Can you claim software development as a tax deduction in Australia?

How does the ATO treat custom software?

Custom software you build, or pay someone to build, for use in your own business is “in-house software” in ATO terms, and it is a depreciating asset. The ATO defines in-house software as computer software, or the right to use it, that you acquire, develop or have someone else develop for your business use, not for sale. It is deductible only under the uniform capital allowance rules or the simplified depreciation rules for small business.

That definition settles the first question most buyers ask. Paying a development company $80,000 for a booking platform, a client portal or an internal operations app does not usually produce an $80,000 deduction in the year you pay. It produces an asset that you write off over time, with a few routes to a faster write off.

The ATO excludes two things from in-house software, and both are deductible in the year incurred:

• commercial off the shelf software with an effective life of one year or less
• periodic payments to use software in your business, such as SaaS subscriptions

Status at the time of writing (8 November 2026): the rules below reflect the ATO pages listed in the sources, which were last updated between June 2025 and September 2026.

What are the four ways to claim in-house software?

Which route applies depends on your turnover, whether the software is ready for use, and choices you have already made. This table summarises the ATO’s options.

Route	Who can use it	When the deduction arrives	Key condition
Instant asset write-off	Businesses with aggregated turnover under $10 million using simplified depreciation	Year the software is first used or installed ready for use	Cost is less than $20,000
General small business pool	Same businesses, for software costing $20,000 or more	15% in year 1, 30% of the pool balance each year after	Software is installed and ready for use
Software development pool	Any business that chooses it	Nil in year 1, then 30%, 30%, 30% and 10%	Software is for use solely for income producing purposes; once chosen, all later in-house software spend must be pooled
Prime cost over the effective life	Anyone not using the routes above	Evenly over 5 years, apportioned in the first year	5 year effective life if you started to hold it on or after 1 July 2015

A few rules connect these routes and catch people out:

• Pooled software is excluded from simplified depreciation. The ATO lists “software allocated to a software development pool (but not other software)” among the assets excluded from the small business rules.
• Each income year’s development spend forms a separate pool. A two year build creates two pools on two schedules.
• GST comes out first. If you can claim an input tax credit, the amount allocated to a pool or depreciated excludes it.
• Abandoned projects stay in the pool. If pooled development is abandoned, the ATO says the amounts remain part of the pool. Software not in a pool that you decide never to use can be deducted immediately.

Is the $20,000 instant asset write-off still available?

Yes. As at 8 November 2026, the $20,000 instant asset write-off is permanent from 1 July 2026 for businesses with aggregated turnover under $10 million, and the ATO says the measure is now law. The limit was previously extended year by year. The Government announced the permanent change in the 2026 to 27 Budget on 12 May 2026, and the ATO’s legislation page lists it as enacted.

What this means for software:

• The limit applies per asset, so separate software assets each costing under $20,000 can each be written off.
• It applies to software that is installed and ready for use, in the year it is first used.
• It is only available through the simplified depreciation rules, and you must apply the whole set of rules, not just the write off.
• The 5 year lock out rule for businesses that opted out of simplified depreciation is suspended until 30 June 2027, so a business that left the regime can return.
• An upgrade to an asset written off in an earlier year can also be deducted immediately if it is the first cost addition after that year and costs less than $20,000.

Splitting one system into several invoices to get under the threshold is not the same as having several assets. Whether a module is a separate asset is a question of fact for your tax agent, not something a development contract can decide.

A worked example: one build, three treatments

The same $60,000 build produces very different deduction timing depending on the route. This example is illustrative only. It assumes a GST registered company with aggregated turnover under $10 million and a 30 June year end, commissioning a $60,000 (ex GST) custom booking system for its own use. Your figures and eligibility will differ.

Treatment A: small business pool, software ready for use on 1 October 2026. The cost is $20,000 or more, so it goes into the general small business pool. Assuming it is the only asset in the pool:

Income year	Opening balance	Deduction	Closing balance
2026 to 27	$60,000	$9,000 (15%)	$51,000
2027 to 28	$51,000	$15,300 (30%)	$35,700
2028 to 29	$35,700	$10,710 (30%)	$24,990
2029 to 30	$24,990	$7,497 (30%)	$17,493
2030 to 31	$17,493	$17,493 (balance under $20,000 written off)	$0

Treatment B: prime cost over 5 years, same date. $60,000 over 5 years is $12,000 a year. The first year is apportioned for the 273 days held from 1 October 2026 to 30 June 2027: $12,000 × 273 ÷ 365 = $8,975. The remainder follows over the next four years and a part year.

Treatment C: software development pool, all spend incurred during 2026 to 27 while the system is being built.

Income year	Deduction
2026 to 27	Nil
2027 to 28	$18,000 (30%)
2028 to 29	$18,000 (30%)
2029 to 30	$18,000 (30%)
2030 to 31	$6,000 (10%)

The arithmetic is the easy part. The choice has knock on effects: choosing a software development pool binds later in-house software spend, and pooled software can’t use the small business write off. That is why the decision belongs with your tax agent before the first invoice, not after the last.

