View from across the Tasman: what the ATO's software royalty ruling means for New Zealand businesses

At a glance 

• Final and binding.  On 4 September 2026 the Australian Tax Office (ATO) issued TR 2026/2, formalising its view that a broad array of outbound software distribution, reseller and SaaS payments made by Australian entities are royalties subject to withholding tax.
• New Zealand is squarely in scope. The Australia-New Zealand Double Tax Agreement (DTA) is not materially different from the OECD model, so the full impact applies to NZ recipients of affected payments.
• Retrospective. The ruling applies both before and after its date of issue, so historic positions may be equally exposed.
• The NZ problem. If Inland Revenue does not agree the payment is a royalty, likely in some cases, a foreign tax credit (FTC) may not be recognised here. That is a genuine double tax risk, not a timing difference.

The ruling in brief, and why it impacts New Zealand 

Now finalised, TR 2026/2 (the Ruling) targets “software intermediation arrangements” where an Australian entity pays an offshore owner or licensor, so that the Australian entity can in turn earn income from customers using the software in Australia. 

The ATO’s clear view expressed in the Ruling is that most modern software distribution operating models “use” copyright under Australian law. Final customers reproduce software when they download or install it, software is communicated to the public when made available online (including SaaS), and a distributor that hands out credentials or download instructions is authorising those acts and therefore “using” the software. 

Labels in legal agreements are largely ignored as part of this test. Legal terms referring to “distribution” and “royalty-free” clauses will be disregarded where performance of the contract requires use of copyright, as broadly defined in the Ruling. 

Notably, the ATO distinguishes most in-scope arrangements from the OECD’s “simple software distributor” example (paragraph 14.4 of the OECD’s Commentary on Article 12 of the model DTA) as a pure resale of copies someone else has already made. Arguably, the Ruling therefore knowingly diverges from OECD commentary, effectively exporting the cost of the dispute onto taxpayers via double taxation risk and the Mutual Agreement Procedure (MAP), which will entail significant delays before certainty is obtained.

For New Zealand companies, the models most exposed are:

• NZ software IP owners selling into Australia through a subsidiary or independent reseller
• NZ entities holding regional rights that on-license to an Australian group company
• Trans-Tasman SaaS groups where the Australian entity contracts with customers and pays a “distribution” or service fee back to New Zealand.

In each case, if caught, the Australian company must withhold on payment to the New Zealand entity. For many companies, this change will be as new as it is unwelcome.

Crucially, the Ruling has retrospective application over 5-years with no transitional relief, despite the ATO’s view having been contested and in draft (and flux) since 2021. 

The New Zealand lens 

Under Article 23(2) of the Australia-NZ DTA, New Zealand credits Australian tax paid “in accordance with this Convention”. Inland Revenue’s (IR) published view in IS 16/05 is that it will not credit tax the source country was not entitled to impose; the taxpayer must seek a refund from the ATO instead.

More alarmingly, IR’s current thinking points the other way. Its draft interpretation guideline PUB00266, released on 2 September 2026 expressly treats a basic cloud reseller paying a “royalty-free”, margin-based fee as buying a service, not paying a royalty. That is strikingly close to Example 1 in TR 2026/2, where the ATO reaches the opposite answer. The IR draft covers outbound payments made by New Zealand companies, not credits for Australian tax, but it shows how IR would likely regard the same inbound arrangements.

It’s also worth keeping in mind that foreign tax credits are non-refundable and cannot be carried forward in New Zealand, so loss-making businesses get no relief anyway. Such credits must generally be claimed within four years of the end of the relevant tax year, which matters given the Ruling’s retrospective reach.

A simple worked example

The following example illustrates the impending exposure for affected New Zealand taxpayers.

NZCo owns its software IP and sells into Australia through AusCo, its Australian subsidiary. AusCo pays NZCo $10m a year, priced so AusCo earns a routine distribution margin. NZCo’s costs attributable to that income are $6m, leaving $4m of net income taxable in New Zealand.

