Update on COVID-19 and Australian Tax Residency

Update on Covid-19 and Australian Tax Residency

We hope everyone is doing well during these times! We previously wrote on 31 March 2020 regarding the ATO’s guidance for expats or individuals who are stuck in Australia due to Coronavirus. Please refer the article here:

The ATO has now updated their guidance. Please see the latest guidance from the ATO outlined below and our comments:

1. Question: I am not an Australian resident. I am staying in Australia for longer than I expected because of COVID-19. What are my Australian tax obligations?

If you are not an Australian resident for tax purposes, you will be assessable only on income from an Australian source subject to the application of any applicable Australian double tax agreements.

You may need to lodge an Australian tax return if you earn any assessable income from an Australian source. This includes salary or wage income that is assessable in Australia.

You may need to lodge an Australian tax return if you become an Australian resident for tax purposes. As an Australian resident all Australian-sourced income, including salary or wage income and investment income, will be assessable. All foreign-sourced income will also be assessable unless you are an Australian resident who is a temporary resident.

2.  Question: Will my tax residency for tax purposes change as a result of me returning to Australia due to COVID-19?

Whether you are a resident for tax purposes in Australia is a question of fact that requires consideration of your circumstances.

If you are here temporarily for some weeks or months because of COVID-19 then you will not become an Australian resident for tax purposes as long as you:

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

However the tax residency issue may be more complicated if you:

• end up staying in Australia for a lengthy period
• do not plan to return to your country of residency when you are able to do so.

We appreciate that there will be unique situations with a range of potential tax outcomes. We will update and may revise this advice progressively as events unfold.

3. Question: What happens if I earn employment income that is paid leave while I am in Australia temporarily?

If you usually work overseas and earn foreign-source employment income and you have been on leave since arriving in Australia, the income you receive from your foreign employer for paid leave (such as annual or holiday leave) is not from an Australian source so you do not need to declare it in Australia.

4. Question: What happens if I earn employment income that is salary and wages from continuing my foreign employment (working remotely) while I am in Australia temporarily?

Whether employment income you earn is assessable depends on whether it is from an Australian or a foreign source. It also depends on whether a double tax agreement applies.

The source of income always depends on the facts. Usually the place where the employment is exercised is very significant when deciding the source of employment income (salary or wages). However, in certain circumstances other factors may be more significant.

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, we accept 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 your facts and circumstances will need to be examined to determine if your employment is connected to Australia. This includes whether:

• the terms and conditions of your employment contract change
• the nature of your 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
• your economic employer – the entity to which you are providing your services – is in Australia (see Taxation Ruling TR 2013/1)
• 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.

In some limited situations your employment income may not have an Australian source. This may be the case if all of the following apply:

• 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.

5. Question: What if I get a wage or salary in Australia and my home country has a double tax agreement with Australia?

Australia’s double tax agreements provide that, in certain circumstances, employment income derived by a person who is a resident of the other country (after applying the DTA tie-breaker rules) from performing employment duties in Australia for a short period will not be taxed in Australia.

Each DTA must be checked carefully as the wording, conditions and time periods vary from DTA to DTA.

Generally, employment income will not be taxed in Australia if:

• you are a resident of a country with which Australia has a DTA (the DTA country)
• you are not present in Australia for more than 183 days in aggregate in either an income year or a 12-month period (depending on the applicable DTA)
• your salary and wages are paid to you by, or on behalf of, an employer that is not a resident of Australia
• your salary and wages are not deductible against the profits of an Australian permanent establishment of your employer.

For some DTAs, the 183 days do not necessarily all have to be in the same income year, and there may be breaks in the aggregate.

Our comments

It is important that both employees and employers consider their Australian tax residency position and their Australian tax obligations. This is particularly important for individuals who are in Australia for longer than three months.

Importantly, the ATO have stated that it was considering the changing circumstances due to Covid-19 and will consider each taxpayer’s individual circumstances. Further, the ATO have noted that they will update and may revise the above advice progressively as events unfold.

The ATO have also commented that due to complexity of the situation, it may be best to apply for a Private Ruling if the taxpayer’s individual situation is not clear.

Please watch this space for further updates from the ATO and get in touch if you have any questions.

Take care all!