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ATO Ruling TR 2021/D4 - Software and Royalties

ATO Ruling TR 2021/D4 - Software and Royalties

Tracy Chang

The Commissioner issued a draft ruling, TR 2021/D4 which considers whether receipts from the licensing and distribution of software, qualify as royalties (under the s 6(1) ITAA 1936 definition).  This draft ruling replaces TR 93/12 on computer software which was withdrawn on 30 June 2021.

TR 2021/D4 provides specific examples to illustrate the circumstances of when payments are considered as royalties. The draft ruling provides guidance to software developers, software distributors and focuses on three software distribution models - packaged software, digital downloading of software and cloud computing arrangements.  
 
In general, examples of payments which are considered to be royalties are summarised below:
 
Royalty Non-Royalty
1. License to reproduce and modify software, including access to source code 1. License for simple use of software (by end user)
2. Software distribution agreement conferring right to enter into end user license agreement 2. Software distribution agreement conferring right to distribute shrink-wrap software
3. Software distribution agreement conferring right to enter cloud services agreements 3. Services ancillary to the simple use of software
4. Services ancillary to the modification of software  

Our recommendation
  1. Business should immediately review their existing arrangement involving the licensing or distribution of software in Australia.
  2. Issues with transfer pricing and financial statement measurement of tax positions also need to be reviewed
  3. Businesses should review their current business model and may need to restructure their existing supply-chain arrangements. 
  4. Australian royalty withholding tax may apply to software-related royalty payments to foreign copyright owners.