16 September 2026 • 6 minute read
ATO finalises software royalty ruling and expands practical compliance guidance
Technology multinational enterprises (MNEs) with Australian software distribution, reseller, licensing, cloud or software-as-a-service (SaaS) arrangements should review their royalty withholding tax (RWT) position following the Australian Taxation Office’s (ATO) final software royalty ruling and updated draft compliance guidance. The ruling confirms the ATO’s broad view of when cross-border software payments may be treated as royalties, while the draft practical compliance guideline (PCG) signals increased disclosure requirements and heightened risk-rating expectations.
Key takeaways
- In Taxation Ruling (TR) 2026/2, the ATO doubles down on its expansive view of when software-related payments by Australian distributors may be royalties, including payments under modern SaaS and cloud arrangements.
- The critical threshold is whether the payment is for the use of, or right to use, copyright or another relevant intellectual property (IP) right. The parties’ labels are not determinative. Australian IP law is critical.
- Some of the ATO’s analysis of Australian copyright law is highly contentious. The ATO expresses views regarding key concepts such as communication to the public, authorisation and access-control technologies. SaaS businesses should obtain detailed IP law advice as the copyright law outcomes and related withholding tax analysis are highly fact dependent.
- Draft PCG 2026/D4 expands the risk framework and, once finalised, will require many technology MNEs to risk-assess their arrangements and make annual disclosures about this to the ATO in their Reportable Tax Position schedule.
- The absence of a statutory limitation period for RWT can create significant historical exposure. MNEs should assess treaty relief, foreign tax credit and mutual agreement procedure options early, especially where the foreign jurisdiction may not accept Australia’s royalty characterisation.
What the ATO released
On 4 September 2026, the ATO released a significant guidance package on software arrangements and RWT. The package refines previously expressed ATO views on how technology MNEs should characterise payments under intercompany software, distribution, licensing and cloud arrangements, including how they assess and disclose associated Australian tax risk.
The ATO’s package included:
- its much-awaited finalised ruling in TR 2026/2;
- a compendium of responses to the 34 issues raised in consultation on the 2024 draft ruling (TR 2026/2EC); and
- an updated draft in PCG 2026/D4 (Draft PCG). PCGs are confined to how the ATO assesses taxpayer risk and how it allocates resources, but they do not provide an interpretation of tax law.
Why this matters
The ATO’s finalised ruling in TR 2026/2 has been a long time coming. In 2021, the ATO withdrew its 1993 ruling, TR 93/12, replacing it with an updated draft ruling in TR 2021/D4. And in 2024, it issued an updated draft in TR 2024/D1. All the while, the ATO has been engaged in deep audits of technology companies. The evolution of the rulings reflects a fundamental change in how software is distributed: electronic delivery, cloud computing and SaaS models having largely replaced traditional physical distribution. The developments create new questions about when a payment is for software services and when it is for the use of copyright.
The latest iteration of the ruling focuses squarely on software “intermediation” arrangements, particularly the cross-border payments made by Australian intermediaries and distributors rather than end users. It considers when those payments are royalties under Australia’s domestic tax law and relevant tax treaty definitions of “royalty.” The ATO’s core position on this remains unchanged and assertive.
What technology MNEs should assess now
Technology MNEs will need to pay close attention. Tax rulings set out the ATO’s view of the law and can provide protection for taxpayers who act within them. More practically, TR 2026/2 foreshadows how the ATO is likely to argue these matters with MNEs. Meanwhile, the expanded Draft PCG will require taxpayers to risk-rate their arrangements based on the ATO’s criteria, and disclose that assessment in the Reportable Tax Position schedule for their company tax returns in due course. This will equip the ATO to choose which MNEs to focus its attention on.
The ruling spans tax law and Australian copyright law under the Copyright Act 1968. Its most consequential questions include whether downloading, installing, accessing or authorising access to software is the exercise of an exclusive right reserved to the owner under the Copyright Act. The ATO’s position on SaaS remains particularly significant and contentious. For taxpayers already under, or heading into ATO review or audit, the guidance provides insight into the ATO’s likely approach. It also suggests that the ATO is prepared to test its copyright analysis in court.
The ATO is conducting consultation on the PCG in mid-September, so there is the potential for changes to be made when it is finalised.
Detailed analysis of the ATO's guidance
The analysis below explains how the ATO’s guidance may apply in practice. It focuses on the key TR 2026/2 updates, the expanded Draft PCG risk framework and the ATO administration issues that may shape future compliance activity, disputes and historical RWT exposure.
1. Key TR updates for software intermediation arrangements
ATO position
The focus of the ruling is now on “software intermediation arrangements”, as distinct from the previously used term “software arrangements”.
This change in terminology is an intentional tightening by the ATO, focussing on intermediaries or distributors rather than end users.1
Payments direct from end users to IP owners are outside the ruling.2
DLA Piper observations
Technology MNEs with an Australian entity acting as an intermediary or distributor remain in scope.
