Australia: Consultation on draft guideline on review of cross-border software arrangements
Guidance on when ATO will not review cross-border software arrangements to determine whether payments are royalties subject to withholding tax
The Australian Taxation Office (ATO) on August 6, 2025, released Draft Practical Compliance Guideline PCG 2025/D4 (PCG 2025/D4)—a draft guideline to provide "certainty about when the ATO will not review software arrangements to determine whether any part of a cross-border payment made to a nonresident is a royalty and subject to withholding tax."
PCG 2025/D4 is a companion to the draft software reseller ruling TR 2024/D1, which sets out the ATO's draft position on when an amount paid under a software arrangement is a royalty and subject to royalty withholding tax. The finalization of TR 2024/D1 has been deferred pending the High Court decision in the PepsiCo case.
PDG 2025/D4 is open for public consultation until September 17, 2025.
KPMG observation
The practical value of PCG 2025/D5 seems limited, given its narrow focus on "low-risk" scenarios that reflect arguably uncontroversial fact patterns from a royalty withholding tax perspective. For example, the ATO's guidance in TR 2024/D1 in relation to finished tangible goods already indicates that an Australian distributor's payment for tangible goods with embedded software would typically not be a royalty where the distributor does not acquire or use any copyright rights and the software embedded in the tangible good only facilitated the operation of that tangible good. Hence, the additional practical guidance provided by PCG 2025/D4 on this point is confined.
For more information, contact a KPMG tax professional in Australia:
Paul Sorrell | psorrell@kpmg.com.au
Jennifer Ta | jta2@kpmg.com.au
Jeremy Capes | jeremycapes@kpmg.com.au
Amanda Maguire | amaguire@kpmg.com.au