On 6 August 2025, the Australian Taxation Office (ATO) released draft Practical Compliance Guideline PCG 2025/D4, aimed at providing greater certainty for taxpayers on when certain cross-border payments for software will be considered ‘low risk’ for tax purposes.
In practice, the draft PCG outlines the software-related arrangements that will not attract ATO scrutiny, meaning the ATO will not devote resources to reviewing or challenging whether those payments are royalties subject to withholding tax.
This article summarises the purpose and scope of PCG 2025/D4, explains how it fits into the ATO’s broader risk assessment framework for intangibles arrangements (particularly those involving international related parties), outlines the implications for multinational enterprises (MNEs), and sets out Andersen’s perspective and the practical steps recommended to be considered.
We’ve also incorporated the ATO’s own examples as included in the draft PCG, to help to illustrate exactly how the safe harbours are expected to work in practice.
Purpose and Scope of Draft PCG 2025/D4
Draft PCG 2025/D4 addresses the implications arising on cross-border payments for software. Its key aim is to identify “low-risk scenarios” – the arrangements the ATO sees little risk of being mischaracterised – and where it will therefore not take compliance action to reclassify or challenge the treatment of such payments.
In practical terms, Draft PCG 2025/D4 defines “safe harbours”. If your arrangement meets the safe harbour criteria, the ATO will not review it to determine whether part of the payment is a royalty.
The draft PCG is focused on international software arrangements, for example, an Australian company paying a foreign entity for the use of software or related intellectual property. It was developed as a companion to draft Taxation Ruling TR 2024/D1, which sets out the ATO’s legal position on when payments for software are royalties under Australian law and tax treaties.
However, finalising TR 2024/D1 has been paused pending the High Court’s decision in the PepsiCo case, expected to clarify the law on software payments and royalties. This is expected to now be updated following the High Courts recent decision on the case. In the meantime, PCG 2025/D4 has been issued to provide interim certainty for taxpayers.
Key Points:
- PCGs do not change the law – they outline the ATO’s administrative compliance approach.
- Draft PCG 2025/D4 does not set out the ATO’s view of the law – that remains the role of TR 2024/D1.
- The draft is open for public consultation until 17 September 2025.
- While no start date is given, the final guideline is expected to apply retrospectively, so businesses should assess current arrangements now.
The ATO’s Risk-Based Framework for Intangibles Arrangements
Draft PCG 2025/D4 is part of the ATO’s broader strategy to assess and manage the tax risks associated with intangibles arrangements involving international related parties.
In early 2024, the ATO finalised PCG 2024/1 – Intangibles Migration Arrangements, which provides a detailed framework for self-assessing the tax risk of such arrangements. It introduced a risk rating system – high, medium, or low – based on factors such as:
- Whether IP assets have been transferred offshore (an “intangibles migration”).
- The DEMPE functions (Development, Enhancement, Maintenance, Protection, Exploitation of intangibles) carried out in Australia versus offshore.
- The allocation of profits resulting from those activities.
High-risk arrangements are likely to attract close ATO scrutiny, while low-risk ones are less likely to be reviewed. Companies are expected to self-assess and disclose these risk ratings to the ATO.
Within this framework, PCG 2025/D4 acts as a targeted safe harbour for software-related payments, using a two-zone model (the white zone and the green zone), to define the lowest-risk scenarios.
Low-Risk Zones for Software Payments: White and Green
The draft PCG identifies two categories of low-risk arrangements where the ATO will not review whether payments are royalties. The PCG also provides practical, fact-based examples.
The ATO has provided a Roadmap to assist taxpayers with their risk assessment:
White Zone – Pre-Assured Arrangements:
Covers situations where the royalty risk has already been resolved to the ATO’s satisfaction, such as:
- Advance Pricing Arrangement (APA) or settlement agreement explicitly covering the withholding tax treatment, with all conditions met.
- Court or tribunal decision determining whether a payment is (or is not) a royalty.
