Royalties and Software Distribution Models

Anthony Patrk, Jason Matchado, Luca Wright

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. 

Will your transaction be considered a royalty payment?

Tax treaty has primacy over domestic tax law

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. 

Royalty vs non-Royalty

TR 2024/D1 importantly provides examples of payments which the ATO considers meeting both treaty and domestic law definitions of a royalty: 

  1. the grant of a right to use IP, regardless of whether that right is exercised.  For example, the grant of the right to reproduce a computer program, regardless of whether or not that right is exercised
  2. the use of an IP right, for example, the use of a copyright consists of doing an act in respect of a copyrighted work that is the exclusive right of the copyright holder, such as authorising the communication of a computer program
  3. the supply of know-how in relation to an IP right
  4. the supply of assistance furnished as a means of enabling the application or enjoyment of the supply
  5. the sale by a distributor of hardware with embedded software, where the distributor is granted or uses rights in the IP of the software.

Examples are also provided for payments which will not be considered royalties:

  1. consideration that is wholly for the grant of a right to distribute copies of a computer program, without the use of, or right to use, the copyright or another IP right
  2. consideration for the transfer of all rights relating to the copyright in software
  3. payments from a distributor that are consideration wholly for the acquisition of hardware with embedded software, provided that the distributor does not use, and is not granted the right to use, any copyright or another IP right in the embedded software
  4. payments from a distributor that are consideration wholly for the acquisition of physical carrying media on which software is stored, provided that the distributor does not use, and is not granted the right to use, any copyright or another IP right in the embedded software
  5. consideration for the provision of services unrelated to any IP right referred to in paragraph (a) of the standard tax treaty definition or any knowledge or information mentioned in paragraph (b) of the standard tax treaty definition.

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.

Apportionment of payment

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. 

Contact us

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.

  • Anthony Patrk, Partner - Tax Advisory
  • Jason Matchado, Partner – Tax Advisory
  • Luca Wright, Partner – Transfer Pricing


The views and opinions expressed in this article are those of the author and do not necessarily reflect the thought or position of Findex (Aust) Pty Ltd trading as Crowe Australasia. 

While all reasonable care is taken in the preparation of the material in this article to the extent allowed by legislation Findex Group Ltd accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Findex Group Ltd assumes no obligation to update this content after it has been issued. The information contained is of a general nature only and does not take into account your objectives, financial situation or needs.   

This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.