This change confirms that the ruling’s focus is on payments made by those intermediary or distributor entities, not by end users.
The focus of the ruling is on characterising what a payment by an Australian entity is for, which is critical to whether the payment is subject to RWT.
A new comment is included on whether an agreement is part of a “single, integrated and indivisible transaction will also be relevant”, citing Pepsi.3
DLA Piper observations
The ATO sought to attack an integrated transaction in Pepsi. Although it lost that litigation in the High Court, the ATO maintains this is relevant to its views. The High Court majority did confine its views to three “critical facts, unique to these appeals”, so the ATO continues to feel unconstrained by that loss.
ATO position
Apportionment may occur where payment is made for several things,4 but this will only be in very limited circumstances. IP rights in software intermediation arrangements are commonly neither separate nor severable, with the commercial bargain unable to be performed without them. In such cases, the entire consideration is a royalty.5
On apportionment approaches, the Draft PCG contains the ATO’s risk assessment for when the ATO will further examine the quantum of a royalty.
DLA Piper observations
The ATO’s narrow approach to apportionment, and its views on the relevance of integrated or indivisible arrangements are critical going forward. MNEs are rightly concerned about being subjected to RWT on the entirety of their outbound payments where IP use by the Australian entity is a relatively small part of the overall arrangement. In practice, we see the ATO adopting a no-apportionment approach.
The ATO’s position contrasts with Moshinsky J’s approach at trial in Pepsi. His Honour applied an apportionment based on a comparable uncontrolled price (CUP) approach. Both Pepsi and the ATO put forward a CUP analysis.6 The Pepsi appeals did not need to address the apportionment, and the ATO has not addressed this in its latest views.
In practice, we see the ATO adopting a position that any IP use results in the entirety of a distribution fee being subject to RWT.
The Draft PCG provides limited comfort for MNEs on apportionment, with the safe harbours being very conservative. Refer to sections 2(a) and 2(e) below.
ATO position
The ATO states that the example “cannot be relied upon where the substance of an agreement or arrangement differs from the facts in the example, such as arrangements where a distributor can independently make software available to download without further action by a software company”.7
DLA Piper observations
The ATO continues to factually distinguish this example. Although its statement is more conciliatory than the prior ruling, the ATO still identifies that many arrangements will fall outside the example, and will depend on Australian copyright law.8
ATO position
Relevant copyrights include the right to reproduce, communicate or adapt a literary work (eg computer program), or to authorise any such act.
The Copyright Act 1968 provides the legal framework for the ruling’s analysis. TR 2026/2 maps these copyright concepts onto the domestic and treaty definitions of royalty.
For SaaS organisations:
-
A communication right might be exercised where an Australian distributor is responsible for determining the content of a communication, where it either enters into an end user agreement or controls the server hosting the software;9 and
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An authorisation right might be exercised where an Australian entity undertakes to provide the service to end users, and the arrangement involves a communication right or reproduction right through the software being made available online.10
DLA Piper observations
These copyright law elements are critical to the analysis, and we regard some of the ATO’s views as highly contestable.
Technology MNEs should obtain tailored copyright law advice which considers their specific delivery model. Detailed analysis is required.
ATO position
Software embedded in tangible goods generally does not give rise to a royalty where the distributor does not use or obtain any copyright, and the software merely facilitates operation of the tangible good (eg mobile phone handsets with pre-installed operating systems).11
The position may be different if the distributor is granted rights to modify or adapt the embedded software.
DLA Piper observations
This is useful clarity for hardware distributors. MNEs should carefully examine their arrangements for any modification or adaptation rights that could impact the analysis.
ATO position
The ATO treats technological protection measures (TPMs), particularly access-control TPMs (ACTPM) (eg authentication programs, license keys, activation codes), as “other like property or rights” within the royalty definition.
DLA Piper observations
This is a significant extension to the ATO’s guidance, and technology MNEs with ACTPMs should consider their copyright law position carefully, including the nature of any right to sue for circumvention of a TPM.
2. Draft PCG risk ratings and disclosure expectations
ATO position
The risk factors in the Draft PCG include the following:
- operating margin calculation;
- residual risk assessment calculation;
- software rights questions;
- payments to specified jurisdictions; and
- payments into tax shelters.
DLA Piper observations
The expanded risk-zone framework creates significant compliance obligations which technology MNEs should start to consider. For example, the ATO’s software rights considerations could act to override other established arm’s length profit margin outcomes.
ATO position
Amber or red arrangements may move to the yellow zone where the Australian operating margin exceeds 10% or is within 10 percentage points of the global group margin.
“Operating margin” is not defined in the Draft PCG.
