Australian tax guidance on software distribution: business impacts

December 2026 | SPOTLIGHT | CORPORATE TAX

Financier Worldwide Magazine

December 2026 Issue

The Australian Taxation Office (ATO) has controversial views on the taxation of software distribution arrangements that potentially significantly increase the tax payable in Australia and could lead to double taxation. The ATO recently finalised formal guidance on its technical views in Taxation Ruling TR 2026/2 and draft administrative guidance on how it will assess taxpayer risk in Draft Practical Compliance Guideline PCG 2026/D4.

This article will explore the ATO’s position and why it is controversial, the practical implications for corporate groups with software distribution arrangements in Australia and potential implications for other jurisdictions.

The ATO position

In 1993, the ATO published technical views on software distribution arrangements in Taxation Ruling TR 93/12, which largely dealt with software distribution using physical media.

It subsequently became common for customers to purchase and download software directly from regional hubs outside Australia, rather than a local distributor. The ATO’s primary concern then appeared to be that regional hubs did not have a taxable presence in Australia and limited taxable income was earned in Australia from sales to Australian customers.

Legislative changes and political pressure led many groups to change their business model to establish a taxable presence in Australia. It is now common to have an Australian distribution company whose activities include enabling Australian customers to access the relevant software directly from the software owner or licensee. Typically, the distributor does not have any rights to copy or modify the software. The distributor collects payments from the customer and pays a fee to the regional hub. The fee is designed to ensure that the distributor earns a profit that satisfies international tax rules. Many of these arrangements were reviewed and the profits earned approved by the ATO.

The ATO then shifted its focus to the payment made by the distributor to the regional hub. The ATO developed a view that this payment would typically be a royalty and subject to withholding tax. Australian withholding tax is not subject to time limits, for example a withholding tax exposure on an arrangement can extend back to the time of its implementation. The cumulative exposure (including penalties and interest) can be large. Further, the regional hub may not be able to claim an income tax credit for the withholding tax, resulting in double taxation, namely the payment is taxed in Australia as well as the jurisdiction of the regional hub.

In June 2021, the ATO withdrew TR 93/12. At the same time, it published Draft Taxation Ruling TR 2021/D4. The ATO received a significant volume of tax industry feedback on the draft ruling, criticising its interpretation. The feedback included criticism that the ATO interpretation was out of step with the approach of revenue authorities of Australia’s major trading partners. Several years later, in 2024, the ATO released a revised draft of the ruling (Draft Taxation Ruling TR 2024/D1). The substance of the ATO’s views did not change materially. Further tax industry feedback was provided but ultimately disregarded and the ATO finalised the ruling in September 2026, more than five years after the original draft was released.

PCG 2026/D4 sets out factors that would cause the ATO to consider an arrangement high risk. It allows taxpayers to self-assess a risk rating that is an indication of the resources that the ATO will likely devote to reviewing their arrangements. If a taxpayer falls in the ‘red zone’ or high-risk category, the ATO is highly likely to audit its arrangements. At the other end of the spectrum, the ‘green zone’ or low-risk category means that the ATO’s enquiries are likely to be limited to confirming the basis for the risk assessment. Taxpayers will likely need to disclose their self-assessed risk rating in their tax return, making it easy for the ATO to identify the taxpayers that it will audit.

Practical implications

There are two immediate practical implications of the ATO’s views. Taxpayers will need to form or confirm an assessment of the technical risk associated with their arrangements at law and the risk of review and challenge by the ATO.

The first risk assessment requires a taxpayer to form a view on whether or to what extent it agrees or disagrees with the ATO’s technical legal views as applied to its arrangements. This will inform the taxpayer’s risk mitigation strategy. However, it will also inform the taxpayer’s assessment of whether a provision (or some other type of disclosure) is required in its financial statements. This is likely to be a matter that each taxpayer’s Australian statutory auditors will raise in the next reporting cycle.

The second risk assessment requires a review of the application of PCG 2026/D4 to the taxpayer’s arrangements and an assessment of its risk rating.

