Tax Updates: 3 April 2023

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Tax Bill receives final reading

The Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill (No 2) has now received its 3^rd and final reading and received the Royal assent on 31^st March 2023. In next week’s edition I will do a summary of the Bill’s elements that are most likely to have an impact on your life.

Deductibility of SaaS costs

Inland Revenue (IR) has released a draft IS (interpretation statement) on the topic of the deductibility of costs a taxpayer incurs in configuring or customising a supplier’s application ‘software as a service’ (SaaS) arrangement.

The topic may therefore be of little relevance to most of you, although, I always find it useful when IR issues any commentary surrounding the capital v revenue question, to see where their current thinking is, which can often then be applied to more general scenarios which you may be faced with.

So PUB00464 deals with SaaS type scenarios, which is a cloud-based software licensing and delivery model giving the customer a right to access the provider’s software that runs on the provider’s cloud infrastructure. SaaS applications include payroll processing, customer relationship management (CRM), enterprise resource planning (ERP), human resources management, content management, and database management systems.

IR refers to the customisation and configuration costs within the IS as being ‘C&C costs’, which are typically incurred in relation to taxpayers requiring assistance to integrate the application with their existing system, or to add extra functionality or features not included in the application.

Draft PUB00464 suggests that the C&C costs may be deductible in one of three ways:

• under the general permission (section DA 1)
• as development expenditure (section DB 34); or,
• as depreciable intangible property.

While deductibility under section DA 1 is suggested, the commentary however goes on to state, that while there is a nexus between incurring C&C costs while carrying on a business or deriving income (the section DA 1 criteria), the capital limitation usually operates to deny a deduction. This is because taxpayers incur C&C costs to transform or enhance their business structure and therefore receive an enduring benefit.

However, if the C&C activities occur continuously during the term of the SaaS arrangement and the taxpayer incurs regular costs to cover these, the recurrent nature of the payments may suggest that they are revenue in nature, and therefore an immediate deduction can be claimed.

So clearly the outcome of each case will be determined based on the specific facts.

The remaining two conclusions reached within PUB00464 were:

• In some cases, the C&C activities may be in-house “development” (as defined in section DB 35) activities, in which case some IFRS reporting taxpayers may be able to claim an immediate deduction for C&C costs under section DB 34. This provision allows a taxpayer to make a deduction for “internally generated” research or development costs recognised as an expense for financial reporting purposes under paragraph 68(a) of NZ IAS 38.

• A deprecation deduction may be available to the extent that C&C costs are not deductible under ss DA 1 or DB 34. The right to use software under a SaaS arrangement is depreciable intangible property. The terms of each SaaS agreement will determine whether the taxpayer should depreciate this right under the depreciable property (section EE 62) or the “fixed-life intangible property” rules (section EE 67).

If you would like to make a comment on the draft IS, the closing date for submissions is 3^rd May 2023.

This article was originally published through the A Week In Review newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.