Skip to main content
Inland Revenue

Tax Policy

Tax treatment of unsuccessful software development

(Clauses 17 and 163)

Summary of proposed amendment

The proposed amendment allows an immediate deduction for expenditure incurred on unsuccessful software development projects in the year that the development is abandoned.

Application date

The amendment applies for the 2007−08 and later income years. The application date is retrospective to give certainty to taxpayers who have previously relied upon a 1993 Inland Revenue policy statement to claim a deduction for the costs of unsuccessful software development.

Key features

The amendments allow a deduction when a person incurs expenditure on developing software for use in their business and the development of this software is abandoned.

The person is allowed a deduction for the expenditure incurred in the development of the software if no other deduction has been allowed for the expenditure under New Zealand legislation.

The deduction will be allowed in the income year that the software development project is abandoned.


On 4 April 2011 the Commissioner of Inland Revenue issued a general notice advising taxpayers that they should not rely on certain parts of a 1993 policy statement, “Income tax treatment of computer software”. The statement indicated that capital expenditure incurred on developing unsuccessful software qualifies for an immediate tax deduction. The 2011 general notice indicated that this is no longer the Commissioner’s view of the law and it should not be relied upon. It advised, therefore, that this part of the 1993 statement should be treated as being withdrawn from the beginning of the 2011−12 income year.

As a consequence of the Commissioner’s revised view of the law, it is possible that some expenditure on unsuccessful software development may never be deductible (either immediately or over time). The non-deductibility of unsuccessful capital expenditure would be an example of so-called “blackhole” expenditure. This raises a policy concern because disallowing a deduction for such expenditure could discourage firms from undertaking otherwise sensible investment.

The changes proposed in the bill will give taxpayers greater certainty over the tax treatment of the costs of unsuccessful software development.