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In-house software development is becoming increasingly popular among Australian businesses, as it offers a range of benefits over off-the-shelf software solutions. In-house software is developed and maintained by a company or organization for its own use, and can be customized to meet specific business needs and processes.
Advantages:
One of the key advantages of in-house software development is the ability to tailor software to specific business needs. Off-the-shelf software solutions may not always meet the unique requirements of a business, and may require significant customisation to achieve the desired functionality. With in-house software, businesses can create custom solutions that are tailored to their specific processes, workflows, and requirements.
In addition to greater customisation, in-house software can also offer greater control and security. Businesses have full control over the development, deployment, and maintenance of their software, which can provide greater security and protect sensitive data. This is particularly important for businesses operating in industries where data privacy and security are critical.
Another advantage of in-house software development is the ability to reduce ongoing costs associated with licensing, upgrades, and maintenance. With off-the-shelf software solutions, businesses may be required to pay ongoing licensing fees, as well as costs associated with upgrades and maintenance. With in-house software, businesses have full control over ongoing costs and can allocate resources as needed.
Disadvantages:
While in-house software development can offer a range of benefits, it can also be a costly endeavour. Developing software in-house requires significant resources, including skilled personnel, infrastructure, and software development tools. As a result, businesses need to carefully consider the costs and benefits of in-house software development before embarking on a project.
Claiming deductions for In-house Software:
Business Costs
Under Australian tax laws, businesses can claim a tax deduction for any expenses incurred in the course of producing assessable income, including expenses related to in-house software development. These expenses may include wages and salaries of software developers, costs associated with acquiring or developing software tools and equipment, training expenses for software developers, and overhead costs associated with software development, such as rent, utilities, and insurance.
These are the options available with how in-house software can be deducted:
- Simplified Depreciation Rules
If the software is ready for use, it can be depreciated under these rules.
- Software Development pools
If the software is still in development and not ready for use at all, it will be depreciated under these rules for tax purposes.
- Software development pool are amortised at the following rates:
- Year 1 – Nil
- Year 2 – 30%
- Year 3 – 30%
- Year 4 – 30%
- Year 5 – 10%
- A separate software development tool will be created for each income year.
Disposal of In-House Software
When in-house software is disposed of, businesses may be able to claim a deduction for the decline in value of the software. This decline in value may be due to obsolescence or other factors that make the software no longer useful or valuable to the business.
Under the software development pool, the amounts remain part of the pool and follows its rules regarding its depreciation.
Under simplified depreciation rules, an immediate deduction can be claimed for the remaining value of the in-house software.
Eligibility for these deductions can be complex, and businesses should seek advice from a registered tax agent to ensure they are claiming deductions correctly.
This blog has been prepared for the purposes of general information and guidance only. It should not be used for specific advice or used for formulating decisions under any circumstances. If you would like specific advice about your own personal circumstances, please feel free to contact us on 02 9411 5422. We can help make sure the right method is used to give you the maximum possible tax deduction associated with any of these methods.
