Spotlight on the Australian tax landscape: three recent developments

The Australian tax landscape is never static. Recent legislative changes and judicial authority continue to present challenges for taxpayers and advisers alike. Three developments in 2026 stand out for their broad reach and practical significance to taxpayers, particularly international investors, and multinational entities generally. This spotlight briefing distils the key points: what has changed, what it means, and what to look out for. 

The Australian Taxation Office (ATO) recently released its long awaited final ruling in respect of software payments. It means that many common cross-border arrangements may now be considered to include a royalty component, with the flow on impact that such payment could  be subject to Australian royalty withholding tax with exposure dating back to July 2021. The Australian approach to software royalties is among the most expansive globally, diverging from positions taken by major treaty partners. 

On 4 September 2026, the ATO published a Taxation Ruling (Taxation Ruling TR 2026/2) which set 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. Withholding tax on royalties is typically reduced to 5% or 10% under Australia’s double tax agreements (DTAs), but the potential exposure extends well beyond the headline rate.

Critically, the ATO is not just focusing on software providers in the technology sector. Further, the ATO is of the view that such arrangements can be ‘embedded’ within other overarching service agreements. It may therefore seek to bifurcate the ‘software/IP’ component of these arrangements to argue that payments attributable to software/IP should constitute a royalty. There  may be a risk that this view is not just adopted in a software context (as demonstrated by recent audit activity in other industries and the High Court PepsiCo case). It may also affect other arrangements where the ATO perceives there to be a risk of IP being directly or indirectly provided for by offshore entities in exchange for payment by related Australian taxpayers. If the ATO scrutinises these arrangements, the result may be that it seeks to apply royalty withholding tax to the payments (or portions thereof) or otherwise apply transfer pricing adjustments to them.

To the extent that arrangements involve the provision of software for use within Australia, even if such software makes up a portion of those agreements, it would be prudent to examine them against the ATO’s guidance in the ruling. If such agreements exist, we recommend that taxpayers ensure their position with respect to remuneration under these arrangements is defensible, such as by compiling a defence file of evidence or obtaining tax and IP legal advice. 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.

Further, given the risk that the views in the ruling may not be confined to software intermediation arrangements, taxpayers should consider whether any payments made from Australia may involve consideration for the receipt (directly or indirectly) of trademarks, patents, know-how or other IP, even where not expressly provided for in relevant agreements. The ATO has expressed views previously that it will ’test the economic fundamentals of arrangements that involve the provision of IP but where no royalty is recognised’, and taxpayers should be adequately prepared to defend their position if such scrutiny arises.

Casting a wide net

TR 2026/2 applies both before and after its publication date. Reliance on the previous tax ruling released in 1993 would only be available up to 1 July 2021. That means that arrangements entered into or renewed after that date may be exposed to royalty withholding for the entire period from July 2021 to September 2026, plus general interest charges and potential penalties. The ATO has been actively reviewing cross-border software and other related party payments for several years.

The tax ruling also broadens the base of what constitutes a royalty for Australian tax purposes. The ruling is very deliberate in its uses of the broad terminology of ‘software intermediation arrangement’, replacing the narrower reference to ‘distributor’ in an earlier draft of what became the final ruling. This can capture resellers, platform operators, managed service providers, and intragroup supply-chain entities on top of traditional software distributors. 

A few specific mechanisms deserve attention. Downloading software constitutes ‘reproduction in a material form’ under Australian copyright law, so distributors that authorise or facilitate downloads are now captured. 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. Moreover, technological protection measures (TPMs) such as licence keys, activation codes, DRM, or access portals are now expressly included. A distributor implementing or managing access controls may be exercising copyright rights via TPM pathways even where the reproduction or communication analysis is contestable. 

The draft Practical Compliance Guideline assigns arrangements to five risk zones, with white and green being the safe and low-risk zones, yellow in the middle, and amber and red being the higher risk zones. However, the safer categories are narrow, including only cases where there are prior ATO rulings in the taxpayer’s favour, or straightforward resale of existing software copies with no copyright rights. Cloud, SaaS, digital, and licence key models will generally not qualify for the green zone.

What makes a payment a ‘royalty’?

