Software Royalties
The ATO has finalised TR 2026/2, which clarifies when payments under software intermediation arrangements are treated as a royalty under section 6(1) of the ITAA 1936 and are liable for withholding tax. The ruling emphasises cross-border payments for:
- The use of, or right to use, copyright or similar property or rights.
- Payments that may otherwise fall within another part of the definition of a ‘royalty’.
Usually, a payment is a royalty if it is consideration for:
- Granting a right to use IP, whether or not the right is exercised.
- Using any IP right.
- Supplying know-how.
- Assisting to enable the application or enjoyment of the above.
- The right to use, or use of, IP rights in software embedded in tangible goods.
- Fully or partly refraining from using or supplying covered property or rights.
A payment is not a royalty where it is:
- Only for the right to distribute copies of a computer program made by the holder of copyright, without using or having the right to use any IP rights.
- Only for the assignment of all copyright rights in software.
- Only for obtaining tangible goods with embedded software, where the distributor does not use or have the right to use IP rights in that software.
- Only for getting physical media having software, where the distributor does not use or have the right to use IP rights in that software.
- Only for services unrelated to the relevant IP rights, information or knowledge covered by the standard tax treaty definition of a royalty.
Where a payment relates to a variety of things, you may need to apportion the amount to determine the royalty portion. The ATO has also released draft PCG 2026/D4, which explains its compliance approach to determining whether a cross-border payment to a non-resident is a royalty and is subject to withholding tax. The PCG uses 5 colour-coded risk zones – white, green, yellow, amber and red – and outlines the features of arrangements that fall within each zone.
PAYG withholding variation for Foreign Resident Capital Gains Withholding Payments
The ATO has released a legislative instrument, Taxation Administration Legislative Instrument 2026, on the foreign resident capital gains withholding regime in order to consolidate five existing class variation legislative instruments into a single instrument from 17 September 2026. The other instruments are repealed and replaced. Apart from the variation relating to acquisitions from entities that are income tax exempt, the new instrument has the same effect as the instrument that it is going to replace.