Australia’s tax environment remains dynamic, with ongoing legislative updates and court decisions posing challenges for taxpayers and advisors. In 2026, three key developments emerged, notable for their wide-ranging impact and practical implications, particularly for international investors and multinational entities.
A significant shift involves the expansion of withholding tax on royalties for cross-border software transactions. The Australian Taxation Office (ATO) has now issued its final ruling on software payments, meaning numerous typical cross-border deals may now include a royalty element, potentially subjecting such payments to Australian royalty withholding tax with exposure stretching back to July 2021.
Cross-border software payments: the expansion of royalty
The ATO’s final ruling, Taxation Ruling TR 2026/2, sets out its view on the character of payments for software and intellectual property rights. This was accompanied by a draft Practical Compliance Guideline, PCG 2026/D4, which outlines the ATO’s compliance and risk framework for intermediation and distribution arrangements. Many common cross-border software arrangements may now be viewed as comprising a royalty component that would then be subject to Australian withholding tax.
The ATO is not just focusing on software providers in the technology sector, but also on other industries where software is used. They may seek to bifurcate the ‘software/IP’ component of these arrangements to argue that payments attributable to software/IP should constitute a royalty. This view may also affect other arrangements where they perceive there to be a risk of IP being directly or indirectly provided for by offshore entities in exchange for payment by related Australian taxpayers.
It would be prudent to review any agreements involving software provision for use in Australia, even if such software forms part of a larger contract, against the ATO’s guidance in the ruling. Taxpayers should consider how to support the reasonableness of the position they have adopted, in order to prepare for ATO scrutiny and to manage and mitigate potential penalties.
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The ruling broadens the definition of a royalty for Australian tax purposes. It uses the broad term ‘software intermediation arrangement,’ replacing the narrower reference to ‘distributor’ in an earlier draft. This captures resellers, platform operators, managed service providers, and intra-company supply-chain entities alongside traditional software distributors.
A few specific mechanisms deserve attention, including downloading software, which constitutes ‘reproduction in a material form’ under Australian copyright law. Cloud and SaaS access is now viewed as being ‘communication to the public’, so SaaS resellers, cloud aggregators, and portal or account managers can be captured. The authorisation right also means that a channel or distribution agreement permitting an Australian entity to issue end-user licence agreements may itself give rise to a royalty, even for a purely administrative reseller.
The ATO’s position is at odds with the United States Treasury’s view and is inconsistent with the OECD Commentary on Article 12 of the Model Tax Convention. The ATO maintains that paragraph 14.4 ‘cannot be relied upon’ where Australian copyright law leads to a different result. The US Treasury had formally objected in 2022 and 2024 to the ATO’s broad interpretation of what constitutes a royalty.
The royalty question intersects with other areas, such as whether an arm’s-length price under Australia’s transfer pricing rules would have included a royalty component, potentially amplifying a withholding tax assessment. A new penalty regime for companies with more than A$1 billion in global turnover (significant global entities – SGEs) that mischaracterize or undervalue royalty payments is also proposed.
Foreign resident CGT reforms: wider net and bigger stakes
Before the foreign resident CGT change, foreign residents were generally taxed on Australian capital gains only where the asset qualified as ‘taxable Australian property’ (TAP), including direct interests in Australian land and mining rights (‘taxable Australian real property’ or TARP), indirect interests in entities whose value was principally attributable to Australian real property (an ‘indirect Australian real property interest’ or IARPI), and certain assets connected with an Australian permanent establishment.
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Under the amendments, a new statutory definition of real property was introduced, going well beyond traditional interests in land. It captures: any interest in or right over land; personal rights to call for such an interest; licences or contractual rights exercisable over or in relation to land; and things fixed or installed on land (whether or not they are fixtures at law and disregarding any State or Territory statutory severance legislation). Infrastructure operating licences are expressly captured, including toll roads, bridges, ports, data centres, energy pipelines.
A rolling 365-day principal asset test has also been introduced, which applies across the entire 365-day period before the sale. A seller must now show that real property never made up more than half of the company’s value at any point during that year-long window. This creates a meaningful compliance challenge in markets where property values move frequently.
The amendments modify the International Tax Agreements Act 1953, which incorporates Australia’s tax treaty network into domestic law, and redefine key property concepts across all of Australia’s DTAs. Because every Australian DTA defines the expressions ‘real property’, ‘immovable property’, and ‘land’ by reference to Australian domestic law, the change has a treaty-wide effect.
Under the amendments, foreign sellers must now notify the ATO of any proposed sale valued at A$50 million or more if the seller proposes to make a declaration to the buyer that they consider the relevant interests are not indirect Australian real property interests. There are strict deadlines for this notification, and if not met by the seller, the buyer must withhold 15% of the purchase price or face penalties starting at A$7.5 million.
