Contributed by Heidi Maguire, Content Specialist, Wolters Kluwer
With strict travel restrictions still in place due to COVID-19, it may seem a little premature to ponder the residency status of individuals arriving in and/or departing from Australia. But what about those who have had to return home from overseas sooner than expected, or have become stranded (inside or outside of Australia) due to COVID-19? How do their changed circumstances affect their residency status or the obligations of the foreign companies that employ them? And how does that, in turn, determine which countries have what taxing rights and obligations for whom? This article highlights some of the ways the application of Australian income tax law has been impacted by COVID-19 and flags the ATO and OECD response to such.
A relatively straightforward application of the law appears in store for certain individuals coming home earlier than expected. As outlined in an ATO fact sheet, Australian residents who return from overseas earlier than planned due to COVID-19 will only be able to access the income tax exemption on foreign earnings under ITAA 1936 s 23AG where they meet the normal requirements of the provision (the primary requirement being 91 days or more of foreign service).
An absence from foreign service because the taxpayer returned to Australia as a result of COVID-19 and commenced working in Australia is not considered a temporary absence from foreign service as the taxpayer is returning without knowing when service in the foreign country can recommence. Nor can the taxpayer’s time in Australia be characterised as a short work-related trip.
However, the application of other taxation laws, and in particular to foreign residents and companies, is not so clear-cut. COVID-19 has created a special set of circumstances that need to be taken into account when evaluating the source of employment income earned by a foreign resident who usually works overseas but instead performs that same foreign employment in Australia.
The ATO considers that a foreign resident who is in Australia for some months due to COVID-19 will not become an Australian resident for tax purposes if they usually live overseas permanently and intend to return there as soon as they can. However, a person must review their residency status if they end up staying in Australia for a lengthy period and do not plan to return to their country of residency when able to do so.
As a guideline, the ATO states that, if the remote working arrangement is short term, the income from that employment will not have an Australian source. However, for working arrangements longer than 3 months, an individual’s personal circumstances need to be examined to ascertain if the employment is connected to Australia.
Initially foreign companies were not expected to register for PAYG withholding if the only reason an employee was working in Australia was due to the effects of COVID-19 on travel and it was anticipated the employee would leave before 30 June 2020. However, the perseverance of the pandemic has caused the ATO to adjust both its expectations and its requirements.
From 1 July 2020, foreign companies must consider whether they are required to withhold PAYG amounts from their employee’s employment income, which requires an understanding of both the employee’s personal circumstances and of any applicable double tax agreement (DTA). In regard to DTAs, a short-term visit exception may apply to ensure that employment income earned in Australia is not taxed here. However, wording, conditions and time periods vary between DTAs so that cannot be assumed. Foreign companies are usually also required to pay super for Australian resident and foreign resident employees performing work in Australia or else pay the super guarantee charge.
The potential impact of COVID-19 on other cross-border tax issues has been flagged in both ATO and OECD guidance on permanent establishments and DTAs. Thus, for example, if the only reason for holding board meetings in Australia or for directors attending board meetings from Australia is because of the effects of COVID-19, the ATO has advised that it will not apply compliance resources to determine if the company’s central management and control is in Australia.
Relevantly, the ATO previously stated that compliance resources will not be applied before 31 January 2021 to determine whether a foreign company has a permanent establishment in Australia if:
• the foreign company did not otherwise have a permanent establishment in Australia before COVID-19
• the temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions
• the employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions, and
• the foreign company has not recognised those employees as creating a permanent establishment or generating Australian source income in Australia for the tax laws of another jurisdiction.
The ATO has since extended this concession to 30 June 2021, stating that, from 1 July 2021, the question of permanent establishment will have to be considered by foreign companies.
For its part, the OECD also initially considered that any exceptional and temporary change caused by COVID-19 would not impact a permanent establishment determination and/or the residency of corporate entities or individuals. However, the OECD’s guidance on the operation of DTAs during COVID-19, first published in April 2020, was revised in January 2021 to include additional fact patterns that emerged over the course of 2020 and outline various government responses to the situation. In January 2021 the OECD also released guidance on transfer pricing, providing clarification on how the arm’s length principle and OECD Transfer Pricing Guidelines apply to unique issues arising from COVID-19.
In an era of ongoing uncertainty, the various government responses to COVID-19, as well as the ATO and OECD guidance on such, are welcome indeed. However, they serve to highlight how rapidly the law can evolve and how its application can be qualified, which may in turn compromise the application of established judicial precedent. Practitioners will need to stay on their toes if they are to successfully manoeuvre through such moving mazes.
Explore further — Residency Topic Guide on CCH iKnow.