In Scenario B the group pays an extra $500,000 a year purely because two revenue authorities disagree. If NZCo is in tax losses, that $500,000 is lost even in Scenario A, as there is no NZ tax to credit against. Across four open years that is $2m, before Australian penalties and interest on AusCo for past failures to withhold. 

Where the disputes and double tax will come from 

1.  Foreign tax credit denials. IR denies the foreign tax credit because, in its view, Australia had no taxing right to what it regards as business profits (not royalties). NZCo is left chasing an ATO refund it is unlikely to win while TR 2026/2 stands.
2.  Retrospective Australian assessments. The ATO can pursue AusCo for tax not withheld in prior years, with penalties, interest and potentially denied deductions. Gross-up and indemnity clauses in agreements may route that cost back to New Zealand.
3.  Transfer pricing knock-on effects. TR 2026/2 treats fees set by a target operating margin (Example 1) or by residual profit (Example 2) as royalties, with apportionment only where other rights are shown to have independent value. Standard limited-risk distributor models, including year-end true-ups, are squarely caught. As such, if AusCo absorbs the withholding under a gross-up, its margin can fall below the benchmarked range, triggering adjustments that reduce NZCo’s income and invite IR questions.

How these disputes will need to be resolved 

Under the DTA

• Mutual agreement procedure (DTA Article 25). Taxpayers can take their case to either country’s Competent Authority but the case must be presented within three years of first notification of the double tax outcome in question. 
• Corresponding adjustments. DTA Article 9(3) provides relief for transfer pricing adjustments, subject to the seven-year limit in Article 9(4).
• Conflict of qualification. DTA Article 3(3) gives undefined terms such as “copyright” their domestic meaning in the state applying the treaty, and the Ruling rests heavily on Australian copyright law. The OECD Commentary on Articles 23A and 23B (paragraphs 32.1 to 32.7) says the resident state should give relief where a mismatch flows from the source state’s domestic law, but not where it reflects a different reading of the treaty. 

Under domestic law 

• New Zealand. Credits must be claimed pursuant to the time limit set out in section 78B of the Tax Administration Act 1994, with earlier assessments reopened under section 113. IR decisions can be challenged through the disputes process, though a binding ruling can lock these in.
• Australia. AusCo can seek a private ruling or object under Part IVC of the Taxation Administration Act 1953, and NZCo can claim a refund of tax not properly payable. Realistically the ATO will hold to TR 2026/2, so MAP, arbitration or litigation are the real pressure points.

What affected NZ businesses should do now - even if you're not sure!

1.  Map the flows. Trace and list every payment received from Australian group companies, resellers and distributors that touches software or IP, including SaaS, support fees and year-end true-ups.
2.  Test each against both views. Look for the ATO’s hooks (authorising downloads, making software available online, issuing licence keys, controlling account access) and compare with IR’s expressed positions.
3.  Review the agreements. Check withholding, gross-up and indemnity clauses, and price hosting, support and other non-IP elements separately where they are genuinely distinct.
4.  Align with transfer pricing. Make sure the functional analysis and benchmarking support the characterisation of the payments, any apportionment and the underlying agreements. 
5.  Quantify the exposure. Model withholding, credit capacity (especially for loss-making entities) and time limits across all open years. What is material to your business and over how many years?
6.  Engage early. Consider rulings in both countries and protective MAP filings to preserve the three-year window.

Key takeaways 

• TR 2026/2 is final, retrospective, and applies to affected payments from Australia to New Zealand.
• IR’s draft guidance points the other way on basic reseller arrangements, so trans-Tasman mismatches are a real prospect.
• The cost risk lands in New Zealand: 5% withholding that may not be creditable, and no relief at all for loss-making businesses.
• Transfer pricing models built on routine distributor margins are directly in the firing line.
• MAP and arbitration offer a way out, but they are slow and come with hard deadlines.

Talk to us 

If your New Zealand business receives software or IP-related payments from Australia, now is the time to look again. RSM New Zealand’s tax and transfer pricing team, working alongside RSM Australia, can help you map your exposure, stress-test your agreements and manage any engagement with both revenue authorities. Get in touch!