On 4 September 2026, the Australian Taxation Office finalised Taxation Ruling TR 2026/2, replacing the long-running draft TR 2024/D1 (and, before that, TR 2021/D4). The finalised ruling confirms, rather than softens, the ATO’s position that a payment for software distributed into Australia will generally be a royalty where the arrangement involves the use of, or the right to use, copyright or similar right in that software.
Business owners and finance leaders must understand how this multi-pathway interpretation alters cross-border compliance, commercial contracts and group risk profiles.
The ATO’s multi-pathway approach
Historically, software tax characterisation hinged on whether an intermediary commercially exploited the underlying copyright, such as reproducing code. Under TR 2026/2, the ATO moves beyond traditional copyright concepts, establishing alternative pathways that can trigger a royalty:
- use of copyright
- authorisation of copyright use
- use of access control technological protection measures (ACTPMs) as ‘other like property or rights’
- Lack of enforcement of ACTPM-related rights by the IP owner
The Commissioner adopts a substance-over-form, rights-based approach, which means that categorisation of payments in a legal agreement is not determinative. Describing an intermediary as a ‘distributor’ that makes a payment for a right to distribute or contractually agreeing that an arrangement is ‘royalty-free’ will not determine the tax characterisation. Instead, the ATO examines the commercial substance and the underlying rights supplied using a reasonable person test.
Software intermediation arrangements in practice
TR 2026/2 broadly defines software intermediation arrangements. It captures any agreement or scheme where an intermediary makes direct or indirect payments to an IP owner or licensor to put itself in a position to earn income from software access or usage.
Crucially, indirect payment flows are explicitly included. Australian businesses transacting with offshore related entities, regional sales hubs or intermediate licensing vehicles remain within scope.
Why ACTPMs broaden the net for SaaS models
Modern Software-as-a-Service (SaaS) and digital platforms rely heavily on technological access controls, such as credential tokens, user authentication, subscription keys and payment gateways.
TR 2026/2 treats the control over access to software as an IP-adjacent right capable of qualifying as an ‘other like property or right’ under the royalty definition. Where an Australian distributor activates or controls these access mechanisms, the ATO may treat payments as:
- Consideration for using those ACTPMs, or
- Consideration for the software owner agreeing not to enforce its exclusive technological rights against the intermediary.
This interpretation broadens the net from the prior position which was focussed on exploitation of the copyright. Cloud delivery models, where there was no right to use the software copyright, previously viewed as pure distribution services or service contracts could now be considered as giving rise to royalties where the Australian entity administers ACTPMs.
Navigating bilateral tax treaty tensions
The ruling specifically calls out that Australia’s tax treaties with the Netherlands, Italy, Singapore, the United States and Mexico define “royalties” differently to the standard OECD definition, which may result in some of the principles set out in the ruling from not applying. Our analysis of the Singapore and US tax treaties shows that there are unlikely to be material differences in practice.
- Singapore: Article 10 of the Singapore treaty defines royalties, relevantly, as payments for the use of, or right to use, any ‘copyright (other than a literary, dramatic, musical or artistic copyright), patent, design or model, plan, secret formula or process, trademark, or other like property or right.’ Software is protected in Australia as a literary work, so payments purely for software copyright fall outside this limb.
However, under ATO ID 2012/67 the ATO treats these payments as falling under Article 16, the residual article, leaving them taxable under Australian domestic law without treaty relief. As the definition also covers ‘other like property or right’ and forbearance (i.e. not taking any action), the outcome is unlikely to differ unless the arrangement is, in substance, a bare licence of literary copyright.
- United States: The US treaty defines a royalty to include ‘…payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any…copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right.’
Unlike the standard wording, it omits ‘however described or computed’, which could arguably limit the ATO’s rights-based approach and give more weight to contract terms than to the underlying rights.
The ATO does not accept this. Its view in TR 2008/7 is that the omission does not narrow the definition, and TR 2026/2 relies on ‘consideration for’ for its rights-based approach, which appears in both the US treaty and the OECD definition. For most software licence or SaaS arrangements, we therefore do not expect the US treaty to significantly impact on the ATO’s analysis.
Recommended actions for business leaders
With TR 2026/2 finalised, Australian groups operating in digital intermediation cannot rely on historic assumptions. Proactive risk management requires practical steps:
- Audit existing agreements: Review cross-border software agreements, reseller contracts and SaaS distribution terms to identify unbundled IP rights, relevant ACTPMs, and which parties have use of ACTPMs.
- Re-evaluate value chains: Review how technology enters the Australian market, ensuring documentation accurately reflects economic substance and functional risk profiles.
- Identify and quantify royalty components: A transfer pricing analysis may provide evidence of arm’s length royalty rates in comparable arrangements which can be used to assess or quantify potential royalty withholding tax exposure.
Determining the character of cross-border software payments requires a detailed assessment of contract terms, intellectual property rights and international tax treaties.
Our international tax and transfer pricing specialists assist mid-market businesses, technology groups and cross-border distributors in assessing their royalty withholding tax profile, reviewing vendor agreements and managing engagement with the ATO.
To review your software arrangements or clarify your withholding tax position under TR 2026/2, contact your local William Buck tax advisor today.
