The CIOs Role

Kieran Lane, partner in charge of tax for the Information, Communication and Entertainment Group for KPMG, says the first thing a CIO should do is understand the difference between leasing for tax and acquisition for tax.

However, CIOs also have to understand that software is a depreciating asset, which just like a motor vehicle has less and less value over time. Lane says CIOs should be connecting with the in-house treasury team and be prepared to seek outside advice when the issues are highly specialized.

Many of the complications surrounding tax and IT concern prime contract arrangements, where a customer is contracting for a bunch of services that may involve a purchase of hardware and software and other bits and pieces. "You have to be careful how you do that, because often some of that stuff would be purchased indirectly by the private contractors and that will cause a tax issue if that's then handed back to the owner at the end of the contract," says Capgemini Australia vice president technology Bradley Freeman.

"So it's a bit of a cautionary thing, before you enter into those arrangements, to actually check in particular the state tax requirements on acquisition of those products, which is why a lot of people buy software directly or hardware directly outside those prime contracts." Get your lawyer and your tax accountant in on the earliest stage of negotiations, Freeman advises.

"The government agencies are very good at this stuff, they know the issues inside and out and most of the procurement guys are really very good . . . It still surprises me that some very intelligent people negotiating some very large contracts often forget about basic tax considerations," Freeman says.

Taxes may be as inevitable as death in the end, but there is nothing inevitable about having to pay more taxes than you owe. And cutting your company's tax liability may go a long way towards saving you from dying an early corporate death, at least.

SIDEBAR: Implementing Tax Awareness

Deloitte tax partner Stuart Osborne has identified some of the major issues concerning tax

Implementation Costs There are many costs associated with implementing a new ERP system, including the costs of the software itself as well as internal and external costs associated with the implementation of the project. Certainly as a general rule the costs of the implementation will constitute a capital cost and therefore be non-deductible for tax, but there are different assets created during the implementation process that if identified may produce a different tax result.

There are also costs that may be separately identified, which could be deductible immediately as opposed to amortized, as well as various rules around the rate at which software itself can be amortized in all of these tax considerations combined to reduce the payback period of a major software implementation.

During the course of a major implementation various new processes and manuals are created. Some of these may constitute intangible property, which may be eligible for amortization.

GST The GST included in the costs of any new IT implementation is a significant proportion of the overall costs of the project and needs to be managed accordingly to ensure that appropriate input tax credit entitlements are maximized.

Research and Development On a major IT project there is significant customization associated with the implementation, and the project itself often leads to various business process changes and improvements. These customizations and process changes may well constitute R&D. The benefit of identifying the R&D projects is that the costs associated with the R&D, even to the extent that they are capital costs, are eligible for deduction at a rate of at least 125 percent. Entitlement to this concession is often overlooked and its appropriate use can significantly reduce the payback period of the costs of implementation of the software itself.