ATO issues finalised tax ruling on software royalties

The Tax Office has published the finalised version of its tax ruling on software royalties in relation to software and intellectual property rights, TR 2026/2.

The tax ruling sets out the commissioner's views on when payments under software intermediation arrangements are royalties for the purposes of Australian royalty withholding tax.

This ruling finalises the draft Taxation Ruling TR 2024/D1, which replaced draft Taxation Ruling TR 2021/D4 Income tax: royalties – character of receipts in respect of software. Taxation Ruling TR 93/12 Income tax: computer software has also been withdrawn.

“Broadly, the ruling explains that payments are royalties where they’re made for the use of, or the right to use, copyright or similar rights. It sets out our view relating to the circumstances in which modern software intermediation arrangements involve the use of copyright,” the ATO said.

“This includes where a software intermediary [or distributor] communicates, reproduces, modifies, or adapts the software, or otherwise exercises rights that are exclusive to the copyright owner. This can also extend to where another entity authorises the software intermediary to reproduce or communicate the software,” it said.

The ATO said the tax ruling takes into account feedback it received during consultation and expands on the view expressed by the ATO in TR 2024/D1.

TR 2026/2 explains the impact of recent court decisions on copyright and royalties on how the ATO characterises a payment as a royalty. It clarifies how the ATO applies the principles of Australian copyright law to software intermediation arrangements.

Oracle decision in Full Federal Court

The Tax Office has also issued a decision impact statement on the decision, Oracle Corporation Australia Pty Ltd v Commissioner of Taxation [2025] FCAFC 145, which relates to the views set out in TR 2026/2.

The ATO explained that the proceedings in the Oracle decision last year tested the ATO's position expressed in TR 2026/2 that certain payments made by Australian software distributors are royalties and subject to withholding tax.

The central issue in the dispute was whether payments from Oracle Australia to Oracle Ireland, to allow Oracle Australia to distribute software to other software distributors and end users in Australia, were ‘royalties’ as defined by section 6(1) of the Income Tax Assessment Act 1936 and Article 13 of the DTA.

The commissioner concluded that the payments were royalties subject to withholding tax under sections 128B and 128C of the Income Tax Assessment Act 1936, and notified Oracle Australia of the penalties for failing to withhold.

Oracle commenced proceedings seeking declarations from the Federal Court that the payments were not royalties, and appealed the commissioner's objection decisions. However, Oracle also applied to stay those proceedings to allow the MAP cases between Australia and Ireland, including any potential arbitration, to be completed.

The ATO said the outcome of any arbitration would not be precedential and would not be accompanied by reasons.

At first instance, the Federal Court concluded that the stay should be refused, but on appeal the Full Federal Court ordered that the proceedings be stayed pending completion of the MAP process.

“The Commissioner recognises the MAP as an important mechanism for resolving cases of potential double taxation between competent authorities, operating alongside domestic legal processes within Australia’s treaty framework,” the ATO said in its decision impact statement.

“However, where resolution through administrative or bilateral processes does not provide sufficient clarity for the consistent administration of Australia’s tax treaties, we will continue to regard judicial consideration as an appropriate mechanism for resolving questions of treaty interpretation.”

ATO issues draft PCG to accompany TR 2026/2

To accompany TR 2026/2, the ATO has also released draft PCG 2026/D4 for consultation, setting out how it will practically administer the legal view set out in the ruling.

“The revised draft PCG sets out expanded lower risk zones where we are unlikely to apply our compliance resources to further review your arrangement and sets out indicia of higher-risk arrangements which are likely to be our focus,” the Tax Office said.

“We remain most concerned about the characterisation of payments under cross-border arrangements structured to reduce or avoid tax on profits connected with Australia.”

The ATO said it had listened to consultation feedback on the initial draft and expanded the practical ‘safe harbours’ and guided how taxpayers can reduce the risk of ATO compliance action.

This includes:

• A ‘green zone’ for straightforward resale of existing software copies (electronic or tangible)
• Lower risk treatment where taxpayers:
• Recognise a reasonable part of their outbound payments as royalties.
• Where Australian taxable profit margins are higher relative to the group’s global profitability.

The ATO is seeking feedback on the draft PCG, including the criteria underpinning the risk zones, the residual risk assessment calculation, issues relating to the practical application of the PCG, the usefulness of the examples, and other aspects stakeholders think should be addressed in the final PCG.