Tax residency implications of COVID-19

What are the tax implications for a temporary resident who stays longer in Australia than intended due to COVID-19?

Tax residency implications of COVID-19

Tax status of temporary residents

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 because they can’t return to their home country? The ATO has provided some guidance on this issue and other scenarios where temporary residents earn income while in Australia and the effect of double tax agreements (DTAs). 

If you can't go home but want to, you won't become tax resident

The COVID-19 pandemic has wrought havoc on a global scale, causing almost every country around the world to lock down their population and close their borders. This has drastically affected international travel and movement across borders, which is causing unintended consequences for individuals who 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 because they can’t 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 DTAs between Australia and the person’s home country. A tax return would only need to be lodged if the individual earns salary or wage income that is assessable in Australia.

If you stay because you want to, you may become tax resident

However, a temporary resident could become an Australian resident for tax purposes if they either end up staying for a lengthy period or don’t plan to return to their country of residency when they can. In those situations, the individual could be assessed on all Australian sourced and foreign sourced income including salary, wages, and investment income.

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

Temporary residents working remotely in Australia for their foreign employer

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, the ATO accepts that COVID-19 has created a special set of circumstances and short-term working arrangements of three months or less where a non-resident usually works overseas but instead performs the same employment in Australia will not have an Australian source.

Remote working arrangements longer than 3 months

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 your employment contract;
  • changes in the nature of your employment activities;
  • whether the work is performed for an Australian entity affiliated with an overseas employer;
  • the 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 staying in Australia changes.

The impact of DTAs

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 total 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 tax residency status?

If you arrived in Australia as a temporary resident and are not sure of your current tax residency status or whether you need to lodge a tax return, we can help.

If you are a foreign resident who came to Australia temporarily and are unsure of whether your current working arrangements or situation would make you a tax resident of Australia due to the impacts of COVID-19, contact us today for assistance.

Disclaimer: The information on this page is for general information purposes only and is not specific to any particular person or situation. There are many factors that may affect your particular circumstances. We advise that you contact Mathews Tax Lawyers before making any decisions.

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