The Australian Taxation Office has published for public comment Draft Taxation Ruling TR 2021/D4 Income tax: royalties - character of receipts in respect of software, which provides guidance on whether amounts received in respect of software are royalties and are not royalties. The ruling replaces Taxation Ruling TR 93/12 Income tax: computer software, and when finalized, will apply both before and after its date of issue. Taxpayers that rely on TR 2021/D4 reasonably and in good faith will not have to pay any interest or penalties in respect of the matters covered, if this draft Ruling turns out to be incorrect and tax is underpaid as a result. However, the correct amount of tax will still need to be paid.
Summary - what this draft Ruling is about
1. This draft Ruling deals with the circumstances in which receipts from the licensing and distribution of software will be royalties as defined in subsection 6(1) of the Income Tax Assessment 1936 (ITAA 1936).
2. This Ruling replaces Taxation Ruling TR 93/12 Income tax: computer software, which has been withdrawn from 1 July 2021.
3. In addition to the matters covered by this Ruling, TR 93/12 dealt with the assessability of receipts in respect of software and the treatment of software as trading stock under subsection 70-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997). These matters are considered to be generally well understood and it is proposed to deal with them through guidance to be published on ato.gov.au.
4. The character of receipts from the licensing and distribution of software depends on the terms of the agreement between the parties taking into account all the facts and circumstances of the particular case.
5. An amount is a royalty as defined in subsection 6(1) of the ITAA 1936 to the extent that it is paid or credited as:
(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
(b) consideration for the supply of know-how in relation to software (paragraph (c) of the definition). Examples include payments for the supply of source code relating to software (see Example 2 of this Ruling, and contrast Example 3 of this Ruling).
(c) consideration for the supply of assistance furnished as a means of enabling the application or enjoyment of the supply (paragraph (d) of the definition) (see Example 7 of this Ruling, and contrast Example 8 of this Ruling).
6. The following amounts are not royalties as defined in subsection 6(1) of the ITAA 1936:
(a) consideration for the grant of a licence which allows only the simple use of software, that is, it allows the licensee or end-user to use the software for the purpose for which it was designed, but does not otherwise permit the end-user to use the copyright in the software (see Example 3 of this Ruling).
(b) consideration for the grant of distribution rights in relation to software where the distributor is not permitted to do anything in relation to the software that is the exclusive right of the owner of the copyright in the software (see Example 6 of this Ruling).
(c) consideration for the transfer of all rights relating to the copyright in software.
(d) proceeds from the sale of goods where hardware and software are sold to an end-user in an integrated form without being separately priced, or where physical carrying media on which software is stored is sold to an end-user, provided in either case that the end-user is only granted simple use rights.
(e) consideration for the provision of services in the modification or creation of software.
7. In certain cases, apportionment may be required to ascertain the extent to which a receipt from the licensing or distribution of software is a royalty. Apportionment is to be done on a fair and reasonable basis taking into account all the facts and circumstances of the particular case.