The Australian Taxation Office has released a draft taxation ruling which sets out the Commissioner of Taxation’s preliminary views on the income tax treatment of receipts from the distribution and licensing of software, as distinct from “simple use” by end-users of the software. The draft ruling has a particular focus on the circumstances where receipts will be treated as royalties under arrangements involving the distribution of packaged software, digital software distribution and cloud computing arrangements including software-as-a-service (SaaS). This has the potential to be quite broad such that any business where software is fundamental to the delivery of services should also consider the draft ruling.
The draft ruling adopts a highly technical approach to the identification and valuation of the royalty element of any software payments and will be relevant to software distributors, software owners and end-users, particularly where there is a cross-border element where transfer pricing and withholding tax obligations become important. However, the draft Ruling does not address the impact of Australia’s tax treaties which will be critical in many cases.
The draft ruling replaces a widely used and accepted taxation ruling issued in 1993 dealing with computer software which has been withdrawn. Once finalised, the draft ruling is proposed to apply both before and after its date of issue. However, it is recognised that taxpayers will be entitled to rely on the 1993 ruling which applied to some arrangements covered by the draft ruling.