Following the High Court’s 2025 decision in Commissioner of Taxation v PepsiCo Inc & Anor [2025] HCA 30, the ATO applies an objective, purpose-based test: a royalty arises where there is a causal connection between the payment and the grant or exercise of intellectual property rights. Specifically, the IP must be the ‘purpose, basis, or condition’ of the payment. Contractual labels such as ‘royalty-free’ would not be determinative, as the ATO looks at the whole arrangement, the parties’ conduct, and the economic fundamentals.

Australian copyright law sits at the core of this new ruling. A royalty arises where a payment relates to the exercise of any exclusive right in copyright, including reproduction (e.g. downloading software), communication to the public (e.g. providing online access to the cloud), adaptation, or authorising another person to do the above. Critically, it is the granting of a right in itself that may give rise to a royalty, so the ruling applies even where such a right is never exercised.

Where a payment covers both IP rights and other value (e.g. support services, training, implementation), apportionment is theoretically available. In practice, the ATO’s view is that IP rights are ‘commonly’ neither separate nor severable from the other rights granted, so the entire payment is typically characterised as a royalty. The apportionment example from an earlier draft ruling was removed from the final version, and taxpayers pursuing apportionment must proceed cautiously and without authoritative guidance. Taxpayers should keep strong contemporaneous documentation of separable non-IP value such as independent pricing calculations to substantiate their case. 

Tensions with international positions

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 (paragraph 14.4), which treats a distributor acquiring copies ‘without the right to reproduce’ as earning business profits, not royalties. 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. This is significant because the United States is, by value, the largest source of software for Australian businesses.

Importantly, the new tax ruling does not cover payments to residents of the United States, the Netherlands, Italy, Singapore or Mexico, as these jurisdictions have non-standard treaty definitions and require separate, treaty-specific analysis. For US-resident payees, the narrower formulation in Article 12 of the Australia-US Convention would apply instead.

Compounding exposure

The royalty question does not exist in isolation. The ATO may also assess whether an arm’s-length price under Australia’s transfer pricing rules (Div 815) would have included a royalty component. An adverse application of the transfer pricing rules may significantly compound a withholding tax assessment. Further, a new penalty regime for companies with more than A$1 billion in global turnover (significant global entities – SGEs) that mischaracterise or undervalue royalty payments is also proposed to apply. The cumulative cost of withholding tax compounded by general interest charge, transfer pricing adjustments and SGE penalties can be substantial.

Key takeaways for cross-border payments

• The ruling affects not only software or technology companies. Any business acquiring software from an overseas supplier through a subsidiary or third-party distributor, accessing cloud services from an overseas group member, or reselling foreign software should assess its position.
   
• It is prudent to review operational practices (how software is delivered, who manages access controls and how pricing is structured), and not just contracts.
   
• Potential exposure from 1 July 2021 onward should be quantified and the applicable treaty position assessed.

See Cross-border software payments and royalties: implications of final taxation ruling and practical compliance guideline for further information. 

ATO compliance focus areas

Australia is dramatically expanding what counts as taxable Australian property for non-resident investors, with even existing holdings potentially captured. The combination of a broader tax base, a rolling lookback test, treaty overrides and stiff withholding penalties makes this one of the most consequential changes to Australia’s international tax settings in decades. It has the potential to impact foreign investors in infrastructure and those engaging in mergers and acquisitions more generally.

Over the last few months, the Australian Government introduced amendments to overhaul the foreign resident capital gains tax (CGT) regime, effective from 1 October 2026. The changes, in Treasury Laws Amendment (Strengthening Accountability for Tax Adviser Misconduct and Other Measures) Act 2026, also have an impact on foreign resident withholding obligations.

Before the foreign resident CGT change

Prior to the introduction of the new law, foreign residents were generally taxed on Australian capital gains only where the asset qualified as ‘taxable Australian property’ (TAP). This included 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. If an asset was not outside TAP, the capital gain or capital loss was disregarded. Now, the concept of what falls within the TAP bucket has been substantially expanded.

A far broader definition of real property

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), plus leases and licences over those things. 

Infrastructure operating licences are expressly captured, including toll roads, bridges, ports, data centres, energy pipelines. Forestry and agricultural licences are also in scope. 

A rolling 365-day principal asset test has also been introduced. Previously, an entity’s connection to real property was assessed only at the point of sale, specifically whether more than 50% of the company’s value was attributable to Australian real property assets. Under the new rules, this test 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. It is likely to give rise to disputes with the ATO over how asset values should be measured.

Treaty override

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. Those terms will now carry the expanded meaning introduced by the above amendments.

