On 4 September, we published the final taxation ruling TR 2026/2 Income tax: royalties – character of payments in respect of software and intellectual property rights and an expanded draft Practical Compliance Guideline PCG 2026/D4 Royalty characterisation of payments relating to intermediation or distribution arrangements – ATO compliance approach.
Final taxation ruling
TR 2026/2 sets out the Commissioner’s view on when payments under software intermediation arrangements are royalties for the purposes of Australian royalty withholding tax.
This ruling finalises draft Taxation Ruling TR 2024/D1 on the same topic (withdrawn on 4 September 2026), which replaced draft Taxation Ruling TR 2021/D4 Income tax: royalties – character of receipts in respect of software, which in turn caused the withdrawal of Taxation Ruling TR 93/12 Income tax: computer software.
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.
This includes where a software intermediary (sometimes called a 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 the software intermediary is authorised by another entity to reproduce or communicate the software.
The ruling takes into account feedback received during consultation. We've elaborated on our view expressed in TR 2024/D1 by:
- explaining the impact of recent court decisions on copyright, and royalties, on the approach to characterising a payment as a royalty, and
- refining how we see principles of Australian copyright law applying in respect of software intermediation arrangements.
See TR 2026/2 on our legal database to learn more.
Draft PCG
To accompany TR 2026/2, we’ve also released draft PCG 2026/D4 for consultation, setting out how we'll 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. We remain most concerned about the characterisation of payments under cross-border arrangements structured to reduce or avoid tax on profits connected with Australia.
We've listened to consultation feedback received on the initial draft and expanded the practical 'safe harbours' and provided guidance about 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, or
- where Australian taxable profit margins are higher relative to the group’s global profitability.
See PCG 2026/D4 on our legal database to learn more.
We encourage you to provide your feedback during the 4-week consultation period, particularly about:
- 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
- any other aspects you think should be addressed in the final PCG.
You can email your comments to IntangiblesArrangements@ato.gov.au by 2 October.
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