Australian draft tax ruling clarifies when software gives rise to royalties

Draft guidance issued by the Australian Taxation Office on June 25 describes the circumstances under which receipts from the licensing and distribution of software will constitute royalties.

The ruling will replace existing guidance on software that was withdrawn on July 1, but it retains the ATO’s previous position that payments for the simple use of software do not give rise to royalties. The new guidance clarifies what types of arrangements, based on all the facts and circumstances, will result in royalties and includes examples.

The ruling also clarifies the application of the tax law to three software distribution models: packaged software, digitally distributed software, and cloud computing arrangements. The latter two types of distribution models were not addressed in the previous guidance.

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