Residency and Source of Income in the COVID-19 Era
The ATO has issued an update on residency and source of income. It deals with issues from the perspectives of an Australian resident and a foreign resident in the context of a change of residency due to COVID-19.
In terms of Australian residents, the update addresses those who are temporarily overseas and those who have had to return to Australia early from certain foreign service. The latter may involve the “91 days of continuous foreign service” test.
Where the update is interesting regards what it says about foreign residents who are stuck in Australia because of the COVID-19 pandemic. The ATO acknowledges that “COVID-19 has created a special set of circumstances that must be taken into account when considering the source of the employment income earned by a foreign resident who usually works overseas but instead performs that same foreign employment in Australia”.
Whether salary or wages earned from continuing foreign employment working remotely while in Australia temporarily is assessable depends on:
- whether it is from an Australian or a foreign source; and
- whether a double tax agreement (DTA) applies.
Where the remote working arrangement is short-term (three months or less), the ATO readily accepts that income from that employment won’t have an Australian source. Unfortunately, COVID-19 has no end in sight and the travel restrictions are set to last much longer than three months.
Long-Term Working Arrangements
So, for working arrangements longer than three months, the ATO says that individual circumstances need to be examined to determine if a person’s employment is connected to Australia. This includes whether:
- the terms and conditions of the employment contract change;
- the nature of the job changes;
- a person starts performing work for an Australian entity affiliated with his or her employer;
- the economic impact or result of work shifting to Australia;
- the person’s “economic employer” is in Australia (ie the entity for which the person is providing services: as per Taxation Ruling TR 2013/1);
- work is performed with Australian clients;
- the performance of work is wholly or to a significant degree dependent on the person being physically present in Australia to complete it;
- Australia becomes the person’s permanent place of work; and
- the person’s “intention towards Australia” changes.
Limited Situations
However, the ATO also notes that “in some limited situations your employment income may not have an Australian source”. (It is worth noting the use of the term “limited situations” here). This may be the case if all the following apply:
- the only thing that has changed about the person’s employment is that they are now doing it from Australia as a result of COVID-19;
- there are no other connections to Australia; and
- the person intends to leave Australia as soon as possible
Important: Clients should not act solely on the basis of the material contained here. Items herein are general comments only and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. We, therefore, recommend that our formal advice be sought before acting in any of the areas.
