ATO ruling on software development

March 20th, 2014

On 12 March 2014, the ATO issued Taxation Ruling TR 2014/1 titled “Income tax: commercial software licensing and hosted agreements: derivation of income from agreements for the right to use proprietary software and the provision of related services”.

This ruling deals with when commercial software developers derive income for the purpose of s 6-5 of the Income Tax Assessment Act (ITAA) 1997 from:

(i) licence agreements for proprietary software; and

(ii) hosted or cloud arrangements for use of proprietary software.

Specifically, the ruling considers the point of derivation of income in respect of the contractual fee for:

(i) the granting of the proprietary licence;

(ii) the hosted arrangement; and/or

(iii) other “additional services” which may or may not be bundled together with (i) or (ii) in contract

Where there is bundling of ‘additional services’, the ruling also considers the proper apportionment of the contractual fee between the licence or access fee and/or the additional services (including software updates, upgrades and maintenance; user support including implementation; and user training).

Click here to view the ruling.