Software ruling by IRD to be reversed

Revenue Minister Peter Dunne. Photo / Sarah Ivey

Government plans to reverse an Inland Revenue ruling on failed software projects have been welcomed by both tax and technology commentators.

Yesterday, Revenue Minister Peter Dunne announced a law change which will allow businesses to claim tax deductions on incomplete software ventures.

This followed the IRD posting a note on its website in April saying the deductions, which had been allowed since 1993, were inconsistent with tax law and would not be allowed to continue.

Industry commentators slammed the ruling and claimed it would harm investment and was not in keeping with the Government's position on research and development.

In signalling the reversal, Dunne agreed the IRD's new rules were not in step with the country's economic objectives and could harm productivity.

"We do not want the fear of undue financial cost of a software product failure to stop growth and innovation. A good tax system is one that is fair and does not distort investment decisions."

Amendments allowing the deductions would be included in laws due to be tabled in September and would be backdated to cover the entire year, Dunne said.

Chief executive of the New Zealand Computer Society Paul Matthews applauded the move.

"Investment means innovation and productivity and so we saw [the IRD ruling] as a potential threat. The fact that the minister's recognised that and signalled a law change is a very positive thing," Matthews said.

KPMG tax partner Adrian Michael said the change was excellent news and the speed of Dunne's actions meant there would be no harm caused to the industry. While welcoming the announcement, Deloitte's Thomas Pippos said the saga showed there are still rough edges in the Tax Act that need smoothing out.

He said the IRD ruling was an internal decision and did not even pass Dunne's desk for approval.

"What had actually happened is that the left hand of the IRD didn't know what the right hand was doing ... and didn't quite appreciate the implications [of their actions]."