Employers and individuals, with changed working arrangements due to COVID-19 who are working across several jurisdictions, are being warned to review their employment tax obligations or risk significant tax shortfalls and penalties.
There is risk for many foreign employers where their employees did not leave Australia by 30 June 2020. These employers may now:
- be required to meet Australian employment tax obligations; or
- be considered to have an Australian “permanent establishment” which could potentially result in income tax being payable in Australia.
While the Australian Taxation Office (“ATO”) initially had a lenient approach in recognising the unique impact of the pandemic, that advice is subject to change and there has been no further clarification to that advice since May 2020. This uncertainty presents significant risks for employers which we outline below.
Foreign entities with employees temporarily in Australia
Pay as you go (“PAYG”) withholding and employment taxes
The ATO previously stated that in situations where employees are only in Australia due to the pandemic, a foreign employer will not have to register for PAYG Withholding, taxes on wages, or pay other employment taxes such as pension contributions.
However, this concession only applied until 30 June 2020. Now that this date has passed, if employees continue working in Australia the ATO has previously stated that the usual obligations for Australian employees will apply. This requires the foreign entity to register in Australia where the employment income is deemed to be Australian sourced. The ATO withdrew their initial announcement regarding the end of the 30 June deadline, leaving affected employers now in a state of uncertainty.
Double tax agreement
The ATO has previously said that it will not consider income from temporary working arrangements in Australia of up to three months to have an Australian source. However, where these arrangements are longer than three months, determining the source of the income under taxation law can be quite complex and may be affected by a double tax agreement between Australia and the foreign country. These agreements may exempt the income from having an Australian source where the employee is not in Australia for more than 183 days (less in some cases), however the pandemic has now exceeded this length of time.
Foreign residents for tax purposes
Where the source of income is deemed to be Australian under the law, the income is taxable in Australia to the employee, even if they are not an Australian tax resident.
In April 2020, the ATO released its position in regards to the tax residency of individuals who were foreign residents for tax purposes, but were in Australia due to the pandemic. Generally, where these individuals were temporarily in Australia for some weeks or months (and usually resided in another place to which they intended to return) they would not be considered a tax resident of Australia. However, if such individuals stayed in Australia for a “lengthy period” or did not intend to return to the foreign country, no guarantees were made.
If their stay is sufficient to make them an Australian tax resident, the employment income becomes taxable in Australia regardless of the source. This opens up the possibility of double taxation and other tax obligations specific to Australian tax residents such as the Medicare levy.
What are the risks?
Where the employer is deemed to be paying Australian sourced income to employees after 30 June 2020, the employer would need to register with the ATO (and obtain an Australian Registered Business Number) and various other compliance (e.g. filing monthly or quarterly activity statements with the ATO).
An Australian citizen employee that usually works and lives in Malaysia (and is a foreign resident for Australian tax purposes) decided to return to Australia in March 2020 and continue working in Australia.
As there are new employment connections to Australia, the law states that income is now determined to be Australian sourced. The employer, being the Malaysian entity, is required to register with the ATO and remit PAYG Withholding and other employment taxes.
Australian permanent establishment
There is also a risk that a foreign entity which employs individuals in Australia may also be deemed to have an Australian “permanent establishment”. This would mean that the entity’s profits attributable to Australian operations are taxable in Australia. In these circumstances, the foreign entity would be required to undertake significant extra compliance, possibly including charging Goods and Services Tax among others.
The ATO has clarified that it will not apply compliance resources to determine if a foreign employer has a permanent establishment in Australia where:
- The foreign incorporated company did not have a permanent establishment in Australia before the effects of COVID-19;
- There are no other changes in the company’s circumstances; and
- The unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel as a consequence of COVID-19.
This position is subject to change, and while the source of income does not necessarily mean a permanent establishment exists, the two concepts are intrinsically linked and the possibility must be considered.
What are my options if I have employees working from Australia?
As the disruptions to “normal” continue and tenure of working from home, or in a different jurisdiction extends, there comes a point when tax rules inevitably also are affected.
As such, we recommend seeking tailored and specific advice to understand your Australian taxation risks.
If you would like to know whether your business or employees may be affected or require assistance please contact Murray Howlett at MHowlett@pilotpartners.com.au or Kylee Smith at KSmith@pilotpartners.com.au, or phone +61 7 3023 1300.