Over the last several years, the Australian Taxation Office (ATO) has increasingly focused on cross-border intangibles transactions between related parties and has started 2024 with the release of Taxation Ruling, TR 2024/D1.
The ATO’s existing taxation ruling on Software (Taxation Ruling 93/12) was first introduced more than 30 years ago when the global software landscape was very different to today. The ATO has spent the past few years updating its taxation ruling regarding software, releasing an initial draft ruling TR 2021/D4 in 2021 and following public consultation, has now released a largely revised draft ruling in the form of TR 2024/D1.
TR 2024/D1 outlines the Commissioner’s view on when a payment made for the use of, or right to use, copyright or other like property or right under a software arrangement is subject to royalty withholding tax.
The following outlines the process which the ATO will undertake when determining whether a software related payment should be characterised as a royalty payment.
Following public consultation received in respect of TR 2021/D4, the ATO now acknowledges in TR 2024/D1 that the treaty definition takes primacy over the definition under Australian domestic law. In this regard, where a treaty applies, “the royalty definition in that tax treaty is given primacy over the domestic tax law definition of royalty”.
Consistent with the treaty definition, TR 2024/D1 sets out that an amount can still be considered a royalty even if it is not paid periodically and regardless of how the payment is described or computed. Determination of whether an amount would constitute to a royalty is therefore dependant on all the facts and circumstances of the arrangement, considering both the legal form as well as the substance.
TR 2024/D1 importantly provides examples of payments which the ATO considers meeting both treaty and domestic law definitions of a royalty:
Examples are also provided for payments which will not be considered royalties:
Clearly, and under the new draft ruling, whether a payment should be classified as a royalty will largely depend on the terms of the relevant arrangement and the rights and obligations of the parties.
TR 2024/D1 acknowledges that under certain circumstances, a payment could be consideration for several things, with only some which fall within the standard tax treaty definition and that it may be possible to apportion the payment on a ‘fair and reasonable’ basis. However, there is limited guidance on how what the ATO considers to be ‘fair and reasonable’.
Caution should be had with apportionment. Under circumstances where any IP rights granted are considered to be inseparable from other things for which consideration is paid, the whole amount could be subject to royalty withholding tax. The ATO provides an example of this under Scenario 1 in TR 2024/D1.
To the extent a payment meets the relevant definition of a royalty, the payment will be subject to royalty withholding tax, regardless of the frequency, description, or computation of the payment. This is particularly relevant for distributors of software, as the granting of a right to use, even if not exercised, could be sufficient to deem a payment associated with that right as a royalty.
If your business is engaged in cross-border software transactions, we recommend you review your arrangements to ensure compliance with TR 2024/D1.
The Tax Advisory team here at Crowe can help your organisation navigate the complexities and obligations of draft software ruling TR 2024/D1. Get the expert guidance your group will need by contacting us today.
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