Foreign Resident Employers Australian Tax and Superannuation Obligations

Foreign Resident Employers Australian Tax

As part of its Covid-19 response, the Australian Taxation Office (ATO) has recently provided guidance for foreign employers who have employees working remotely from Australia. The ATO’s guidance considers the Australian tax and super obligations.

Whether a foreign employer has a tax and super obligation will depend on each individual employees individual facts and circumstances.  It is also critical to consider the Double Tax Treaty (DTA) where applicable.

PAYG Withholding

PAYG withholding tax will apply to:

1. Employment income earned by Australian residents; and
2. Australian-sourced income earned by employees who are foreign residents (unless the short-term visit exception applies).

Crucially, most of Australia’s Double Taxation Agreements (DTA’s) stipulate that, under specific conditions, income earned by a foreign national working in Australia for a brief duration (up to 183 days) is exempt from taxation in Australia. This provision is commonly referred to as the short-term visit exemption. If the short-term visit exemption isn’t applicable, the relevant DTA could classify income earned by a non-resident working in Australia as originating in Australia and, consequently, subject to taxation in the country.

Employment income not taxable in Australia

Where the employee’s employment income is not taxable in Australia, there is no requirement for the employer to withhold PAYG tax.

Generally, employment income will not be taxable in Australia under the short-term visit exception if all of the following apply. The employee:

• is a resident of another country for the purposes of a DTA (including after applying the tie-breaker rule for dual residents, if required)
• is not present in Australia for more than 183 days in total in either an income year or a 12-month period (depending on the terms of the applicable DTA)
• receives salary and wages paid by, or on behalf of, an employer that is not a resident of Australia
• the employee’s salary and wages are not deductible against the profits of an Australian permanent establishment of their employer.

Where there is no DTA with the foreign country, the situation is more complex and will depend on whether the employment income has an Australian source.

COVID-19 has created a special set of circumstances that must be taken into account when considering the source of the employment income of a non-resident who usually works overseas but instead performs that same employment in Australia as a result of COVID-19. In this situation, the ATO accepts that, if the working arrangement is short term (three months or less), the employment income will not have an Australian source.

For working arrangements that last longer than three months, all facts and circumstances will need to be examined to determine if the employment is connected to Australia. This includes whether:

• the terms and conditions of the employment contract change
• the nature of the employment activities change
• you commence performing some work for an Australian entity affiliated with your employer
• the economic impact or result of your work shifts to Australia
• you perform work with Australian clients
• the performance of your work is otherwise wholly or to a significant degree dependent upon you being physically present in Australia to complete it
• Australia becomes your permanent place of work
• your intention towards Australia changes.

Your employment income may not have an Australian source where:

• The only thing that has changed about your employment is that you are now doing it from Australia as a result of COVID-19.
• There are no other connections to Australia.
• You intend to leave Australia as soon as you are able to do so.

Australian Tax Residency

Please note that where an employee intends to stay in Australia for an extended period (and not return overseas as soon as they are able to), it will also be important to consider their Australian tax residency status. If the employee becomes an Australian tax resident, they are subject to tax on their worldwide income at that point and the foreign employer also has a PAYG obligation.

Where an employee is temporarily in Australia for some weeks or months because of Covid-19 they should not be considered an Australian tax resident provided they:

• usually live overseas permanently
• intend to return there as soon as you are able to.

Employment income is taxable in Australia

Where the employment income of the employee is taxable in Australia, the employer will need to register for PAYG withholding and the individual employee will need to obtain a Tax File Number.

Superannuation

A foreign resident employer is normally required to pay super for Australian resident and foreign resident employees who perform work in Australia, otherwise the super guarantee charge may apply.  However, there is an exemption where a bilateral super agreement is in place with that country.

Please do not hesitate to get in touch with us if you have any questions and we would be happy to assist you.

Please visit our website at https://www.murphytax.com.au/ for further details.