Understanding Pcg 2025 D4 Low Risk Payments Relating To Software Arrangements

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Understanding PCG 2025/D4
Low Risk Payments Relating To Software Arrangements

The Practical Compliance Guideline (PCG) 2025/D4 is a draft guideline issued by the Australian Taxation Office (ATO) that helps taxpayers determine when cross-border software payments would be characterised as a royalty payment versus other software payments (e.g., licenses, SaaS, cloud subscriptions).

This characterisation is important as royalty payments have a withholding tax impact whilst other software payments do not attract withholding tax liability.

This PCG is aimed to be complimentary to the pending High Court’s decision of the appeal from Tax Ruling (TR) 2024/D1 (i.e. PepsiCo, Inc. v Commissioner of Taxation) – and therefore the PCG is in a draft state and is subject to change.

The aim of the PCG is to provide the taxpayer with a framework to self-assess the compliance risk on payments to non-resident relating to software. The risk framework provides ‘zones’ to indicate the nature of the risk.

Risk-Zone Framework

The PCG uses a simple two-zone model for risk assessment, these are:

White Zone: Covers payments already protected under an existing Advance Pricing Arrangement (APA)[1], settlement, or established court precedent. This zone does not attract ATO’s review of the arrangement and further risk assessment is not required.

Green Zone: Covers low-risk payments, such as off-the-shelf or standard internal-use software without rights to modify, resell, or sublicense. This zone does not attract ATO’s review of the arrangement, other than to verify that the green zone requirements are met.

Arrangements outside White or Green Zones will be those that may involve significant customisation, resale or broad usage rights, which do not fall within the White or Green zone. These may attract ATO scrutiny to determine if the payments are royalties in nature.

[1] An agreement with the ATO that pre‑approves how your cross‑border pricing and tax outcomes will be treated for future years, giving certainty and avoiding disputes.

Roadmap for risk assessment

Payments for software that are not stated to be ‘Royalty’ are referred to as ‘undissected payment’. The roadmap for self-assessment is illustrated in the figure below :

PCG 2025/D4 offers taxpayers a clearer pathway through one of the most commonly misunderstood areas of cross‑border transactions: when a software payment is a royalty and when it is not. By distilling complex characterisation rules into practical White and Green zones, the guideline helps taxpayers quickly identify which arrangements are low risk, which may attract withholding tax, and which are more likely to draw ATO attention.

This draft PCG, designed to complement the pending High Court decision in TR 2024/D1, provides a pragmatic risk‑assessment roadmap for software licences, SaaS, cloud‑based tools and internal‑use technology. For multinational groups with high volumes of recurring software payments, aligning with the PCG means fewer surprises, more predictable tax outcomes and a significantly reduced likelihood of costly audits or disputes.

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Understanding Pcg 2025 D4 Low Risk Payments Relating To Software Arrangements