Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

June 28, 2021

Australian Taxation Office issues draft tax ruling expanding scope of royalty withholding tax on software related payments

The Australian Taxation Office (ATO) has released Draft Taxation Ruling TR2021/D4 – Income tax: royalties – character of receipts in respect of software. The draft ruling is open for public comment and consultation until 23 July 2021 ahead of issuance of a final ruling. The ATO has stated that the final ruling is proposed to apply both before and after its date of issue.

The draft ruling specifically applies to computer software re-seller and distribution arrangements. However, the principles conveyed could also be relevant and indicate the likely ATO approach to broader intellectual property transactions, in particular where intermediaries are involved in data streaming and digital media distribution. The long-running ruling TR93/12 – Income Tax: computer software was withdrawn effective 25 June 2021. This is a positive development, as it was written in 1993 when the sale of shrink-wrapped software was the prevailing business model.

The controversial aspect of the draft ruling is the potential imposition of Australian royalty withholding tax (RWT) on software re-seller or distribution agreements for licensing, subscriptions and cloud-based software-as-a-service (SaaS) arrangements. The ATO is seeking to expand the scope of RWT by connecting untested links between the Copyright Act and RWT rules. If finalized in its current form, the draft ruling will not be aligned with other developed economies regarding the characterization of software related payments. However, it may become another example of Australia leading the way for other countries to follow.

The ATO does recognize in the draft ruling that there can be software distribution agreements that do not confer copyright related rights and therefore would not be expected to attract RWT. However, the only example provided is narrowly expressed as relating to the re-sale of packaged software, notwithstanding that a major reason for the issuing the updated ruling is to address new business models such as digital supplies of subscription licenses and cloud-based SaaS. The draft ruling therefore gives extensive guidance on when RWT can apply and very limited guidance on when it would not apply.

Imposing RWT on re-seller arrangements seems punitive as the ATO has encouraged inbound technology groups to restructure into buy/sell business models in response to the Multinational Anti-avoidance Law (MAAL). The draft ruling appears to conclude that the mere existence of a sub-license arrangement between a commercial distributor and customer is sufficient to treat all or part of the master license payment or distribution fee as royalty.

Taxpayers who have responded to the ATO restructure program (in response to the MAAL) and moved to a buy/sell structure may now be at a competitive disadvantage being exposed to higher levels of tax risk and uncertainty with outbound transactions potentially subject to Australia’s diverted profits tax as well as the broad scope of anti-hybrid rules, and now as proposed in this draft ruling an expanded scope of RWT – in addition to normal transfer pricing rules.

In contrast, taxpayers who have not re-organized and have retained compliant inbound sales support structures may now be in a better position than those with a buy-sell structure.

The draft ruling is focused on the Section 6(1) definition of “royalties” under Australian domestic tax law. It is silent in respect of Australia’s Double Tax Agreements (DTAs) where the royalty definition may differ from the domestic law definition. Further, the ATO’s position demonstrated by this ruling may add challenges to concluding some bilateral Advance Pricing Agreements (APAs) in the future.

The ATO indicates in Paragraph 39 of the draft ruling that it intends to apply the new ruling both retrospectively and prospectively. This may be a significant tax risk issue for some taxpayers where the ruling is an expansion of the scope of the previously understood royalty definition. The draft ruling could also call into question the ability to claim a foreign tax credit in a licensor country if the ATO definition is not acceptable/consistent with the DTA.

Given developments in the technology sector since 1993, it was time for the ATO to refresh its stated view on RWT and software related payments. However, this draft ruling will likely be challenging for taxpayers.

While the draft ruling is open for public comment and may be modified by the ATO as a result of this consultation process, taxpayers should assume that the ruling will be finalized as currently drafted. Accordingly, taxpayers should take action and consider the following in reviewing their tax position and updating defense files:

  • A tax ruling is not the law. It is the ATO’s position on how it will apply the law to stated facts and how it would like the untested law to operate in certain circumstances. It is, however, published ATO guidance and as such is directly relevant for taxpayer penalty exposures for income tax return positions and disclosures, as well as financial statement reporting.
  • Taxpayers will need to understand whether the tax profile of their business operating model in the Australian market and prior year positions will be materially impacted.
  • Inbound technology groups could be adversely affected by potential new RWT costs imposed on distribution fees or re-seller fees.
  • Taxpayers will need to review terms of End User License Agreements and Terms of Use Agreements as well as Distribution Agreements for potential RWT exposures. They will also need to determine whether the agreements provide legal and commercial flexibility to alter contractual arrangements or pass on any additional costs.
  • Taxpayers may also need to consider commercial terms of third-party re-seller agreements where they deal with channel partners to see if any added tax cost can be and should be passed on - this will require consideration from a legal and commercial perspective.
  • Taxpayers may need to review the terms of APAs to determine whether any additional RWT costs may trigger rights to re-open those agreements. The ATO has stated in Paragraph 39 that the new ruling will not apply to settlements of past disputes. There appears to be no policy reason why APAs that did not arise out of any dispute with the ATO should not be similarly grandfathered.

Submissions close on 23 July 2021. EY will make a submission in respect of the ruling and is able to assist taxpayers with participation in the public consultation.


For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Sydney

Ernst & Young (Australia), Perth

Ernst & Young (Australia), Melbourne

Ernst & Young LLP (United States), Australia Tax Desk, New York

Ernst & Young LLP (United Kingdom), Australia Tax Desk, London


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2024, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or Please refer to the privacy notice/policy on these sites for more information.

Yes, I accept         Find out more