We pay an overseas company for the software our business runs on — does part of that money have to stay in Australia?

The invoice arrives from Singapore, or California, or Shenzhen. It says ‘licence fee’ or ‘annual subscription’, you pay it in full, and in the years you have been doing it nobody has suggested that part of that money was supposed to stay in Australia. On 4 September 2026 the Commissioner signed the ruling that decides whether that is right — and its date of effect is not next July.

What was published on 4 September

Two documents. Taxation Ruling TR 2026/2 Income tax: royalties – character of payments in respect of software and intellectual property rights is final and binding. It finalises draft ruling TR 2024/D1, withdrawn the same day, which had replaced TR 2021/D4 — which in turn caused the withdrawal of TR 93/12, the 1993 ruling on computer software that a lot of long-standing arrangements were built on. Alongside it sits draft Practical Compliance Guideline PCG 2026/D4, which says not what the law is but which arrangements the ATO will spend its review resources on. Comments on the draft close with the ATO on 2 October 2026.

The line to read first is the date of effect. TR 2026/2 applies both before and after its date of issue, and the draft PCG proposes the same. This is not a rule that starts on 1 July next year — it is the Commissioner’s view of what the law has always meant, applied to agreements signed years ago.

Who has to withhold, and how much

Royalty withholding tax is somebody else’s tax and your obligation. Where an Australian business pays a royalty to a foreign resident, the Australian payer must withhold, pay the amount to the ATO, issue the payee a payment summary and lodge the annual report for interest, dividend and royalty payments to non-residents (NAT 7187) — and must be registered for PAYG withholding before withholding anything.

The rate is whatever the tax treaty sets where the recipient is a resident of a treaty country, and 30% where there is no treaty. Australia has treaties with more than 40 countries; the list is on treasury.gov.au. One exemption comes up often: no withholding is required on a royalty paid to a foreign resident of a treaty country who carries on business in Australia through a permanent establishment where your payment is effectively connected with that Australian business.

What the ruling treats as a royalty

A payment is a royalty where it is consideration for the grant of a right to use intellectual property — whether or not the right is ever exercised — for the use of an IP right, for know-how, for assistance supplied to let you apply or enjoy those things, for the right to use IP in software embedded in tangible goods, or for an undertaking not to grant that right to anyone else.

It is not a royalty where the payment is wholly for the right to distribute copies made by the copyright holder without using any IP right, wholly for the assignment of all rights in the copyright, wholly for tangible goods or physical media where the distributor neither uses nor is granted any IP right in the software, or wholly for services unrelated to IP. Where one payment covers several of these at once, the ruling requires apportionment on a fair and reasonable basis.

The payments the ATO has said it will leave alone

This is where most Australian businesses land. Under the draft PCG an arrangement sits in the green zone — low risk, no royalty recognised — where the payment is solely to acquire copies of software for private or domestic use; or copies of software that is generally available to the public and used solely in your own business, meaning not on-sold, licensed or otherwise exploited as a primary object of the business; or finished tangible goods where the software is an inherent, practically inseparable part that only makes the goods do their job, which is the firmware in an appliance.

The ATO’s example is a company buying a suite of cloud productivity applications for its own staff: it can configure dashboards and set permissions, it cannot touch the source code. Green zone. There is a second green-zone door for genuinely simple distribution — you buy copies to on-sell, have no right to and do not make additional copies, do not adapt the software and provide no pre-sale, implementation or post-sale services connected with your customers’ use, and either the copies are on physical media or your customer pays a fixed one-off price for a perpetual or ongoing licence. The worked example is downloadable video games bought outright, with no subscription.

Where an ordinary reseller arrangement stops being ordinary

The draft puts an arrangement in the amber zone — medium to high risk, prioritised for review — where you sell Australian customers products or services that comprise, or substantially involve, access to or use of software whose IP the offshore supplier holds, and any one of three things is true: your agreement with the supplier refers to or permits use of that software, or your customers need a licence or right to use it in order to use what you sold them, or they need access protected by a key code, password or copy protection.

An access code issued to your customer is enough on its own. So is not having done the self-assessment, or not being able to evidence how you reached it. The zone above is reserved for amber arrangements with added features — among them that you copy or modify the supplier’s software or have the right to, or that you previously paid a royalty under the same or a similar agreement.

The two mistakes this ruling will expose

The first is trusting the label on the contract. Agreements here are often drafted to say the rights granted are limited, restricted or royalty-free, and the PCG addresses that directly: those descriptions do not take an arrangement out of the amber zone. The ruling makes the same point from the legal side — an amount can be a royalty however it is described or computed, and need not be periodic.

The second is assuming a ruling published in September 2026 starts in September 2026. It applies before and after its date of issue, so the exposure is not ‘from now on’ — it is payments already made, on agreements already signed, in years that are still open.

This is general information current as at September 2026 and not advice on any particular arrangement. Whether a payment is a royalty turns on the terms you actually contract on and on the specific treaty with the supplier’s country, and PCG 2026/D4 is a draft that can change before it is finalised.

The step worth taking this month is small: pull the agreements behind your regular overseas software payments and read what they actually grant you. If the answer is ‘copies of a finished product that we use ourselves’, the ATO has now told you in writing where that sits. If it includes a right to copy, adapt or sub-licence — or your customers receive an access code — that is a different conversation, and it is the one our companies, trusts and bookkeeping service is for.