Residency implications of COVID-19

COVID-19 has turned lives upside down on a global scale, with one unintended side-effect being the drastic restriction of movement across borders. So, what happens to the tax status of an individual that arrived in Australia as a temporary resident staying longer than expected due to not being able to return to their home country? The ATO has provided some guidance on this issue and other scenarios where temporary residents earn income whilst in Australia and the effect of double tax agreements.

COVID-19 pandemic has wrought havoc on a global scale, causing almost every country around the world to lockdown their population and close their borders. This has drastically affected international travel and movement across borders, which is causing unintended consequences for individuals that are not Australian residents for tax purposes.

One of the most common scenarios is an individual who is not an Australian resident staying in Australia longer than expected due to not being able to return to their home country. According to the ATO, if you’re in Australia temporarily for some weeks or months, you will not become an Australian resident for tax purposes as long as you usually live overseas permanently and intend to return there as soon as you are able to.

In those cases, the individual would only be assessable on income from Australian sources subject to the application of double tax agreements (DTAs) between Australia and their home country. A tax return would only need to be lodged if the individual earns salary or wage income that is assessable in Australia.

However, a temporary resident could become an Australian resident for tax purposes if they end up staying for a lengthy period and/or do not plan to return to their country of residency when they are able to do so. In those situations, the individual could be assessed on all Australian-sourced and foreign-sourced income including salary, wages, and investments.

The ATO notes that the issue of residency depends on the unique individual circumstances of each case with a range of potential tax outcomes.

Another likely scenario is a temporary resident who usually works overseas continuing to earn salary and wages through their foreign employer by working remotely. Whether or not this income is assessable depends on the source of income and DTAs. The ATO notes that usually the place where the employment is exercised is very significant when deciding the source of employment income. However, it accepts that COVID-19 has created a special set of circumstances and short-term working arrangements of three-months of less where a non-resident usually works overseas but instead performs the same employment in Australia will not have an Australian source.

For working arrangements lasting longer than three-months, the ATO will consider the facts and circumstances in deciding whether the employment is connected to Australia including:

changes in the terms and conditions of employment contract;
changes in the nature of employment activities;
whether work is performed for an Australian entity affiliated with overseas employer;
economic impact or result of work shifts to Australia;
who is considered to be the economic employer;
whether work is performed with Australian clients;
whether work depends on physical presence in Australia either significantly or wholly;
whether Australia becomes a permanent place of work; or
whether your intention towards Australia changes.

In all scenarios, DTAs may determine that in certain circumstances, employment income derived from performing employment duties for a short period in Australia by an individual who is a resident of a foreign country (after applying DTA tie-breaker rules) will not be taxed in Australia. Each DTA is different, therefore, depending on your home country, the taxation outcome may be different. However, generally, employment income will not be taxed in Australia if:

you’re a resident of a country which has a DTA with Australia;
you’re not present in Australia for more than 183 days in aggregate in either an income year or a 12-month period;
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.

Not sure about your residency status?

If you arrived in Australia as a temporary resident and are not sure of your current tax status or whether you need to lodge a tax return, we can help. Foreign resident unsure of whether their current working arrangements or situation would make you a tax resident of Australia, contact us today, we can help you figure it out.

Courtesy of Thomson Reuters