Managing director as representative

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.

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:

  1. Be required to meet Australian employment tax obligations; or
  2. 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.

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 this date has passed, if employees continue working in Australia, the usual obligations for Australian employees will likely apply.

Double tax agreement risks

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.

Advice for foreign entities

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 are also affected. As such, we recommend seeking tailored and specific advice to understand your Australian taxation risks.

For more information, contact Murray Howlett or Kylee Smith at Pilot Partners, a Nexia International member firm.

Please click here to read the full article: https://www.pilotpartners.com.au/employers-beware-extended-australian-presence-of-international-employees-may-have-adverse-implications/

Date: December 2020