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AJML Accountants Update – March 2019

What deductions are available to an app developer? – Part 4

Once again, the deductions available to an app developer depend on the specific agreements under which they operate. If the developer ‘sells’ apps through a third party platform, it is likely they pay a distribution fee. This fee is generally revenue in nature it would be deductible where the app developer is carrying on a business or an income-producing app development activity.

Of course, the question most app developers are interested in is whether they are able to claim a deduction for the cost of developing their app (e.g., the most significant cost is generally the amount paid to have the app developed). In this regard, the copyright in the app is an asset or enduring benefit and thus, the cost is capital in nature and not deductible under S.8-1. However, if the app is a depreciating asset (refer above) then, depending on the client’s circumstances, a deduction may be available under one of the provisions set out below. Notably, an app developer cannot claim a deduction for a notional amount reflecting the taxpayer’s own contribution of labour, and nor can such an amount be included in the cost of the asset for Division 40 purposes.

a. Deduction for decline in value of copyright under Division 40 – The decline in value of copyright can be claimed (to the extent it is ‘held’), calculated using the prime cost method, generally over 25 years beginning when the app is ready to use. Refer to S.40-95(7).

b. Deduction for in-house software – Special rules apply where the app constitutes in-house software. In-house software is, broadly, software that the taxpayer acquires, develops or commissions and that is mainly for the taxpayer to use in performing the functions for which the software was developed (but not where it is mainly for sale or for licensing). In-house software can be deducted over five years provided the taxpayer starts using it, or has it installed ready for use, from 1 July 2015 (before this date, effective life was four years).

Note also that taxpayers may pool expenditure on developing or commissioning (but not acquiring) in-house software if it is intended to be used solely for a taxable purpose. For expenditure incurred in the 2016 or a later income year, the pool balance is deducted (even if the software is not ready for use) over five years in the way set out in S.40-455.

c. Less than $20,000 immediate deduction under Division 328 – Eligible ‘small business entity’ taxpayers can claim an immediate write-off for eligible assets first acquired, and first used or installed ready for use (for a taxable purpose) from 7.30pm (AEST) on 12 May 2015 to 30 June 2017 for less than $20,000 (if $20,000 or more, the asset is allocated to the ‘general pool’). An exception applies for in-house software that has been developed (or is being developed) by the taxpayer and the taxpayer has previously chosen, or chooses, to use a software development pool. Refer to S.328-175(7)(b) and S.328-180(4) of the ITTPA.

d. Research and development provisions – Eligible entities conducting eligible activities (registered with AusIndustry) can obtain generous concessions under the R&D provisions. These rules are beyond the scope of the notes but reference can be made to Division 355.