ON 4 September the ATO finalised TR 2026/2, its view on when cross-border software payments are royalties subject to withholding tax. Importers of physical goods should also look again at their customs values.
At first glance customs seems to have little to do with it. Duty is charged on goods, and the Customs Act 1901 defines goods as movable personal property. Software that arrives by download or is used in the cloud is not "goods" under the Customs Act 1901, so most of what TR 2026/2 targets has no customs value. The overlap is where software and goods travel together: machinery, medical equipment, vehicles and electronics with embedded software, often sold with separate licence or subscription fees.
Customs requirements are separate from those of the ATO. A royalty or licence fee is dutiable only if it is part of the price of the goods or relates to the goods as imported and is paid under the import sales transaction. The customs definition of royalty does not include copyright, the main right the ATO appears to rely on. So, a tax royalty is not automatically dutiable, but a payment the ATO doesn't call a royalty may still be.
Three risks:
Unbundling. The draft guideline PCG 2026/D4 accompanying the Ruling treats groups that recognise part of their related-party payments as royalties as lower risk. Splitting one hardware price into a lower goods price plus a separate licence fee may look like it reduces customs value. But in Mattel (1994) the Federal Court held a royalty paid outside the invoice was part of the price. A fee for software the hardware cannot run without could be treated the same way.
Retrospectivity. TR 2026/2 applies to past years, with reliance on an old 1993 ruling protected only before 1 July 2021. Royalties or transfer pricing adjustments recognised now may show that earlier customs import declarations were undervalued. Customs can demand short-paid duty within four years, and GST at import is calculated based on customs value plus duty plus overseas freight and insurance.
Consistency. The High Court’s 2025 decision in Commissioner of Taxation v PepsiCo, which was a tax case, confirmed that what a payment is "for" is an objective question. An importer needs to tell the ATO, the ABF and their customs broker the same information.
Not every payment is caught. Payments only for the right to distribute or resell imported goods, including in an exclusive territory, are not dutiable unless perhaps they are a condition of the sale for export, because transaction value is partly based on the price in the import sales transaction. Fees merely for the right to reproduce the goods in Australia, and for assembly, maintenance or technical assistance after import, are also excluded.
The open question is hardware imported with features locked and activated later by licence key or subscription. Whether that fee is dutiable is untested in Australian courts.
The message for importers: involve your customs broker before you restructure for TR 2026/2, not after. A better tax position can create a customs undervaluation, with the duty, GST and penalties that follow. Consider whether a Valuation Advice from the ABF is required to protect your position.