Computer software capital allowances




















Both software products were in development and whilst had potential, there was no clear evidence business framework or resources to support significant trading activities in the periods of claim or in the future. Presumably, this is because on first principle, the whole basis of a legitimate trade was in dispute. Both parties submitted a Discolurse of Tax Avoidance Scheme DOTAS form as a matter of caution and it was clear from the documents and explanations provided that the availability of capital allowances was a major factor for all concerned.

The transactions also contained esoteric finance features with limited recourse loans and warranties to the effect that investors were exposed to limited commercial risk if the licenses failed to generate any profits.

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In this case, D Bank sought to claim it as an operating expenditure qualifying for full deduction in the year it was incurred. The court dismissed the claim arguing that the expenditure was capital in nature and a prohibited deduction in terms of the law.

It was also barred from capital allowances because the expenditure had not been classified as expenditure qualifying for purposes of capital allowances.

In view of the importance and growing size of this expenditure in financial institutions and Information Technology companies, the government amended the law to correct the anomaly with effect from 1 January The effect was to grant capital allowance on computer software expenditure incurred by any taxpayer deriving income from trade and investment, except for mining entities with effect from 1 January Special Initial Allowance is an investment allowance which is claimed over a period of four or three years, for big businesses and Small to Medium Enterprises respectively.

While this was a welcome relief for persons deriving income from trade and investment, mining entities have been secluded from enjoying the benefit. Mthuli Ncube in his National Budget Speech has however proposed to correct this imbalance by extending capital allowances on expenditure incurred by persons earning income from mining operations on acquisition and development of computer expenses with effect from 1 January Thus, tangible or intangible property in the form of computer software that is acquired, developed or used by the tax payer in connection with its mining operations and has been classified as capital expenditure for purposes of claiming capital redemption allowance.

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