Draft ATO PCG fails to download meaningful guidance on software arrangements

The Australian Taxation Office (ATO) yesterday released draft practical compliance guideline PCG 2025/D4: Low-risk payments relating to software arrangements – ATO compliance approach (PCG 2025/D4). While providing some guidance on the ATO’s approach to software arrangements in limited circumstances, much uncertainty still remains.

What is covered by PCG 2025/D4

PCG 2025/D4 provides guidance on certain software arrangements that will not attract ATO attention (or compliance resources). In this regard, PCG 2025/D4 is consistent with the expected content that the ATO informally signalled to the market in various forums earlier this year. 

In line with other practical compliance guidelines, PCG 2025/D4 establishes a white zone and a green zone. Arrangements that fall within these zones will not attract compliance resources in relation to royalty withholding tax. However, the ATO may still engage with you: 

• to verify the basis of your self-assessment under PCG 2025/D4; and/or
• to investigate these arrangements in respect of provisions other than those relating to withholding tax (e.g. in relation to the application of the transfer pricing or anti-avoidance provisions). 

Arrangements that fall within the white zone include those that are subject to an advance pricing arrangement (APA) or a review that resulted in a low risk (or high assurance) rating. However, the APA or review must have explicitly considered the existence of a royalty or the application of Australian withholding tax for the arrangement to fall within the white zone.

Arrangements that fall within the green zone are limited to specific categories of software arrangements and are illustrated by some basic examples. There is nothing new or surprising in these categories. Broadly, they are payments for the acquisition of:

• software solely for domestic use;
• generic software packages used in your business (e.g. word processing and spreadsheeting software);
• software incorporated into tangible goods (e.g. a washing machine) that enables those goods to perform their intended function; and
• software stored on physical media for resale (e.g. the traditional distribution of software on CDs).

What is not covered by PCG 2025/D4

PCG 2025/D4 does not address arrangements that fall outside the low-risk zones. Unlike other practical compliance guidelines, PCG 2025/D4 does not define any blue, yellow or red zones or provide any guidance on how the ATO will approach arrangements outside the white or green zones. In particular, the ATO appears to have parked (or potentially abandoned) its proposal to provide guidance on the quantification of the royalty component of payments under non-low risk software arrangements.

As such, there remains significant uncertainty in relation to the ATO’s approach to all other arrangements involving software (in particular, arrangements involving the distribution of software via the internet). The ATO appears to be unable (or unwilling) to narrow its areas of focus. Taxpayers whose business involves software arrangements should continue to remain on high alert and prepare for potentially broad-ranging enquiries from the ATO addressing a range of ATO perceived risks in addition to withholding tax (including transfer pricing, diverted profits tax and anti-avoidance provisions).