The experiences of employees and businesses over the last three years with COVID restrictions have significantly accelerated the emerging trend of increasing levels of working remotely – and not merely in someone’s city or interstate, but also globally.
As people became more accustomed to video calls, logging in remotely to company systems and other digital-based collaboration, the realisation grew for many people that they could work from anywhere.
Unfortunately, the tax laws in Australia and other countries have not kept pace with these social and technological changes, and this can produce some unexpected outcomes.
Tax residency
This is an important starting point for any overseas relocation, as the tax laws will generally apply differently in most countries depending on whether someone is a resident or a non-resident, which can differ from residency for migration purposes.
From an Australian tax perspective, traditionally when taking up a position overseas it has usually been cleaner to qualify as a non-resident (where the required tests are satisfied), meaning they should be taxed on their salary only in the foreign country.
What happens, however, when your employer is based in Australia and it is only the employee who has moved overseas? How will this be treated by the ATO and the foreign tax authority?
While these situations arose frequently during the lockdowns as people became “stuck” in either a foreign country or their home country, it prompted guidance from the OECD and concessions in many countries, including Australia, to ensure that employees were not disadvantaged by circumstances beyond their control. Such arrangements however have now become commonplace and we can no longer count on using temporary administrative concessions.
Working remotely for an Australian employer
From the Australian side, it is common for the employee to be left on the Australian payroll and, in fact, often there will be no foreign payroll because the employer has no business presence in the foreign country.
This often means that PAYG withholding deductions are made from the gross salary, employer superannuation contributions are made and wages are included as taxable for state payroll tax purposes – none of which are likely to be the technically correct approach for a non-resident employee working overseas.
In the foreign country, often no payroll arrangements are made and either the employee does not declare their salary to the local tax authority or is left to work it out themselves.
In almost all cases, local tax laws will apply to any salary derived by an employee who is performing their services in that country, and where a double tax agreement (DTA) with Australia is in place, there is generally an article that gives sole taxing rights to the country where services are performed.
In practical terms, there is a risk the Australian employee incorrectly deducts and remits tax to the ATO on salary that is not even taxable in Australia, while the employee is most likely required to report the salary in their local tax return and pay tax on their country of residence, without an obvious ability to claim a credit against the local country tax.
The most effective solution, which may not be the most practical one, is for the employer to update its payroll reporting for the relevant periods and request a refund of the tax withheld and remitted from the ATO.
What should the employer and employee do to ensure full compliance?
To avoid a mismatch in tax payments, if it is reasonably clear to the employee that they will be a non-resident once they relocate, then this conclusion should be clearly communicated to the employer before they leave Australia so they can make the appropriate adjustments to the payroll arrangements, including not reporting the wages to the ATO and not deducting and paying tax.
In the other country, however, it is likely that the Australian employer will have an obligation to set up an overseas payroll and comply with all the requirements of being an employer in that country, while potentially having no other activities or presence there, which could seem quite onerous.
Permanent establishment (PE) issues
Finally, it is worth noting that if the individual working remotely is a key decision-maker in the Australian business, there is at least a risk of the other country deciding there is a PE there, which opens up the business to local corporate tax and a whole range of complexities and additional compliance obligations.