The final(?) word on software royalties: the ATO finalises its view - TR 2026/2

On 4 September 2026, the Australian Taxation Office (ATO) issued the Ruling, finalising the Draft Ruling, which replaced TR 2021/D4 and, before it, TR 93/12W (withdrawn 1 July 2021). It was released alongside draft PCG 2026/D4, a compendium of responses to earlier submissions (the Compendium), and a somewhat curiously timed Decision Impact Statement on Oracle. 

The Ruling considers when a payment under a software intermediation arrangement is subject to withholding tax because it is a royalty as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). While the long-awaited finalisation provides taxpayers with a measure of certainty as to the ATO's position, the substance of that position has, in practice, remained largely the same as the Draft Ruling, notwithstanding the extensive industry feedback provided throughout the consultation process. Of the 34 issues in the Compendium, 20 are marked ‘no change’ and only three ‘position amended’ – two by deleting material and one by adding an example that widens the net.  

In our view, the Ruling is unsatisfactory in three administrative respects. Firstly, it has retrospective application over 5 years with no transitional relief, despite the view having been contested and in draft (and flux) since 2021. The ATO say in the Compendium that the Ruling ‘does not represent a change of view’; if so, it is unclear why TR 93/12 had to be withdrawn, or why it took two drafts and five years to say so. Secondly, the Ruling presents as settled a position no court has endorsed. The only on-point case, Oracle, has been stayed pending the Australia-Ireland mutual agreement procedure (MAP), the outcome of which (including any arbitration) will not be precedential, and the Commissioner lost the closest High Court authority, PepsiCo. The ATO even concede in the Ruling that it is unclear how the courts would apply the infringement cases on ‘authorisation’, on which much of its analysis rests. Thirdly, the Ruling knowingly diverges from OECD Commentary and the express position of the US Treasury, conveyed in 2022 and 2024, effectively exporting the cost of the dispute to taxpayers through double taxation and the MAP, with the years of delay that entails. The ATO is entitled to hold and litigate its view, but finalising a retrospective ruling before any court has vindicated it looks less like the provision of certainty and more like regulation by attrition.  

The Government of Australia’s biggest investment Partner (the US) considered this proposal so egregious that it had specifically singled out for retaliation in an earlier version of the US “Revenge Tax”. Particularly given the current environment in US, the possibility of such retaliatory action occurring as a result of the ATO's position cannot be ruled out. 

The Ruling seeks to respond to changes in how software has been distributed in the 30-plus years since TR 93/12, with the ATO taking the view that concepts developed for physical goods do not adequately address software and intellectual property (IP) delivered electronically. Only paragraphs 1 to 38 (including Examples 1 and 2) are administratively binding; the copyright analysis and new Example 3 sit in the non-binding Explanation.  

The Ruling analyses these arrangements through the lens of the 'standard tax treaty definition’ of a royalty, focusing on payments to parties in jurisdictions that have entered into a tax treaty with Australia containing that definition. On the ATO’s view, a payment that is a royalty under that definition will also be one under the broader domestic definition, although a treaty, where it applies, limits the operation of section 128B.  

Importantly, the ATO acknowledges that certain treaties depart materially from the standard tax treaty definition. As at the date of the Ruling, these are Australia's treaties with the Netherlands, Italy, Singapore, the United States and the United Mexican States. For those treaties, some of the principles in the Ruling may not apply, and the specific treaty text must be considered. 

The heart of the Ruling remains the ATO's characterisation of everyday distribution activity as the use of copyright rights under the Copyright Act 1968. Notably, section 31 thereof confers no general right to distribute copies, so the ATO’s analysis must route through other rights. The exclusive rights of a copyright owner in a computer program (a ‘literary work’) most relevant to software arrangements are:  

The ATO's practical conclusion, as set out in Example 3 (in the non-binding Explanation), is that a distributor which supplies credentials or instructions enabling customers to download and install software is exercising a copyright right, and the fee it pays upstream is, to that extent, a royalty. That conclusion is stated to be unaffected by whether the parties are associated, whether the rights are express or implied, how the fee is calculated, or who issues the end-user licence agreement.  