DLA Piper observations
The lack of a definition for an operating margin creates uncertainty about whether it refers to:
- earnings before interest and tax (EBIT);
- earnings before interest, tax, depreciation and amortisation (EBITDA); or
- another measure.
The 10% threshold and the 10-percentage-point comparison to global group margins may not reflect legitimate commercial reasons for lower Australian margins, including market entry, competitive pricing or different cost structures.
The 10% threshold is also notably higher than existing ATO benchmarks in PCG 2019/1 (transfer pricing issues related to inbound distribution arrangements). Under PCG 2019/1, distributors in the information and communication technology sector may qualify for the low-risk zone with EBIT margins above 4.1%, or 5.4% when they undertake more complex sales and marketing activities.
ATO position
Where a royalty is recognised with a related party, this calculation is the payment less the offshore supplier’s costs (eg infrastructure costs, sales and marketing costs, direct labour).
Green zone rating requires the royalty to be >75% of the residual or >50% of the total payment. If not, the arrangement will be in the yellow zone.
DLA Piper observations
The introduction of the residual risk assessment calculation demonstrates that the ATO is also assessing the risk on the quantum of royalties with respect to software intermediation arrangements.
Notably, supplier costs explicitly exclude related party royalty payments, amortisation of intangible assets, and stock-based compensation payments.
This indicates that the ATO is seeking to compare the royalty to a proxy of entrepreneurial profit earned within the global value chain from Australian sales.
Although the thresholds provide some certainty, they are very high and we expect that few SaaS organisations will recognise a royalty above these thresholds.
ATO position
The amber and red zone rating also depends on certain software rights of the offshore supplier and Australian entity.
DLA Piper observations
These matters are critical because they override the above calculations.
The issues, including whether software is “copied” or “modified”, should be approached with IP law and technological expertise.
ATO position
A red zone rating result if:
- an undissected payment is made to a specified jurisdiction; and
- any of various tax criteria are met, including if the recipient’s income will be “substantially sheltered” by a tax holiday, exemption or concession, R&D tax credits, deductible IP amortisation or tax losses.
DLA Piper observations
The specified jurisdictions include Singapore, Hong Kong, the Netherlands, Luxembourg, Switzerland and Ireland.
The ATO has not provided any quantitative thresholds to what constitutes a substantial offsetting or sheltering of the income.
3. How the ATO may administer software royalty compliance
ATO position
The ruling applies retroactively, though TR 93/12 can apply up to its date of withdrawal on 1 July 2021.
DLA Piper observations
The absence of any statutory limitation period for RWT creates potentially unlimited historical exposure. This is a significant compliance risk for MNEs.
The ATO rejected a transition period or a reasonable window to restructure. Withholding turns on the timing of the payment with no statutory limitation period.12
The ATO also points to the potential for TR 93/12 to have been relied upon inappropriately by MNEs.13 TR 93/12 was applicable up until it was withdrawn in 2021, so can provide penalty protection up until that time.
ATO position
The ATO is unaware of any technology MNEs having been denied foreign tax credits in another country for Australian RWT arising on this issue.
DLA Piper observations
Double taxation is a real and pressing concern for MNEs. Australian RWT may not be creditable if the foreign country does not also characterise the payment as a royalty. The known US Treasury position raises specific concerns in this regard.
MNEs should carefully analyse FTC eligibility criteria, statutory time limits and mutual agreement procedure (MAP) provisions in relevant treaties.
ATO position
The ATO refers to the general anti-avoidance rule (GAAR), the Diverted Profits Tax (DPT) and the Multinational Anti-Avoidance Law (MAAL) as provisions that may be relevant in addition to RWT.
DLA Piper observations
The ATO is signalling the likelihood that it will continue to review software arrangements through a broader anti-avoidance lens.
This is very common practice in ATO reviews and audits. MNEs should ensure that their arrangements are defensible on all fronts.
ATO position
The ATO is willing to test its copyright views in court.14
MAP is an important mechanism for resolving potential double taxation, but the ATO will continue to regard judicial consideration as appropriate where administrative or bilateral processes do not provide sufficient public clarity.
DLA Piper observations
The ATO’s statement about its willingness to test these issues in court is notable.
The finalised PCG will require disclosures in the Reportable Tax Position schedule in future tax returns, allowing the ATO to focus its compliance activity on arrangements rated amber or red.
MAP remains available, but the ATO’s comments about this as a mechanism means that the ATO could seek to push taxpayers towards litigation.
HOW WE CAN HELP WITH SOFTWARE ROYALTY AND RWT RISK
If your Australian entity distributes, resells, licenses or supports offshore software, now is the time to review your RWT position.
We work with technology multinationals across tax advisory, tax controversy, transfer pricing and intellectual property matters, helping businesses assess and manage RWT risks from transaction structuring through to ATO reviews and disputes. Contact us to discuss what the ATO’s latest guidance means for your business, including potential RWT exposure, risk assessment and dispute management strategies.
