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By: Aliece Graham, Keith To, Jessica Brass
11 Sep 2026 9 min read
Together, these publications provide the ATO's view on when payments made under software distribution, intermediation and other intellectual property (IP) arrangements may constitute royalties and therefore be subject to Australian royalty withholding tax (RWT).
Importantly, the Ruling applies to payments made both before and after its date of issue on the basis that it reflects how the ATO sought to apply the law as a longstanding practice. However, TR 93/12 continues to apply to periods before its withdrawal in 2021. The Ruling reinforces the ATO's continued focus on identifying what it regards as ‘unrecognised royalty’ payments.
While the release provides greater certainty following several years of consultation and multiple draft rulings, many businesses may find that their existing arrangements are now more vulnerable to RWT scrutiny than previously expected.
The ATO has largely maintained the position adopted in its earlier draft rulings, focusing on whether payments are made – wholly or partly – for the use of, or right to use, copyright or other intellectual property rights. This includes where ‘software intermediaries’ communicates, reproduces, modifies or otherwise exercises rights that are exclusive to the copyright owner. This can also extend to where the software intermediary is authorised by another party to reproduce or communicate the software.
The term ‘software intermediaries’, introduced in this Ruling, replaced the term ‘software arrangement’ from the previous draft ruling which reinforces that the ruling is directed at intermediaries rather than end users.
Pursuant to the Ruling, the ATO’s views regarding when a payment is – and is not – a royalty are set out below:
| What is a royalty | What is not a royalty |
|---|---|
|
The grant of a right to use IP (whether or not exercised). |
The grant of a right to distribute copies of a computer program made by the holder of the copyright, and not for the use of, or right to use, any IP rights. |
|
The use of any IP right (including the doing of any act comprised in copyright, and including the exclusive right to authorise a person to do such an act). |
The assignment of all rights relating to the copyright in software. |
|
The supply of know-how. |
The acquisition of a tangible good with embedded software, provided that the distributor does not use, and is not granted the right to use, any IP right in the embedded software. |
|
Ancillary and subsidiary assistance (related to the application or enjoyment of the above). |
The acquisition of physical media on which software is stored, provided that the distributor does not use, and is not granted the right to use, any IP right in the software stored on that media. |
|
The right to use or the use of IP embedded in tangible goods. |
|
|
Total or partial forbearance in respect of any of the above. |
Alongside the Ruling, the ATO has issued draft PCG 2026/D4, which outlines how it proposes to assess RWT risk in software-related arrangements.
The draft PCG provides a practical risk assessment framework and identifies arrangements that may be less likely to attract compliance attention (as opposed to the likelihood that the law has been applied incorrectly).
The ATO indicates that lower-risk arrangements may include:
However, the ATO has specifically identified higher-risk scenarios, including:
The draft PCG provides a number of practical worked examples, although it does not conclude whether the arrangements result in royalties or not, but rather to assist with the risk assessment. The draft PCG also remains subject to change as a result of further consultation process.
TR 2026/2 considers when a payment may constitute a royalty under Australia's domestic income tax law, including the royalty definition in subsection 6(1) of the Income Tax Assessment Act 1936 and the withholding tax provisions in section 128B.
Where the recipient is resident in a treaty country, the relevant tax treaty is given primacy over domestic law.
Importantly, TR 2026/2 recognises that Australia's tax treaties do not contain a uniform definition of ‘royalty’. While the ruling is primarily directed at treaties containing the standard royalty article, it expressly acknowledges that for example, the Australia-US and Australia-Singapore tax treaties contain materially different royalty definitions. This distinction is particularly relevant given the significant volume of technology, software and SaaS transactions involving suppliers and regional hubs located in those jurisdictions.
Accordingly, even where a payment may be characterised as a royalty under Australian domestic law, the treaty analysis remains critical.
A recurring theme is the ATO's focus on the underlying rights being exercised and the economic substance of the arrangement, rather than simply how parties label payments or document commercial relationships. The ATO's commentary following the High Court decision in Commissioner of Taxation v PepsiCo Inc & Anor [2025] HCA 30 (PepsiCo) (see our commentary on PepsiCo) suggests it will closely examine whether a payment is, in substance, consideration for the exploitation of copyright or other intellectual property rights.
The ‘substance over form’ approach is to be expected and means taxpayers cannot assume that describing an arrangement as a ‘distribution agreement’, ‘reseller agreement’ or ‘software licence’ will determine the withholding tax outcome. Businesses will need to understand precisely what rights are granted and how those rights are exercised in practice.
Historically, many businesses viewed software distribution arrangements as relatively low-risk from a royalty withholding tax perspective, particularly where the distributor did not own the underlying software intellectual property.
The final ruling indicates that the ATO will focus on whether distributors or intermediaries are exercising rights that would ordinarily belong to the copyright owner, including rights relating to reproduction, communication, modification or adaptation of software. Where those rights exist, the ATO may view some or the entire related payment as a royalty.
As a result, multinational software groups should revisit long-standing positions that have not historically been treated as giving rise to royalty withholding tax obligations.
Many software distribution and intermediation arrangements are entered into between related parties. Importantly, the PCG indicates the ATO may request evidence demonstrating how taxpayers determined the royalty amount recognised under those arrangements. Significantly, the ATO has stated that this expectation extends to arrangements classified within both the green (low) and yellow (low to medium) risk zones.
This signals that the ATO's focus is not limited to whether a royalty has been correctly identified and applied. Rather, the ATO will also scrutinise whether the quantum of the royalty can be substantiated as arm's length, supported by robust economic analysis and contemporaneous evidence. In practice, taxpayers should not assume that a lower risk rating shields the pricing outcome from further examination.
As the ATO increases its scrutiny of software royalty arrangements, taxpayers should ensure they have a well-documented transfer pricing policy. This is important for taxpayers seeking to demonstrate that software royalties recognised within the ATO's lower-risk zones are appropriately priced and supported.
Businesses should consider:
The finalisation of TR 2026/2 brings welcome certainty regarding the ATO's interpretation of software-related royalties. However, that certainty comes with a broader and more assertive view of when software payments may give rise to royalty withholding tax obligations. Further the draft PCG does provide some useful insights into how the ATO would seek to approach its compliance activities in certain circumstances as set out in the examples.
A proactive review now may significantly reduce the risk of future ATO scrutiny, withholding tax exposures and associated penalties.
Grant Thornton can assist with:
Article contributed to by Sagar Shah - Transfer Pricing and Tom Butcher - Tax
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