TR 2026/2: Australia's Software Royalty Ruling and Its Implications for Groups with Indian Operations

On 4 September 2026, the Australian Taxation Office finalised Taxation Ruling TR 2026/2, along with a draft Practical Compliance Guideline, setting out its position on when cross-border payments for software, SaaS access, and related IP arrangements amount to 'royalties' subject to withholding tax. The ruling took five years to finalise, replacing a position that traces back to the withdrawal of an older ruling in 2021. It follows the Australian High Court's decision in PepsiCo, which the ATO has relied on to justify a substance-over-form, purpose-focused test for what counts as a royalty.

The fact pattern is close to one India's Supreme Court resolved in 2021, in Engineering Analysis Centre of Excellence v CIT. That decision ended nearly two decades of litigation by holding that payments to non-resident software suppliers for resale or use under distribution agreements and end-user licences are not royalty payments, because what is transferred is a copyrighted article, not an interest in the copyright itself. India adopted the narrow, taxpayer-favourable reading. TR 2026/2 goes the other way, and further: it takes the position that where IP rights are practically inseparable from the other commercial rights in a software intermediation arrangement, which the ATO treats as the common case, the entire payment is characterised as a royalty, with no workable apportionment pathway in the final text. The draft compliance guideline layered on top classifies most royalty-free distribution structures as medium-to-high risk unless the local margin clears a threshold meaningfully higher than the ATO's own prior benchmark for low-risk distributor margins.

The commercial reality of how software gets distributed cross-border has not changed. What has changed is the doctrinal lens two major tax administrations apply to that reality, and the two now point in opposite directions. This matters because many multinational software distribution structures are built on a common template rolled out across several jurisdictions at once. A group that priced its Indian and Australian distribution entities on the same functional analysis and the same intercompany agreement now faces two different downstream outcomes. In India, the royalty question was settled years ago, so the TP analysis stands on its own. In Australia, the royalty characterisation question sits ahead of the TP question and can override it: if the whole payment is a royalty, the arm's length distribution margin analysis becomes secondary to a withholding tax exposure that was never priced into the original structure. MinterEllison's analysis of the final ruling described this as a 'full-royalty rather than apportioned outcome' as the default assumption, a marked hardening from where the draft guidance started.

Whether this is an Australian idiosyncrasy or an early sign of a broader trend is not yet clear. Some revenue authorities, facing fiscal pressure, have shown greater willingness to use substance-based, purpose-focused tests to recharacterise payments, an interpretive approach not unlike the one behind India's GAAR and its expanded commercial substance doctrines. If more jurisdictions begin reading embedded software royalties this expansively, Indian multinationals licensing software into distribution networks abroad, and Indian subsidiaries of global software groups receiving payments from Indian customers, may need a characterisation review ahead of every TP benchmarking exercise, rather than a periodic refresh of comparables alone. For now, groups with common distribution documentation across India and Australia should map where the two jurisdictions' positions on the same contract diverge, rather than assume that a settled Indian royalty position carries over wherever the same paperwork is used.