Key Highlights

  • The ATO finalised software royalty ruling TR 2026/2 in September.
  • Copyright-related distributor payments can trigger royalty withholding tax.
  • Domestic withholding can reach 30%, subject to treaty reductions.
  • Draft compliance guidance identifies lower- and higher-risk arrangements.

The ATO has finalised its long-running view on when payments for software are royalties. Taxation Ruling TR 2026/2, published on 4 September 2026, says payments by Australian distributors and other intermediaries to offshore software owners can be royalties where they are made for the use of, or the right to use, copyright. With the comment period on the companion compliance guide closed on 2 October, businesses are now waiting to see how the ATO will apply it.

What the final ruling says

TR 2026/2 is titled "Income tax: royalties – character of payments in respect of software and intellectual property rights". It sets out the Commissioner's view on when payments under software intermediation arrangements are royalties for Australian royalty withholding tax purposes.

The core test is whether a payment is made for the use of, or the right to use, copyright or similar rights. that can capture a software intermediary or distributor that communicates, reproduces, modifies or adapts software, or otherwise exercises rights that belong exclusively to the copyright owner.

It can also extend to intermediaries that another entity has authorised to reproduce or communicate the software. That matters for groups where a local subsidiary is permitted, under a licence from an offshore affiliate, to deliver software to Australian customers.

A public ruling is ATO guidance. It states the Commissioner's interpretation and generally binds the ATO when taxpayers rely on it, but it is not legislation, and the courts have the final word on what the law means.

A long road from TR 93/12

The ruling closes a chapter that has run for several years. TR 2026/2 finalises draft ruling TR 2024/D1, which was withdrawn on 4 September 2026.

That draft had itself replaced an earlier draft, TR 2021/D4. The 2021 draft led to the withdrawal of TR 93/12, the ATO's previous ruling on computer software, which had stood since the 1990s.

The ATO says the final version reflects consultation feedback. It explains the impact of recent court decisions on copyright and royalties and refines how Australian copyright principles apply to software intermediation.

The ATO's list of public advice and guidance completed in 2026 confirms TR 2026/2 was published on 4 September 2026.

Why the royalty label matters

Characterisation drives the tax outcome. Under Australia's domestic law, royalties paid to non-residents are generally subject to withholding tax of 30% of the gross amount, and the Australian payer is responsible for withholding it.

That rate is often reduced under Australia's tax treaties, commonly to 5% or 10% depending on the country. By contrast, a payment that is simply the price of goods bought for resale is usually treated as business profits of the overseas seller, which a treaty generally lets Australia tax only if the seller has a permanent establishment here.

The gap between those outcomes explains why the ATO's line on distributors has been contested for so long.