Once the taxpayer has a robust view of its own level of technical risk and understands the ATO’s likely perception of its risk, it can develop or confirm its strategy for risk mitigation.

One element of the strategy might be to reduce the risk profile. Taxpayers might consider whether they can decrease the ATO’s perception of the risk. For example, if a taxpayer would otherwise fall in the ‘amber zone’ of PCG 2026/D4, its risk rating can be reduced to the ‘yellow zone’ if the Australian operating margin of the distributor is greater than 10 percent. There may be operational choices that the taxpayer can make that would increase the operating margin to meet this threshold. Those that take this type of approach, should keep in mind that the ATO will continue to modify the basis for its risk assessment. Being in a lower risk category might limit the level of attention a taxpayer receives from the ATO in the short term, but the goalposts can move and in five years the taxpayer may find its arrangement, even if unchanged, is no longer considered low risk.

A taxpayer considering a structural change to its arrangements to reduce the level of technical risk will also need to consider the ATO’s views on Australia’s anti-avoidance provisions. There is a risk that the ATO might consider that the change was undertaken for the dominant purpose of reducing Australian withholding tax, warranting an application of Australia’s general anti-avoidance rules.

An additional element of the strategy might be to prepare to defend the current position. However, there may be limited options for constructive ATO engagement. Taxpayers are unlikely to persuade the ATO that its views are technically incorrect. The ATO has acknowledged that there are other views on the relevant technical issues and explicitly disagrees with them. The ATO has institutional views that will only shift with an external impetus, such as legislative change, which is unlikely, or a judicial decision that is unfavourable to the ATO. Taxpayers should expect the ATO to be cautious about resolving a position on their arrangements, while the ATO’s views remain untested in court, unless the terms of resolution are extremely favourable to the ATO. Taxpayers should prepare for a long and drawn-out audit that may ultimately result in a dispute in the public domain.

This may require significant stakeholder management. We have noted the potential accounting implications that will need to be considered in the short term. Companies should also start preparing for a potentially public dispute. The amount of effort put into this will increase depending on the phase of engagement with the ATO. However, even if there has not yet been any contact with the ATO there may be benefit in providing a heads up to some of the following stakeholders: (i) government relations, concerning any interaction between perceived tax avoidance and the group’s social licence to operate, particularly where governments are considering further regulation of digital platforms; (ii) media, investor relations or company secretariate, to consider if any public disclosure is required and to establish a communications plan if the matter enters the public domain; (iii) operations, so they understand the drivers for the tax risk and are aware of the operational changes that might impact the exposure, such as changes to the mechanics for deploying products to customers; (iv) risk, to the extent that an exposure might require reporting in the risk register or the definition of new controls; and (v) legal, as in some organisations legal may be involved in tax disputes heading to litigation.

Implications for other jurisdictions

At this stage, we are not aware of other jurisdictions sharing the ATO’s views. In fact, the US government has explicitly advised the Australian government that it disagrees with the ATO’s position.

The ATO view can potentially lead to double tax where both the ATO and the relevant foreign jurisdiction believe they have the right to tax the payments made by the distributor to the regional hub. This should be capable of resolution through procedures under international tax treaties. However, these procedures generally rely on cooperation from the ATO.

Other jurisdictions may decide to adopt the ATO approach. A slightly worrying development in that regard is that the United Nations recently updated its model tax convention to expand the definition of royalty to include some forms of payments in respect of software distribution arrangements. From a taxpayer perspective, one hopes that this is not the thin edge of the wedge.

Stewart Grieve is a consultant and Don Spirason is special counsel at Johnson Winter Slattery. Mr Grieve can be contacted on +61 (3) 8611 1353 or by email: stewart.grieve@jws.com.au. Mr Spirason can be contacted on +61 (3) 8611 1379 or by email: don.spirason@jws.com.au.

Stewart Grieve and Don Spirason

Johnson Winter Slattery