- Prior ATO review or audit resulting in a “low risk” or “high assurance” rating for royalty treatment.
White Zone arrangements will no be subject to further ATO risk assessment.
Green Zone – Safe Harbour Arrangements:
Covers common, low-risk software transactions where no significant IP rights are transferred.
The draft PCG includes four illustrative examples, covering the four scenarios where the ATO will consider an undissected payment to be within the green zone:
Example 1 – Internet security software for private use.
Sarah, an Australian consumer, purchases a one-year subscription for antivirus software from a foreign supplier’s website. She downloads and installs it on her personal computer for her own use. The licence is for private/domestic use only, with no rights to distribute or modify. This is green zone because it is purely for private use, with no exploitation of IP.
Example 2 – Cloud-based productivity suite for internal business use.
EducationCo Australia subscribes to a suite of cloud-based productivity, project management, communication, ERP, and CRM tools from an offshore vendor. The software is generally available to the public, not substantially customised, and is used internally by staff. EducationCo can configure dashboards and access settings but cannot alter the source code. It cannot resell or license the applications. This is green zone because it is internal-use, off-the-shelf software, with no onward commercial exploitation.
Example 3 – Physical software copies for resale.
Electronics Retail Co buys boxed productivity software on physical media from offshore suppliers at wholesale prices. It resells the boxes in-store to consumers without any right to copy, modify, or sublicense the software. This is green zone because the retailer simply resells the finished product and holds no IP rights.
Example 4 – Embedded software in tangible goods.
AusCo imports smart washing machines from its offshore parent. The machines contain embedded software enabling remote control, sensor functions, and diagnostics. AusCo has no rights to modify or sublicense the software; it is inseparable from the hardware and sold as a finished product. This is green zone because the software is integral to the tangible good and used only to operate it.
If an arrangement falls within either the white or green zone, the ATO will treat it as low risk and not initiate a review beyond confirming the facts to verify the arrangement meets the requirements of the green zone.
Anything outside these zones is not covered by the draft PCG and may be subject to closer ATO scrutiny.
Implications for Multinational Enterprises (MNEs)
For MNEs, draft PCG 2025/D4 offers:
- Comfort: That routine, everyday software transactions should not be targeted for royalty withholding tax enforcement by the ATO.
- Clarity: In defining specific safe harbours for common fact patterns.
- Challenge: For arrangements involving more complex licensing, sublicensing, or related-party dealings that are outside the safe harbours.
For non-safe-harbour arrangements, MNEs should:
- Review contracts to identify any IP rights that could trigger royalty classification.
- Consider applying withholding tax as a precaution.
- Maintain strong transfer pricing and legal documentation.
- Explore restructuring to align with low-risk profiles where possible.
Andersen’s Takeaways – Preparing for Implementation
We recommend businesses act now, before draft PCG 2025/D4 is finalised:
- Map and Categorise: Identify all cross-border software and intangible payments, classifying them against the PCG’s zones.
- Document: Keep evidence for safe-harbour arrangements; build robust transfer pricing and contractual records for others.
- Assess Withholding Tax: Evaluate whether non-safe-harbour payments may need withholding tax to be applied.
- Engage Early: Use the consultation period to seek clarity or adjustments, and consider proactive ATO engagement for high-value arrangements.
- Stay Informed: Monitor finalisation of PCG 2025/D4, TR 2024/D1, and the PepsiCo decision. Update policies and educate internal teams accordingly.
Conclusion
Draft PCG 2025/D4 is a welcome clarification of the ATO’s compliance approach to cross-border software payments. The inclusion of specific examples in the white and green zones provides tangible guidance for taxpayers, helping businesses self-assess with greater confidence.
However, the guideline also makes clear that anything outside these zones remains firmly on the ATO’s radar for review.
By reviewing and adjusting arrangements now, businesses can secure certainty, reduce risk, and position themselves for smoother interactions with the ATO.
At Andersen, we help clients interpret these guidelines, align with safe harbours where possible, and manage higher-risk cases with strategic, well-documented approaches.