The Ruling also expands on non-copyright rights, notably ’technological protection measures’ (TPM). The Ruling sets out that TPMs, such as licence keys, activation codes, account-creation or payment gateways that control access to software, can fall within the A standard tax treaty definition of a royalty, and that a distributor's role in issuing keys or controlling access may itself evidence use of IP rights or authorisation of acts comprised in the copyright.

Respectfully, the foregoing stretches copyright concepts beyond their purpose. The authorisation cases, from University of NSW v Moorhouse (1975) to Roadshow Films Pty Ltd v iiNet Limited (2012), ask whether a person has sanctioned, approved or countenanced another’s infringement. A distributor emailing installation instructions to a customer already licensed by the copyright owner sanctions nothing that the copyright owner has not already permitted. Additionally, because the ATO say it is irrelevant whether the authorised act would infringe at all (e.g., reproductions made in running a licensed copy, which section 47B of the Copyright Act permits), a royalty may be payable for permission to permit what the law already permits. Likewise, the TPM provisions give owners a cause of action against circumvention: they are locks, not licences. A car dealer handing over the keys does not pay a royalty for the immobiliser, yet almost all modern software is protected by one, so the TPM theory alone could capture virtually every software resale.  

The Ruling applies both before and after its date of issue. TR 93/12 may continue to apply to some arrangements prior to its withdrawal on 1 July 2021, to the extent it was appropriately relied upon. The retrospective application means that historical software arrangements, not just prospective ones, are squarely within the ATO's contemplation, subject to statutory time limits and the draft PCG. 

As we noted when the Draft Ruling was released, this project reflects a clear and sustained intention to extend the reach of the royalty definition to arrangements that, for decades under TR 93/12, were understood to sit outside it. The Ruling now binds the Commissioner – though not taxpayers or the courts – and in our view, several substantive concerns endure:  

What affected groups should do now

• Map your arrangements. Identify cross-border payments made by Australian entities (or Australian permanent establishments) that touch software or IP – including distribution, reseller, SaaS, cloud and embedded-software arrangements.
• Self-assess against the draft PCG and document it. An unevidenced self-assessments default to amber, and the residual calculation needs offshore cost data a local subsidiary may not hold.  
• Analyse the copyright “hooks”. Assess whether performance requires reproduction, communication to the public, authorisation, or the use of TPMs, as these are some of the features the ATO relies upon to characterise payments as royalties.
• Review agreements and evidence. Consider whether documentation supports a defensible apportionment, and whether any distribution or other rights genuinely have value independent of the IP.  
• Quantify exposure, including historically. Given the retrospective date of effect, model potential royalty withholding tax (and denied deductions, penalties and interest for failures to withhold) across relevant years. Consider whether prior year positions were reasonably arguable.  
• Consider treaty relief and process. Assess entitlement to reduced treaty rates, foreign tax credit positions for the counterparty, and whether protective disclosures or engagement with the ATO are warranted. After Oracle, consider requesting MAP early and seeking a stay of any litigation, especially where arbitration is available.  
• Restructure with care. The draft PCG warns that changes reducing withholding tax, such as moving customer contracts offshore, may attract anti-avoidance scrutiny.  
• Watch for the final PCG. Consultation closed on 2 October 2026, and the ATO has said that the 75% residual threshold will be confirmed afterwards. Revisit self-assessments once the draft PCG is finalised.  

Multinational groups with Australian operations should treat the finalisation of the Ruling as a prompt to revisit their software and IP payment flows now, rather than waiting for the ATO to raise the issue. The Commissioner has had the last word for now. However, given PepsiCo and the objections of a major treaty partner, we doubt it will be the final one.  

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