On 4 September 2026, the Australian Taxation Office (ATO) published its views in relation to cross-border software and intellectual property (IP) arrangements. The approach to characterisation of arrangements taken by the ATO is broad, with many common IP ownership and distribution arrangements likely to attract scrutiny by the ATO. If the ATO’s position is maintained, the risk of additional royalty withholding tax is significant, with the ATO position applying to arrangements from 1 July 2021 (and potentially earlier).
The immediate challenge for multinationals with software and IP distribution arrangements involving Australian customers is the need to conduct a risk assessment as to whether their arrangements present a technical risk that royalty withholding tax applies. If the position is that there is no obligation to pay royalty withholding tax, the company is required to document the basis for their view. Alternatively, if it is determined that the payments ought to be characterised as a royalty, then there is a need to consider the approach to engaging with the ATO.
We set out below an overview of these issues and relevant considerations.
Arrangements in scope
Arrangements where there is a payment from Australia to a foreign entity (typically the IP owner or licensor) connected with the distribution of software related IP to Australian customers.
The ATO view is that the payment may be a royalty if it is for the following:
- The grant of rights in relation to the IP (including the grant of the right to reproduce the software (regardless of whether it is reproduced)).
- The use of IP (including authorising the use of copyright or communicating the copyright work to the public).
- The supply of know-how.
- The supply of assistance furnished as a means of enabling the application or enjoyment of the IP.
- The right to use or the use of IP in software embedded in tangible goods.
- The total or partial forbearance in respect of the use or supply of any property or right referred to above.
Arrangements with the following features will attract the highest risk of scrutiny by the ATO:
- Foreign entity owns all of the IP relating to the software.
- Australian entity distributes or resells the software to Australian customers.
- The distribution agreement between the foreign entity and the Australian entity:
- Grants to the Australian entity a right to market and distribute the software to Australian customers even where the agreement does not expressly grant the Australian entity a right to make copies or to modify the software; or
- Grants to the Australian entity a right to market, promote, distribute, copy (for the limited purpose of permitting end-users to make copies for their internal use) and sell licenses for the software to end users.
- The Australian entity enters into agreements with Australian customers under which the Australian customers are granted access to the software by the Australian entity or its associated entity.
- Australian customers pay the Australian entity to access the software.
- The access to the software is protected by security features such as key code, password or copy protection, and the Australian entity undertakes activities necessary to facilitate the software to be made available to Australian customers.
The ATO has said that it will review these arrangements to assess whether royalty withholding tax is payable. It will prioritise its resources to review arrangements it considers to be in the amber or red-zone which includes circumstances where:
- Taxpayers cannot produce satisfactory documentation as against the ATO’s criteria and evidence to support that self-assessment.
- The Australian entity previously paid a royalty to the foreign entity under similar arrangements.
- No royalty is paid by the Australian entity to the foreign entity.
- The recipient of the payment is tax resident (or has a branch) in a “specified jurisdiction”, including Ireland, Netherlands, Singapore and Switzerland.
- The recipient of the payment has concessional, tax-loss or hybrid features.
Analysis required
The analysis expected by the ATO is detailed and involved. How the law applies is necessarily dependent upon the facts and circumstances of each software arrangement. The review should include consideration of the relevant contracts between the relevant Australian and foreign entities, customer agreements, and payment flows as well as actual activity and conduct of the Australian entity in relation to customers.
Controversially the ATO approach relies heavily on its liberal interpretation of intellectual property law. A number of concerns about incorrect assumptions or misunderstandings by the ATO have been raised with the ATO during the consultation process prior to the publication of its finalised view. The ATO has said it is willing to test its position in the courts.
If a royalty is recognised, the taxpayer will need to explain the basis, method and valuation approach used. If no royalty is recognised, the onus is on the taxpayer to explain why the payment made by the Australian entity to the foreign entity has no connection or nexus with the IP rights provided to the customer.