as it is not currently being used for a taxable purpose.