ATO releases critical guidance on software-related payments and intangibles migration arrangements

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

ATO releases critical guidance on software-related payments and intangibles migration arrangements

Sponsored by

Sponsored_Firms_piper.png
Programming code abstract technology background of software deve

Jock McCormack of DLA Piper Australia reviews crucial new government guidance on tax and related issues involved with software licensing and distribution and intangibles migration arrangements

On January 17 2024, the Australian Taxation Office released its updated guidance on firstly, draft Taxation Ruling TR 2024/D1, which deals with the characterisation of payments related to software and related intellectual property rights, and secondly, Practical Compliance Guideline PCG 2024/1 on intangibles migration arrangements.

Earlier ATO guidance on the draft ruling and the PGC has effectively been withdrawn.

Firstly, draft TR 2024/D1 provides the ATO’s views on when cross-border payments related to software arrangements are properly regarded as royalties and thus subject to Australian royalty withholding tax. Generally, the characterisation of cross-border payments as royalties will be determined under the relevant double tax agreement definition and/or the section 6(1) definition in the Income Assessment Act 1936.

There has been significant interest in the taxation treatment of software licensing and distribution arrangements for multinational entities and this draft ruling replaces and updates the earlier guidance provided in draft TR 2021/D4. The ATO has also issued a compendium dealing with responses to issues raised with respect to the previous draft ruling.

The ATO provides specific guidance on when cross-border payments will be characterised as a royalty and includes, amongst other things, consideration paid for:

  • The grant of a right to use IP;

  • The use of an IP right;

  • The supply of know-how or assistance to enable the application or enjoyment of the IP; or

  • In certain circumstances, the sale of hardware with embedded software.

The ATO also outlines certain cross-border payments that are not royalties and the likely circumstances in which an apportionment of the consideration between the royalty component and the non-royalty component would be necessary. It also provides various analyses of different scenarios to assist multinational entities.

This draft ruling is critically important for distributors of software-related products and services and the ATO has welcomed comments on the draft ruling on or before March 1 2024.

Secondly, PCG 2024/1, which deals with intangibles migration arrangements, was finalised and released on 17 January 17 2024. It replaces earlier drafts PCG 2021/D4 and PCG 2023/D2 and provides important guidance to multinational entities.

The guidance covers the potential application of Australia’s general anti-avoidance rules (including diverted profits tax) or the transfer pricing rules to cross-border related party arrangements involving the migration of intangible assets, and the mischaracterisation and non-recognition of Australian activities connected with intangible assets.

In the updated guidelines the ATO has provided its risk assessment framework which enables taxpayers to assess their risk profile related to the development, enhancement, maintenance, protection and exploitation of intangibles. Importantly, the ATO provides 15 examples of intangibles migration arrangements and sets out its supporting documentation and other evidence expectations.

The draft Tax Ruling and the updated Practical Compliance Guideline each provide critical guidance to taxpayers on tax and related structuring and risk management issues associated with software licensing/distribution and intangibles migration arrangements.

Further, the PCG 2024/1 is separate from and does not address the proposed multinational tax integrity measure associated with non-deductible payments relating to intangible assets connected with low corporate tax jurisdictions as announced as part of the 2022-23 Australian Budget.

more across site & shared bottom lb ros

More from across our site

It’s not all doom and gloom for the firm as it seeks to bounce back from the tax leaks controversy, but transparency and trust are still major issues
A tax lawyer accused the firm’s Washington DC head of sexual assault; in other news, e-invoicing will reportedly generate an additional €111 million in VAT revenue
A lack of technical tax knowledge among advisers will render AI use ineffective, ITR’s AI in Tax Forum also heard
Advisers say Spanish taxpayers will have to reexamine how they finance themselves following TP litigation that went all the way to the country's Supreme Court
AI automation in the tax agency has supported around 13 million transactions in 2024/25 and freed up the equivalent of around 400 full-time staff, David Johnson said
Shelley compares tax law to philosophy, shares best practices to get the most out of the working day, and reveals his alternate life as a teacher in Japan
Partners Sebastian Diehl and Martin Seevers reveal why the firm set up in London and discuss the city’s growing demand for German legal expertise
Tax advisers who aren’t alive to clients’ AI needs risk falling behind, even though the technology is not a miracle cure just yet
Awards
The ‘big four’ firm scooped over 60 honours at a lively ceremony held at The Londoner hotel, including both EMEA and APAC Tax Advisory Firm of the Year
The firms received fees for referring clients to the avoidance scheme, HMRC said; in other news, Freshfields’ former tax head has lost his fraud conviction appeal
Gift this article