On 17 January 2024, the Australian Taxation Office (ATO) issued a revised draft taxation ruling, TR 2024/D1, which addresses the taxation implications of payments relating to software distribution arrangements.
This ruling has been eagerly anticipated, mainly due to concerns from the legal and technology industries surrounding the ATO's earlier draft, TR 2021/D4. The ATO's latest publication builds upon its previous stance, incorporating feedback and providing further clarification on its position on the characterisation of payments as royalties subject to withholding tax.
The ruling outlines two critical scenarios that determine whether the ATO considers payments fall under the category of royalties. The first scenario occurs when the performance of a contract to distribute software necessitates the use of copyright rights.
The second scenario occurs when a distribution agreement needs more specificity regarding the parties' rights and obligations. Despite the expanded rationale, TR 2024/D1 maintains the ATO's position outlined in TR 2021/D4 with minimal substantive changes.
It is important to highlight that while the terms of distribution or license agreements are relevant, they are not the sole factor the ATO uses in determining payment characterisation. For Scenario one, the ATO contends that the distributor's right to make copies, even for a limited purpose, constitutes the grant of an exclusive right held by a copyright holder to produce the software.
In addition, if a distributor enters into an agreement with an end-user specifying the software to be obtained, the distributor assumes responsibility for determining the communicated software, thereby incurring exclusive rights that the ATO says characterise payments as royalties.
Payments may be considered royalties under a distribution agreement when the distributor gains rights to trademarks, brands, and designs or acquires technical and commercial information from the copyright holder.
Furthermore, TR 2024/D1 introduces the concept of apportionment in certain cases to determine the extent to which a payment constitutes a royalty or a distribution fee. Distributors must demonstrate the separability of other rights conferred under the agreement to establish that the distribution right holds substantial value independent of the copyright use right. However, the ATO provides limited guidance on when apportionment is applicable, so taxpayers need to exercise caution. Careful consideration of future legal agreements is advised, particularly in drafting and apportioning different rights conferred, as the failure to do so may lead to the entire payment being treated as a royalty.
Considering the ATO's latest guidance, it is recommended that businesses engaged in software distribution review their agreements carefully. The two outlined scenarios, combined with the need for potential apportionment, underscore the importance of careful consideration in structuring future agreements. Businesses are urged to seek professional advice to ensure compliance and mitigate potential tax implications.
Our team of tax experts is here to assist you in navigating the changing taxation landscape in the digital era, including payments related to software distribution arrangements.
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Daniel Smedley
Principal | Accredited Specialist in Tax Law
M +61 411 319 327 | T +61 3 9611 0105
E: dsmedley@sladen.com.au
Kseniia Gasiuk
Associate
T +61 3 9611 0160
E kgasiuk@sladen.com.au
