The Australian Taxation Office (ATO) has released draft Practical Compliance Guideline PCG 2025/D4, outlining its approach to cross-border software payments and when these may be subject to royalty withholding tax.
For Australian businesses purchasing or reselling software from overseas suppliers, this new guidance offers welcome clarity. But it also highlights some ongoing grey areas — meaning careful review and documentation are still essential.
At Boa & Co. Chartered Accountants, we’ve broken down the key points you need to know.
1. Why Software Payments Matter
Cross-border software transactions can be tricky under Australian tax law. Depending on how they’re classified, payments may be treated as “royalties” and attract withholding tax.
This issue has been under increased scrutiny following high-profile cases such as PepsiCo v Commissioner of Taxation. In response, the ATO has drafted this guideline to reduce compliance costs and provide a framework for identifying low-risk software arrangements.
2. The ATO’s Risk Framework
The draft PCG introduces a risk assessment system that businesses can use for self-assessment:
- White Zone – No further review required (applies if there’s a prior settlement, APA, or ATO audit with a low-risk outcome).
- Green Zone – Considered low risk. The ATO won’t review further if the arrangement meets the low-risk criteria.
💡 Businesses still need to keep documentation to support their risk rating in case the ATO requests it.
3. Examples of Low-Risk Software Payments
According to the draft guidance, the following types of payments generally fall within the Green Zone:
- Personal Use Software – e.g., antivirus purchased by an individual.
- Business Use Software – standard, off-the-shelf software installed for internal operations (with no rights to exploit or resell).
- Embedded Software in Goods – e.g., software pre-installed in appliances or machinery purchased for resale.
- Software on Physical Media for Resale – where a retailer purchases copies for resale without sublicensing or modification rights.
4. What This Means for Businesses
For businesses with simple, straightforward arrangements, this framework may:
- Reduce compliance costs.
- Provide greater certainty around ATO expectations.
However, customised software arrangements or those involving intellectual property rights may fall outside the Green Zone, leaving businesses exposed to withholding tax risks.
The ATO is inviting feedback on the draft, with submissions due by 17 September 2025.
How Boa & Co. Can Help
At Boa & Co., we specialise in helping businesses navigate cross-border tax issues and software-related payments. Our services include:
✔ Reviewing your current software payment structures against the ATO’s risk framework.
✔ Assessing potential royalty withholding tax exposure for complex or customised software.
✔ Preparing robust documentation to support self-assessment.
✔ Advising on restructuring software arrangements to reduce compliance risks.
The Bottom Line
The ATO’s draft guidance is a step forward in providing clarity and consistency for software payments. But for many businesses, uncertainty remains — making careful self-assessment and documentation critical.
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