Quick answer
Software subscriptions are deducted as you pay them. Software you own for your own use, called in-house software, is depreciated over five years using the prime cost method, or pooled through the software development pool if you build it. A small business can write off in-house software costing less than $20,000 immediately under the instant asset write-off, now permanent. Overseas SaaS should arrive without GST once the vendor has your ABN.
Is software tax deductible in Australia?
Yes, with the method depending on what you acquired. The ATO’s guidance on digital product expenses treats periodic subscriptions, licence fees for a term, and cloud service charges as ordinary operating costs, deductible in the year incurred to the extent of business use. Commercial off-the-shelf software with an effective life of one year or less is specifically excluded from the in-house software definition, so it is deducted immediately as well.
Everything else that you buy or build mainly for your own use is in-house software. The ATO says it may only be depreciated using the prime cost method, with an effective life of five years for software you started to hold on or after 1 July 2015. That is the default for a perpetual licence, a custom-built job-management system, or a purchased ERP module.
Two alternatives sit alongside the five-year rule. The first is the simplified depreciation regime for small businesses with aggregated turnover under $10 million. Under it, in-house software costing less than $20,000 is written off in the year it is first used or installed ready for use, and the government has now made that $20,000 threshold permanent from 1 July 2026 through the Treasury Laws Amendment (Tax Reform No. 2) Act 2026. Software costing $20,000 or more joins the small business pool at 15% in the first year and 30% thereafter.
The second alternative is the software development pool, which only applies to software you develop or have developed for your own use. Expenditure incurred from 1 July 2015 is deducted at nil in year one, 30% in years two, three, and four, and 10% in year five. The pool is a one-way choice: once you put one project in, all later in-house software development must follow.
Employees who buy software for work follow the depreciating-asset rules for work items: $300 or less is deducted immediately, above that it is depreciated over its effective life at the work-use percentage.
How much can you claim?
Subscriptions: the full business portion in the year. In-house software: 20% a year over five years, or in full under the instant asset write-off for a small business. Worked example: a Brisbane architecture practice (turnover $3 million) pays $9,600 a year for design and accounting subscriptions and buys a $14,500 perpetual licence for a structural analysis package in March 2027. The subscriptions are deducted in full. The licence is in-house software under $20,000, so under simplified depreciation the practice writes off the whole $14,500 in the 2026-27 year. A larger firm outside the simplified rules would deduct $2,900 a year for five years instead.
| Software type | Treatment |
|---|---|
| SaaS, term licences, cloud services | Deductible as incurred |
| Off-the-shelf with effective life of one year or less | Deductible as incurred |
| In-house software (perpetual licence, custom build) | Prime cost over 5 years |
| In-house software under $20,000, small business | Instant asset write-off, per asset |
| In-house software $20,000 or more, small business | Small business pool, 15% then 30% |
| Self-developed software, by election | Software development pool 0/30/30/30/10 |
Private use reduces every figure. A sole trader using a $1,200 a year design suite 40% personally claims $720.
GST on software
Australian-billed software carries 10% GST, claimed as an input tax credit at the business-use percentage on the next BAS. Overseas vendors are where errors cluster. The GST law puts a registered business in the same net position as a local purchase: give the supplier your ABN and a statement that you are registered, and they should not charge GST. If a vendor still charges it, the credit is claimable. The reverse charge only bites where you would not be entitled to a full credit, so for most fully taxable businesses there is nothing to add. Use the GST calculator for the arithmetic and the Australian GST and BAS guide for the rules.
Record-keeping requirements
Keep the licence terms, because they decide whether you bought a period of access (operating expense) or a perpetual right (in-house software). Keep renewal invoices for subscriptions, and for in-house software a depreciation schedule showing the date it was first used or installed ready for use, since that date fixes the write-off year. Records must be kept for five years. The Australian record-keeping guide covers electronic formats.
How to claim, step by step
- Classify each software purchase: period access or short-life off-the-shelf is expensed; a perpetual licence or custom build is in-house software.
- Deduct subscriptions at the business-use percentage in the year incurred.
- For in-house software, check the simplified depreciation rules first if turnover is under $10 million; apply the instant asset write-off under $20,000 or pool at $20,000 and above.
- Outside the simplified rules, depreciate over five years using prime cost, or elect the software development pool for self-built systems.
- Give overseas vendors your ABN and GST registration statement so they invoice without GST; claim credits on the BAS for GST actually charged.
- Record the first-use date on the depreciation schedule and review subscriptions annually.
Common mistakes
- Depreciating a monthly SaaS plan over five years because it is “software”.
- Expensing a $30,000 custom build in full when it should be pooled or depreciated.
- Claiming the instant asset write-off while not using the simplified depreciation rules, or when aggregated turnover is over $10 million.
- Putting one project into the software development pool and later depreciating the next project separately.
- Paying GST to a US vendor that was never given the ABN, then forgetting to claim the credit.
Software that helps
- Dext captures vendor invoices from forwarded emails and keeps recurring charges coded consistently.
- ExpenseFlow reads software invoices with frontier vision AI, tells a subscription from a perpetual licence or build, explains the call under each line, lowers its confidence for review when the invoice does not say which, flags overseas bills that need reverse-charge or import treatment, and syncs the approved result to Xero with the invoice attached, or to QuickBooks Online as a coded bill.
- Xero includes a fixed asset register that handles the small business pool and prime cost schedules.
FAQ
See the answered questions above for subscriptions, in-house software, the $20,000 write-off, the development pool, and overseas GST.
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GST coding on autopilot
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