How the ATO’s scrutiny of software payments affects international businesses

The Australian Taxation Office (ATO) has released on 6 August 2025 the Draft Practical Compliance Guideline (PCG) 2025/D4, which outlines its compliance approach to cross-border payments for software. While this is not new law, it acts as an administrative guide to help businesses, including international ones, understand when their arrangements are less likely to attract detailed ATO review.

By Ro Elvinia

For many of our international clients, this is an important update, especially where software licences, SaaS platforms, or bundled technology services are involved.

The ATO’s new ‘risk zones’

The draft PCG sets out two clear categories:

  • White zone – where arrangements are already covered by a court decision, an advance pricing arrangement (APA), or an ATO audit or settlement.
  • Green zone – low-risk arrangements such as off-the-shelf software, software embedded in goods, or distribution via physical media.

Anything outside these zones isn’t automatically high-risk, but it may attract ATO scrutiny.

The ATO deferred finalising its draft ruling TR 2024/D1 (on when software payments are royalties) pending the High Court’s decision in Commissioner of Taxation v PepsiCo, Inc [2025] HCA 30, which upheld the Full Federal Court’s reasoning in [2024] FCAFC 86. The High Court confirmed that payments for embedded intellectual property within product pricing do not necessarily constitute royalties under Australian law. The ATO has indicated it will revisit TR 2024/D1 in light of this outcome.

Why this matters for international businesses

Cross-border payments for software can give rise to a number of tax challenges, including:

  • Royalty withholding tax (generally 30%, though often reduced under treaties);
  • Transfer pricing reviews of how payments are characterised;
  • Double taxation risks if different countries treat the same payment differently.

For businesses, this means:

  • If your arrangements fall within the green zone, your compliance risk is likely lower.
  • More complex arrangements (for example, SaaS subscriptions or bundled licences) will usually sit outside the guideline and may be reviewed more closely by the ATO.
  • Good documentation and careful structuring remain essential to support your position.

How ABN Australia can support you

At ABN Australia, we are here to help international businesses:

  • Review cross-border software payments in line with the ATO’s framework;
  • Assess and manage withholding tax obligations;
  • Document and support tax positions to reduce risk of dispute;
  • Stay ahead of regulatory changes as the ATO finalises its views.

Our team works with international clients across a wide range of industries, including those already navigating these issues. With our expertise in tax, compliance, and structuring, we provide the clarity businesses need to confidently manage their Australian operations.

If your business makes cross-border software or royalty-style payments, now is the right time to review your arrangements in light of the draft guideline. ABN Australia can guide you through the ATO’s framework, ensure compliance, and help reduce the risk of unnecessary tax costs.

Published: 11th Sept 2025 | Last updated: 11th Sept 2025

About the Author

Ro Elvinia is ABN Australia's Customer Success and Marketing Manager. She holds a bachelor’s degree in mass communication, majoring in journalism, and also has an academic background in civil engineering. With over a decade of experience in professional writing and a background spanning journalism, Australian immigration, and business services, Ro brings a unique mix of communication and analytical expertise. She works closely with international clients and contributes to ABN Australia's content strategy, helping global businesses stay informed and confident as they navigate the Australian market.