On 17 January 2024, the Australian Taxation Office (ATO) announced that it started consultation on a new Draft Taxation Ruling TR 2024/D1 Income tax: royalties – character of payments in respect of software and intellectual property rights. The new draft ruling is now open for public comment. It addresses circumstances in which the Commissioner considers payments relating to software to be royalties.
This draft Ruling considers when an amount paid under a software arrangement is subject to royalty withholding tax. This turns upon whether an amount paid is a royalty as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) and the various tax treaties. The focus of this Ruling is on payments for the use of, or right to use, copyright or other like property or right. However, such payments may also be for the use of, or right to use, other intellectual property (IP) rights or otherwise fall within the definition of a ‘royalty’. This will also affect the characterization of the payment.
The new draft Ruling includes more detailed examples and provides further detail as to the Commissioner’s view of the following:
- interaction between the domestic law and tax treaty definitions of royalties
- interpretation and application of the Copyright Act 1968
- extent to which payments are royalties
- kinds of modern software distribution arrangements we are seeing, including ‘software-as-a-service’
- circumstances where the final Ruling will apply before its date of issue
- This has replaced the Commissioner’s previous guidance on the royalty withholding tax obligations related to software being TR 2021/D4 and TR 93/12.
