Important:
- To claim the R&D tax credit, you must submit a detailed statement online.
- In most instances, the last date for submitting a detailed statement was April 30 2010. Find out more
About the limit on internal software development expenditure
Internal software development is where eligible R&D activities are used to develop internal software which doesn't have as its main purpose the sale, rent, license, hire or lease to two or more people who are not associated with the developer or with each other.
Regardless of an intention to sell or license the software, any software development activity is internal software development if it is to be used:
- for internal administrative functions (such as payroll, bookkeeping, or personnel management) of the taxpayer (or an associated person as defined in YB 2-4, YB 7, YB 9-18, and YB 20 of the Income Tax Act 2007).
- by the taxpayer (or an associated person as defined in YB 2-4, YB 7, YB 9-18, and YB 20 of the Income Tax Act 2007) in providing non-computer services (for example accounting, consulting or banking services).
New Zealand legislation
Income Tax Act 2007
- LH 7
- LH 17
- YB 2-4, 7, 9-18, and 20
Is the R&D activity internal software development?
Larger version of image | Long description of flowchart
Example - application of limit on software expenditure where the software will be used in the business
Company B is undertaking eligible R&D to develop software for internal use.
The limit applies because Company B is developing the software to use in the internal administration of its business. Company B may not claim credits for more than $3 million of its software development expenditure.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - application of limit on expenditure where the software is to be used by an associated company
Company C is undertaking eligible R&D to develop software which it will sell to its parent company, Company D.
The limit applies because Company C is developing the software with a purpose of sale only to an associate.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - application of limit on expenditure where the software has multiple purposes
Company E is undertaking eligible R&D to develop software for internal use.
The board members of Company E have also discussed the possible sale of the software to other large companies that are not competitors, to get back some development expenditure. They told a staff member to investigate the potential market for the software and ensure that it could be easily customised. The developers have been advised that they need to build some flexibility into the design of the software.
The limit applies because Company E has a purpose of using the software in the internal administration of its business.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - application of limit on expenditure where software is used in the internal administration of the business
Sub Co is undertaking eligible R&D to develop software which will be used by Parent Co to process transactions. Sub Co also plans to sell the software to other businesses.
The limit applies because the software will be used in the internal administration of business activities of Parent Co, who is associated with Sub Co. Intent to sell is not relevant in this case.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - application of limit on expenditure where software is used to deliver a non-computer service
Tel Co is undertaking eligible R&D to develop software which will allow its customers to independently configure account settings, and add and remove lines and services. Tel Co plans to charge customers a licence fee for using the software.
The limit applies because the software will be used to provide a non-computer service. Tel Co's customers use the software primarily to obtain a telephone service, and not to obtain the use of Tel Co's computer technology or software.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
What is internal software development?
Internal software development is where eligible R&D activities are used to develop internal software which doesn’t have as its main purpose the sale, rent, license, hire or lease to two or more people who are not associated with the developer or with each other.
Regardless of an intention to sell or license the software, any software development activity is internal software development if it is to be used:
- for internal administrative functions (such as payroll, bookkeeping, or personnel management) of the taxpayer (or an associated person as defined in YB 2-4, 7, 9-18, and 20 of the Income Tax Act 2007).
- by the taxpayer (or an associated person as defined in YB 2-4, 7, 9-18, and 20 of the Income Tax Act 2007) in providing non-computer services (for example accounting, consulting or banking services).
Internal software development includes software development that supports eligible systematic, investigative and experimental (SIE) activity as well as SIE software development.
New Zealand legislation
Income Tax Act 2007
- LH 7
- LH 17
- YB 2-4, 7, 9-18, and 20
What is a non-computer service?
A service is a non-computer service if the customers it is delivered to, use it mainly to obtain a service other than the use of the taxpayer's computer technology or software (even though that service may be enabled, supported or facilitated by computer or software technology).
New Zealand legislation
Income Tax Act 2007
- LH 9 - LH 13
- LH 17
Software as an integral part
Software that is an integral part of an electrical or mechanical device is considered as being developed for that device. In this explanation this software is referred to as "firmware" in the context of the R&D tax credit.
Examples include the software that runs inside a washing machine, stand-alone DVD player or wireless network card.
Software that is not an integral part of an electrical or mechanical device includes most software developed to run on general-purpose computers.
Purpose of the firmware development
If firmware is part of a device developed for a particular purpose, it should be considered as developed mainly for that purpose.
Development of firmware for inclusion in something for sale, rent, license, hire or lease to one or more customers, as part of the taxpayer's business, would not be internal software development, or subject to the $3 million limit on internal software development expenditure, unless:
- the software was used in the internal administration of the taxpayer's, or an associated, business, or
- used to deliver non-computer services.
Example - software as an integral part of a product (firmware)
A Co develops a robotic dog for sale. Innovative software is developed to run the movements and interactions of the dog. The software development meets the definition of eligible R&D.
The software is integral to the robotic dog, which cannot run without it, and should therefore be regarded as developed with the main purpose of sale to the public.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Example - software not an integral part of the product
Company B develops software to be used for conducting cash transfers between its customers over the internet. Company B also buys computer hardware and modifies it to prevent physical tampering. The software will run on the tamper-proof computer hardware, which will be owned and administered by the customers at their premises.
Company B intends to mass produce the modified hardware and sell it to non-competitors, who can use it to run their own security-sensitive applications.
The software is not integral to the modified hardware and will not be supplied as part of the hardware when sold to external customers. It could also, with minor modifications, be run on other hardware.
The software is subject to the limit on expenditure, because it is not integral to the modified hardware, so is not considered firmware.
Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.
Software as support activity
Internal software development includes software development which supports eligible SIE activity.
Find out more
- Requirement for developers to group themselves with other developers under the same control
- Calculating the limit on expenditure if you are not part of a group
- Allocating the limit across members of a group
- Applying to have the limit on internal software development expenditure increased
Date published: 24 Mar 2009
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