Software royalties and income tax

The Australian Taxation Office (ATO) recently released a draft Taxation Ruling (TR) 2021/D4 (Draft Ruling) which considers whether certain software related royalties may be taxable.  In short, the Draft Ruling provides a much needed, and quite broad, scope for when consideration of computer software will be a royalty for income tax purposes.  This article discusses this broadened scope.

What are royalties?

‘Royalty’ and ‘royalties’ are defined under section 6 of the Income Tax Assessment Act 1936 (Cth) (Act).  That section provides:

royalty or royalties includes any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as the case may be, as consideration for:

  • The use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark, or other like property or right;
  • The use of, or the right to use, any industrial, commercial or scientific equipment;
  • The supply of scientific, technical, industrial or commercial knowledge or information;


Copyright Act

While consideration for the use of computer software being a royalty is not discussed in the Act definition above, the Draft Ruling suggests reading it in light of subsection 31(1) of the Copyright Act 1968 (Cth) (CA).[1]  This provision outlines that the exclusive rights retained by the copyright owner of a literary work (including software) include being able to:

  • reproduce the work in a material form;
  • make an adaptation of the work; and
  • communicate the work to the public.

Software will be ‘copied’ or ‘reproduced’ when it is downloaded onto a computer,[2] and, for the purposes of section 31(1) of the CA, exclusive rights will transfer.  Therefore, a vague connection between the principles and scope of copyright would previously need to be met to establish consideration flowing from software and royalties.  However, the Draft Ruling provides certainty around this issue.

The Draft Ruling’s simplification

The Draft Ruling clarifies whether payments derived as consideration for the licencing or otherwise of computer software constitutes a royalty for tax purposes, providing at paragraph [5]:

“…(a) consideration for the grant of a right to do something in relation to software that is the exclusive right of the owner of the copyright in the software (paragraph (a) of the definition). Examples include payments for the grant of a licence which permits:

(i) The licensee to reproduce software or to modify or adapt software; and

(ii) A distributor of software to sub-licence the use of the software, whether the software is distributed by way of physical carrying media, digital download or cloud-based technology.

(b) Consideration for the supply of know-how in relation to software. Examples include payments for the supply of source code relating to software;

(c) Consideration for the supply of assistance furnished as a means of enabling the application or enjoyment of the supply.”

The Draft Ruling substantially broadens the scope of payments which will be considered as royalties for income tax purposes.  Where royalties, per the section 6 definition above, typically relate only to the act of giving permission to use certain properties, the Draft Ruling expands from this position to include the supply of know-how and assistance in enabling the use of an application.  Such supply or assistance could be analogised with a ‘delivery fee’.

This is a departure from established practices.  For example, when licensing a photo or musical jingle, any consideration paid by the licensor in respect of similar ‘delivery fees’ would not be considered a royalty.  An exception applies in the case of an agreement concerning the licensing or distribution of software which provides for the payment of a royalty to a non-resident.[3]  Now, many more categories of consideration will be liable to royalty withholding tax.  This is likely in recognition of computer software being less simple and requires a more involved process than other common forms of intellectual property.

What doesn’t constitute a royalty?

The Draft Ruling specifically provides for types of consideration won’t constitute a royalty for tax purposes. Paragraph [6] provides:

  • consideration for a licence which provides only for the use of the software;
  • consideration for distribution rights of the software;
  • consideration for the transfer of all rights in the software;
  • proceeds from the sale of hardware and software packaged together; and
  • consideration for the modification or creation of software.


The Australian Tax Office (ATO) has considered in some detail what constitutes ‘software’ before determining whether consideration relating to its licencing or use will be a royalty.  the ATO highlighted that ‘software’ is a generic term for computer programs consisting of code instructing particular functions or products.[4]  Furthermore, ‘software’ is distinguishable from other intellectual properties in that it is not physical and consists only of information.[5]  In addition, the ATO states that ‘software’ is developing and can take many forms, no longer bound by distribution via physical carrying media,[6] appears to provide the rationale for why consideration for ‘delivery fees’ will constitute royalties.


The ATO has expanded on what will be considered a royalty for income tax purposes in relation to consideration derived from the provision of computer software or related services.  It is important to be aware of such changes and ensure compliance with the Draft Ruling.  The Final Ruling will be issued on 25 June 2021 and will likely hold substantially the same requirements surrounding royalties derived from computer software.

Links and further references

Related articles

Software as a service agreement revisited

What is a Division 293 Tax?

What is my superannuation taxed at?


Copyright Act 1968 (Cth)

Income Tax Assessment Act 1936 (Cth)


Dyason v Autodesk Inc & Autodesk Australia Pty Ltd [1990] FCA 449.

Other government materials

Taxation Ruling (TR) 2021/D4

Further information

If you need advice on whether you may owe income tax on royalties collected from software licensing, contact us for a confidential and obligation free and discussion:


Malcolm BurrowsMalcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
Telephone: (07) 3221 0013 (preferred)
Mobile: 0419 726 535



This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.


[1] Taxation Ruling (TR) 2021/D4 [56].

[2] Taxation Ruling (TR) 2021/D4 [57] – [58]; see also Dyason v Autodesk Inc & Autodesk Australia Pty Ltd [1990] FCA 449.

[3] Income Tax Assessment Act 1936 (Cth) s 128B(2B), (2C).

[4] Taxation Ruling (TR) 2021/D4 [40].

[5] Taxation Ruling (TR) 2021/D4 [41].

[6] Taxation Ruling (TR) 2021/D4 [42] – [43].

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