The draft guideline analyses the deductibility of costs a taxpayer incurs in configuring or customising (C&C) application software in a software as a service (SaaS) arrangement.

The draft guideline concludes:

1. It is highly likely SaaS C&C costs will have the necessary nexus with income to be deductible, but consideration will need to be given to whether the expenditure is capital in nature.
2. An immediate deduction will be allowed under section DB 34 of the Income Tax Act 2007 if the C&C expenditure meets the definition of “internally generated” research or development costs and has been expensed for financial reporting purposes under NZ IAS 381 .
3. In other cases, the C&C costs should be capitalised and form part of the cost of a right to use software which qualifies as depreciable intangible property or as fixed life intangible property.

According to CA ANZ, the finalised interpretation guideline will be useful and give taxpayers and their advisers confidence that they are treating the SaaS C&C expenditure correctly for tax purposes. Provided a reasonable approach/interpretation has been adopted by taxpayers to date, CA ANZ recommend the application date of the finalised guideline be prospective.

CA ANZ also suggest some aspects of the items be reviewed and clarified with additional references.