Under Australia's tax residency rules, an individual is a resident if her or she:
- Resides in Australia;
- Has a domicile in Australia, unless their permanent place of abode is outside Australia;
- Is in Australia for 183 days or more in the relevant financial year, unless their usual place of abode is outside Australia; or
- Is a member of an Australian Commonwealth superannuation fund.
One of the challenges when assessing Australian tax residency in a COVID travel restricted world is that individuals have been either been unable to enter Australia or leave Australia safely. This has significant impacts in respect to the resides and domicile tests.
The ATO has issued guidance clarifying a number of scenarios as to how it will approach the tax implications for internationally mobile employees and their employers affected by the COVID-19 pandemic.
We have summarised these issues below. It is important to note that this is not a tax ruling and Commissioner is not bound by this guidance.
As per the ATO guidance, foreign resident individuals who unable to depart or are in Australia temporarily due toCOVID-19 will not become Australian tax residents provided that they:
- usually live overseas permanently; and
- intend to return there as soon as they are able to.
The ATO further notes that the tax residency issue may be more complicated if:
- the individual ends up staying in Australia for a lengthy period; and/or
- the individual does not plan to return to their country of residency when they are able to do so.
Lengthy stays in Australia may result in a change to residency. However, this should not be an immediate concern for people who are in Australia temporarily.
Source of Income
The source of employment income is generally the place where the employment is exercised. In the case of an employee working in Australia, this would lead the income to be sourced in Australia.
As per the ATO guidance, whether employment income a taxpayer earns 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, 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 the facts and circumstances will need to be examined to determine if an individual’s employment is connected to Australia. This includes whether:
- the terms and conditions of the employment contract change
- the nature of the employment activities change
- the employee commences performing some work for an affiliated Australian entity
- the economic impact or result of your work shifts to Australia
- the economic employer (see Taxation Ruling TR 2013/1)
- the employee performs work with Australian clients
- the performance of work is otherwise wholly or to a significant degree dependent upon the employee being physically present in Australia to complete it
- Australia becomes the permanent place of work
- the employee's intention towards Australia changes.
In some limited situations the 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 the employment is that the employee is now doing it from Australia as a result of COVID-19.
- There are no other connections to Australia.
- The employee intends to leave Australia as soon as they are able to do so.
We would recommend that where there is any ambiguity, advice is sought by clients for appropriate interpretation of their relevant facts and circumstances. Should you require any additional information, please contact our office and we will gladly assist.