In practice, this means that the broader concept of TARP, as expanded by the new law, will also govern how these expressions are read within Australia’s treaty framework. The change applies from the legislation’s commencement date, taking immediate effect on transactions that would otherwise fall within existing treaty protections.

This could raise the key question of whether one treaty party might effectively alter the agreed meaning of bilateral treaties through unilateral domestic legislative changes. Treaty partners may contest this expansion on the basis that it undermines the negotiated terms of the agreement. Whether courts would ultimately uphold this form of domestic treaty override remains an open question.

Foreign resident capital gains withholding

The Australian foreign resident capital gains withholding rules require buyers of interests in TARP or IARPI from foreign sellers to withhold 15% of the purchase price, which is to be remitted to the ATO. The rules presume that each seller will be foreign for these purposes. For example, a buyer of shares in an Australian company from a seller that holds more than 10% of that company, where the value of that company is predominantly (i.e. more than 50%) attributable to land in Australia, would generally be required to withhold from the purchase price. A seller could provide a declaration to the buyer that it was not a foreign resident. Alternatively, where the circumstances allow, a seller could provide a declaration that the shares were not IARPIs (e.g. because the underlying land, if any, did not meet the above threshold in terms of value). A buyer would be entitled to rely on such a declaration as the basis to not withhold from the purchase price unless the buyer knew the declaration to be false (i.e. a subjective standard). 

Under the amendments that are effective from 1 October 2026, 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 IARPIs. There are strict deadlines for this notification that, if not met by the seller, will mean that the buyer must withhold 15% of the purchase price or face penalties starting at A$7.5 million. Further, any declaration provided by a seller to a buyer will not be valid unless the seller has notified the ATO. Therefore, the seller’s compliance with its notification obligations will be a critical due diligence item for buyers. The buyer’s knowledge threshold in respect of a declaration by a seller has also shifted from a purely subjective test based on actual knowledge to a more objective standard, requiring the buyer to determine whether they knew or could reasonably be expected to have known that the declaration was false. Again, this is likely to require buyers to conduct further due diligence. The difficulty in doing so would be compounded by the amended concepts set out above and the potentially limited information that is available from the seller. These rules will add time, cost and complexity to cross-border M&A timelines.

Key takeaways

• Existing investments held by foreign residents that were previously outside the Australian CGT net may become fully taxable from commencement, without any disposal event and mostly without transitional relief.
   
• The expanded definitions of ‘real property’ and the rolling 365-day PAT create new compliance and valuation challenges for infrastructure, energy, and resource investors.
   
• Foreign vendors and their Australian acquirers face heavier withholding obligations and tighter timeline restrictions, with potential penalty exposure.

See Foreign resident CGT reforms enter Parliament for further information. 

A Federal Court decision on the sale of the Sydney Hilton Hotel may reshape how Australia’s general anti-avoidance rule applies to property and M&A deals. We watch on as we wait for the decision of the appeal to the Full Court.

In September, the Federal Court handed down Hilton International Australia Pty Ltd v Commissioner of Taxation (No 2) [2026] FCA 1325, a decision that tax advisers should have on their radar. 

Australia’s general anti-avoidance rules (Part IVA)

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that would apply if a taxpayer entered into a ‘scheme’ which had as its objective ‘dominant purpose’ to secure a ‘tax benefit’. If Part IVA is considered to apply to a transaction, the Commissioner of Taxation may, among other things, deny the taxpayer the ‘tax benefit’ and impose penalties, as well as interest.

The facts of Hilton

Hilton International Australia (Hilton) was the head company of an Australian tax consolidated group. The Sydney Hilton Hotel was held through a layered Australian structure. Before the sale of the hotel, an internal restructuring made Admiral Holdings Australia (AHA) the sale vehicle. The hotel and business assets were consolidated into AHA, which was left owing roughly $420 million in intercompany debt to Hilton. A Luxembourg entity was then interposed as the seller of the AHA shares.

The buyer, Bright Ruby Resources, paid total consideration of approximately $442 million – about $29 million for the shares (to Luxembourg) and around $420 million directly to Hilton to discharge the debt. The result was that Hilton recognised no taxable gain, and the Luxembourg seller returned a net capital gain of only about $21 million. The ATO applied Part IVA and included $173.3 million in HIA ’s assessable income. The Federal Court upheld the ATO’s assessment.

