The Australian Taxation Office (ATO) has published updated guidance on trading stock and the treatment of proceeds from the sale for software.
Trading stock and the treatment of proceeds from the sale of software
The correct tax treatment of the proceeds from the sale of software depends on whether or not the software is trading stock.
Trading stock is anything your business acquires, produces or manufactures for the purposes of manufacture, sale or exchange.
If you are a software distributor, packaged software (that is, a copy of a software program stored on physical carrying media) that you acquire for sale in the course of your business is considered as trading stock. This is the case even if the legal ownership of the software product (that is, the program, the carrying medium and associated manuals) remains with the software developer, which can occur where software is acquired and distributed under licence.
Computer software produced or developed for sale (for example, by way of transfer of all of the rights relating to the copyright in the software) by a software developer is considered as trading stock. In addition, any packaged software you produce for sale that remains on hand at the end of an income year is trading stock.
Any proceeds you receive from the sale of packaged software is included in your assessable income as income according to ordinary concepts.
Changes in the value of trading stock software must be brought to account in calculating your taxable income.
Digital download and cloud computing arrangements
Software that is distributed by way of digital download or through cloud computing arrangements is not trading stock, as it is not held for the purposes of sale or exchange.
In a licence or relevant access arrangement under which software is distributed or made available for use, the software is not itself trading stock. This is because the software is not held for sale, sold or exchanged. On the same basis, the licence or relevant access arrangement under which software is distributed in this context is not itself trading stock.
This does not mean that intangible property cannot be trading stock in certain circumstances. If you are a software distributor or software developer, any proceeds you receive from the distribution or licensing of software under such arrangements is included in your assessable income as income according to ordinary concepts.
Treatment of proceeds from the transfer of the copyright in software
If you are a software developer who, in the course of your business, transfers all the rights relating to the copyright in software, any proceeds you receive from the transfer are included in your assessable income as income according to ordinary concepts.
The transfer or disposal of all the rights relating to the copyright in software that is not trading stock gives rise to a balancing adjustment under the capital allowances regime.
Software and the capital allowances regime
Copyright in software and licenses of copyright are intangible assets that are defined as depreciating assets if they are not trading stock.
If you are the holder of a depreciating asset, you can claim a deduction for its decline in value. In most cases, the legal owner of a depreciating asset will be its holder. In the context of the distribution of software, the software owner is considered to be the holder of the software depreciating asset and can claim a deduction for its decline in value.
Software and royalty withholding tax
Where an agreement concerning the licensing or distribution of software provides for the payment of a royalty to a foreign resident, or to a resident carrying on business at or through a permanent establishment outside Australia, the recipient may be liable to royalty withholding tax and the payer may be required to withhold an amount from the payment.