How are SaaS subscriptions treated compared with a custom build?

Subscriptions you pay to use someone else’s software are generally deductible in the year incurred; a custom build you own is depreciated. This is one of the real financial differences between buying and building, and it belongs in the comparison alongside licence fees and control.

Spend	Typical tax treatment (ATO)	Watch for
Monthly or annual SaaS subscription	Deductible in the year incurred	Prepaid plans covering several years may be treated differently
Off the shelf software with a life of a year or less	Deductible in the year incurred	Perpetual licences are usually longer lived assets
Custom software for your own use	In-house software: depreciate, pool or write off	Turnover, cost, readiness for use, prior pool elections
Implementation or customisation of a SaaS product	Depends on what you are paying for	Ask your tax agent; the accounting answer may differ
Ongoing maintenance and bug fixes on existing software	Often a revenue expense, depending on facts	Enhancements that add new capability may be capital

The last two rows are where judgement comes in. Fixing a defect usually keeps an asset working. Adding a payments module or a client portal usually improves it. Invoices and statements of work that separate the two make your accountant’s job easier, which is one reason we keep maintenance and new feature work on separate lines. Our software maintenance cost guide covers what ongoing work typically involves, and build vs buy covers the wider decision.

Do you capitalise or expense software in your accounts?

For financial reporting, AASB 138 Intangible Assets decides, and it is a separate question from tax. Under AASB 138, expenditure in the research phase of an internal project is recognised as an expense when incurred. Development phase expenditure is recognised as an intangible asset only if the entity can demonstrate a list of criteria, including technical feasibility, intention and ability to complete and use or sell it, and the ability to measure the cost reliably. If you can’t separate the research phase from the development phase, AASB 138 treats it all as research.

Cloud products add a twist. In April 2021 the IFRS Interpretations Committee published an agenda decision on configuration and customisation costs in a cloud computing arrangement. The Queensland Audit Office summarises the effect: most of those costs are expensed rather than capitalised, unless they create an intangible asset the organisation controls or are a prepayment for services received over time. If you are spending heavily on configuring a SaaS platform, your accounts may show it as an expense even though a custom build of similar cost would be capitalised.

Tax and accounting can therefore point in different directions for the same invoice. That is normal, and your accountant reconciles them.

Where does the R&D Tax Incentive fit?

If part of a software project is registered R&D, the ATO says the eligible spend must be claimed under the R&D Tax Incentive, not as an ordinary deduction. The ATO’s guidance is direct on three points:

1. Amounts that meet the eligibility requirements must be claimed under Division 355 of the ITAA 1997. If you choose not to claim them there, you generally can’t claim them elsewhere in your return.
2. A notional R&D deduction can’t also be claimed as a general deduction.
3. The decline in value of depreciating assets used for R&D activities is claimed as a notional deduction, and assets used in R&D are excluded from the small business simplified depreciation rules.

In practice most software projects are a mix. Routine development is depreciated under the rules above; any genuinely experimental work that is registered is claimed under the incentive. Software built mainly for your own internal administration is excluded from core R&D, which business.gov.au explains and our guide on what qualifies for the R&D Tax Incentive covers. For what the incentive does and doesn’t do to a project budget, read how the R&D Tax Incentive affects the cost of building software.

We don’t quote offset percentages on this page. They depend on your turnover, tax position and the program’s rules for the year, and announced changes from 1 July 2028 are not yet law. A registered R&D tax agent should model them for you.

What to give your tax agent before the build starts

The decisions with the biggest effect on timing are made before the first invoice, so bring your agent in early. Take this checklist to the conversation:

1. Purpose. Is the software for use in your business, for sale or licensing to others, or both? The answer changes the category.
2. Turnover. Your aggregated turnover for the year, including connected entities and affiliates.
3. Existing elections. Do you use simplified depreciation? Have you ever chosen a software development pool?
4. Timeline. When will spend be incurred, and when will the software be installed ready for use? A build that straddles 30 June creates two income years of spend.
5. Structure of the work. Is it one system or several distinct assets? Separate stages in the contract help, but substance decides.
6. New capability vs upkeep. Which invoices add features and which fix or maintain?
7. Experimental work. Is any part genuinely uncertain in a way that might be R&D? If so, records need to be kept as the work happens. Our guide to technical uncertainty explains the test.
8. GST. Whether you can claim full input tax credits.

You can check that an adviser is registered on the Tax Practitioners Board register, linked in the sources.

How AWLabs helps with the paperwork, not the tax

AWLabs is not a registered tax agent and doesn’t advise on deductions. What we can do is make the records your accountant needs easy to produce. After a Development Consult and a paid Discovery Audit (the fee is credited in full against the build), we price the work in a fixed price Schedule of Work with three options: The Minimum, The Recommended and The Complete. Stages are defined in the schedule, invoices map to those stages, and we can note when each part was delivered and handed over, which helps your agent work out when software was installed ready for use. Where a project may include R&D activities, our R&D documentation support keeps contemporaneous technical records for your registered R&D tax agent to assess. Senior engineers lead every build, and we work Sydney business hours.