What the court found

1. Part IVA works by comparing the actual scheme with a ‘counterfactual’, which is a hypothetical scenario of what would or might reasonably have happened. The Federal Court held that there can be more than one reasonable counterfactual, and the tax benefit is measured against the one most favourable to the Commissioner. For taxpayers, this means identifying a single good alternative postulate may not be enough. One may also need to defend against every alternative the ATO puts forward.
    
2. For a counterfactual to support a taxpayer’s claim, it must not itself fail on anti-avoidance grounds. Hilton argued that the appropriate comparator was a debt-free sale (replacing the intercompany debt with share capital before the sale). The Court rejected this because that postulate was itself motivated by tax minimisation. Therefore, the two would be ‘two sides of the same coin’. If a proposed counterfactual would itself attract Part IVA, it cannot serve as a legitimate counterfactual. Taxpayers must show their counterfactual is not only commercially plausible but also free of a dominant tax-avoidance purpose.
    
3. Documentary evidence is key. An Investment Committee memorandum stating that the structure was adopted ‘for tax reasons’ and describing it as an opportunity to exit ‘in a tax-efficient manner’ was given determinative weight. Equally damaging was the absence of contemporaneous documents supporting the commercial rationale Hilton relied on at trial. The judge drew a pointed inference: ‘an objective not stated – particularly one that is now stated to be of central importance – is an objective not held’. The message for deal teams is clear: if you don’t document the commercial logic at the time, a court may conclude it didn’t exist.
    
4. Preparatory steps and post-completion conduct are taken into consideration. The 2014 restructuring that allocated debt to AHA was treated as part of the scheme, even though it occurred before the sale process. The Court also considered what the buyer did after completion, including transferring hotel assets to a trust, winding up AHA, and eventually selling the hotel as an asset sale in 2022. Both the lead-up and the subsequent conduct informed the dominant-purpose analysis.
    
5. Asset sales are viewed as a natural starting point. The Court accepted that for Australian hotel transactions, an asset sale was market practice (the comparable Sheraton on the Park transaction was an asset sale with a long-term management agreement). Where a share sale is used instead, the Court accepted the use of a clean vehicle without much prior transaction history as the most reasonable alternative. Departures from standard market practices were treated as a red flag.

Future implications from the Hilton decision 

Importantly, the Hilton decision is currently in the early stages of being appealed to the Full Court of the Federal Court. This means the decision is not necessarily the last word on these issues. Businesses and deal teams should monitor the appeal closely.

In the meantime, taxpayers should exercise caution. It would be prudent to review exposure in light of this decision if a business has previously entered into schemes with a similar profile. This is particularly important for those involving pre-sale restructuring that involved intercompany debt, using an offshore entity as a sale vehicle, or using structures where the documented rationale emphasises tax efficiency. Equally, if for those currently contemplating a transaction with these features, they should obtain specialist tax advice at the earliest opportunity. The decision is a clear signal that the ATO will scrutinise such arrangements closely.

Key takeaways from the Hilton decision

• Related party restructuring before a sale will attract close scrutiny, especially where it shifts value between equity and debt.
   
• Contemporaneous documentation of commercial rationale is essential. Board papers, investment committee materials, independent adviser correspondence and strategic plans should record the commercial purposes as decisions are made.
   
• Departures from market-standard structures in the form of a transaction are a risk factor. Deal structures that are more complex than their stated commercial purposes could substantiate or invite the inference that the dominant purpose was tax motivated.

See Part IVA: Federal Court upholds the Commissioner’s assessment of the Hilton Hotel sale for further information.

Litigation update (2025-26)

These three developments reflect a common trend: Australia's tax regime is evolving rapidly and becoming more demanding to navigate for international investors and multinational groups. The ATO's final ruling on cross-border software payments captures arrangements many businesses assumed were outside the royalty withholding tax regime, with exposure potentially dating back to at least July 2021. The foreign resident CGT reforms broaden the definition of taxable Australian property and significantly increase withholding and penalty exposure in cross-border M&A. The Federal Court's decision in Hilton signals that the ATO will take an expansive approach to Part IVA where pre-sale restructuring is involved, with contemporaneous deal documentation potentially determinative. 

Businesses with cross-border operations, foreign investment structures, or upcoming transactions should be proactive. We recommend reviewing existing arrangements against each of these developments, quantifying exposure and ensuring that transaction documentation reflects genuine commercial rationale. 

Australian public CbCR

Multinationals should also be aware of the new Australian country by country public reporting regime.