The ATO have released a revised draft tax ruling, offering a more detailed explanation of its interpretation of payments linked to software and other intangible property rights.

Australian distributors who currently don’t classify sales within software distribution arrangements as royalties should carefully consider this updated guidance, as it may result in withholding tax responsibilities. In cases where  gross-up clauses exit in current distribution agreements there could potentially be increased withholding tax liabilities.

What does the latest draft ruling include?

The ruling emphasises that the nature of payments in connection with a software arrangement is contingent upon the specific details of each case. This includes the terms outlined in any agreement between the involved parties and their actions relating to the software arrangement.

What will and won’t be considered royalties?

The ruling states it will apply both before and after its date of issue.

The retrospective nature of the ruling introduces considerable uncertainty for taxpayers. For multinational groups, it may lead to potential penalties for failure to lodge.

The payment of offshore royalties means that certain annual compliance activities will be required.  To the extent that these obligations were unknown prior to the ruling being released, the retrospective nature of this ruling could mean that these obligations are already overdue!

Should you have any questions about how these changes will impact you, please reach out to your Engagement Partner.