Tax law change may limit software

Thomas Pippos, managing tax partner at Deloitte. Photo / Supplied

Inland Revenue appears not to have considered how a change to tax rules could financially impact software developers.

The IRD posted a notice on its website last month saying companies can no longer deduct money spent on unsuccessful software projects for tax purposes.

This practice had been allowed since 1993.

The new rules are a shift in the interpretation of tax law, rather than a change to legislation.

The IRD justified the new approach because failed software is not directly part of the income-earning process.

Industry players said the move could stifle innovation and make companies hesitant to start software projects.

In response to queries, the IRD said the notice "seeks to clarify the taxation implications in relation to software development to assist taxpayers and their advisers".

"Inland Revenue is not in a position to comment beyond this as to any possible specific commercial implications," the department said.

However, Deloitte managing tax partner Thomas Pippos said the IRD should have "thought more laterally" about it if it needed to change its tax policies, rather than just altering its interpretation.

"The crux of the matter is that the department is a very large machine. Each part of the department has a role of a job that they actually do. What strikes us is that only one part of the department [appears to have] reflected in relation to this matter and the department as a whole didn't consider the correct overall decision," Pippos said.

"The one thing [the IRD] might not appreciate in this instance is the magnitude of the amounts that are actually involved [for businesses]," he said.

Pippos argued that although the rules will not affect all software businesses, for those it does touch it could be worth millions of dollars.

"This is not an immaterial tweaking of the law. As far as corporates are concerned this is a material policy change," he said.

Pippos said from what he could tell, the IRD did not consult the industry before making the change.

The IRD said it provided an advance copy of the notice to both the Law Society tax committee and the Institute of Chartered Accountants.