Royalty Withholding Tax on Software: The ATO Finalises TR 2026/2

Alongside the accompanying Compendium (TR 2026/2EC) and draft Practical Compliance Guideline (PCG 2026/D4), the Ruling provides the Commissioner's views on the application of s 128B of the Income Tax Assessment Act 1936 (Cth) to payments made in respect of software. The Ruling also reflects the position taken by the High Court in the recent landmark decision of Commissioner of Taxation v PepsiCo Inc [2025] HCA 30 (PepsiCo), in which Rimma Miller, Partner in our Tax Disputes practice, acted for the Commissioner.

Key considerations

Application to different jurisdictions

The Ruling focuses on cross-border arrangements involving jurisdictions with which Australia has a tax treaty that contains the "standard tax treaty definition" of "royalty or royalties". This, notably, excludes jurisdictions like the United States and Singapore, where the relevant tax treaties must be specifically considered.

Software intermediation arrangements

Whilst containing the Commissioner's general views on the application of RWHT post-PepsiCo, the Ruling is targeted specifically for software intermediation arrangements. Relevantly, these may include arrangements in relation to software owned by a non-resident entity where an Australian entity is permitted to: 

• licence the software to end-users in Australia;

• allow end-users in Australia to download and install copies of the software onto the end-user's computer; and

• allow end-users to access the software via the Internet (where the software is located on servers owned by the non-resident entity).

Consistent with his long-standing position, the Commissioner emphasises that labels attached to agreements are relevant but not determinative; characterisation of payments made pursuant to agreements are to be undertaken on an objective basis.

It is also clear that the Commissioner considers the application of the Ruling to extend to SaaS models, as well as situations where software may be embedded in a tangible good.

Copyright

The Ruling acknowledges that as "copyright" is not defined in the standard tax treaty definition of royalty, it takes its definition from Australian domestic law.

Under the Copyright Act 1968 (Cth) (the Copyright Act), 'copyright' is not defined, but rather, is the bundle of exclusive rights that the Copyright Act confers on the owner of a work. For software, this relevantly includes the right to reproduce the work in a material form, the right to communicate the work to the public, the right to make an adaptation of the work, and, significantly for distribution arrangements, the right to authorise another person to do any of those acts.

Retrospective application

The Commissioner's position as outlined in the Ruling will be applied with retrospective effect by the Commissioner – that is, to payments made both prior to and after 4 September 2026. It is important to note that the triggering event for RWHT is not the date on which any agreement or contract was entered into, but rather, the date on which the relevant payment which can be characterised as a royalty was made.

Implications of PepsiCo

Extensive reference to PepsiCo is made throughout the Ruling, Compendium, and draft Practical Compliance Guideline. In particular, the Commissioner makes reference to PepsiCo in his interpretation of 'royalty or royalties', including in relation to the required causal connection between the relevant payment and the use of, or right to use, IP. Other implications of PepsiCo as outlined in the Ruling include the Commissioner's views on the construction of the relevant agreement under which payments are made, and apportionment.

Risk assessment

Schedule 1 of the draft Practical Compliance Guideline contains the Commissioner's risk assessment framework in relation to software, which categorises risk profile into five zones: white, green, yellow, amber, and red.

If you need any assistance navigating or managing risk in relation to the Commissioner's position on RWHT as applied to software, or would like to discuss how this Ruling impacts any of your arrangements or transactions, please contact our team: