An Accidental Australian – Tax Residency in a COVID Era

Posted on by Admin

8 February 2021

Since mid-March 2020, more than 400,000 Australians living overseas have returned to Australia and many foreign expatriates have found themselves stranded in Australia as a result of the COVID-19 pandemic.  It is fair to say that most did not expect for the crisis to be so long running and given the speed at which the crisis unfolded, many gave little thought to the possible tax implications of their return and continued presence in Australia.

Nearly one year down the track, with travel restrictions largely still in place, this group of individuals may have become accidental Australian tax residents.  Changes to tax residency can have significant tax implications and this article seeks to highlight some of the key areas for consideration for both individuals and employers.

When does an individual become an Australian tax resident?

Determining tax residency will always be a question of fact and must be considered annually, based on an individual’s circumstances and intention.  There are four tests of residency, and an individual will be an Australian tax resident if they meet any one of the following tests.

Testing residency in the era of COVID

Initially, the inability to depart Australia during COVID-19 generated uncertainty for many people regarding their tax residency status in Australia and in response, the ATO released limited guidance.  The ATO guidance provides that a foreign resident will not become an Australian resident where they were stranded here temporarily (i.e. for weeks or months) due to COVID-19, if they usually live overseas permanently and importantly, they intended to return there as soon as they are able.  However, as the crisis has continued longer than expected, it is less likely that the ATO will consider an individual’s stay to be temporary, particularly given that whilst travel bans are in place, individuals are now generally free to return to their home countries.

Returning Australians may also find proving their stay is temporary especially difficult, given the likelihood that they will have existing social and family links to Australia and may have retained some Australian assets or purchased property, such as a home.

Given the subjective nature of tax residency and the importance of demonstrating intention, individuals must be aware that there is a tipping point in which their intention to return overseas is at odds with their actions.  For example, the following factors may be indicative of a change in a person’s intention to remain in Australia for the short to medium term:

  • Making Australian living arrangements more permanent (i.e. signing a 12-month rental lease or buying a family home), especially when coupled with giving up an overseas residence;
  • Enrolling children in local schools;
  • Joining Australian clubs (and cancelling foreign memberships);
  • Foreign employment ending (i.e. through resignation or termination) or continuing to work remotely for a foreign employer;
  • Enrolling for Medicare and private health insurance.

Opening Australian bank accounts (and closing foreign ones).

Happy New Year – are you a resident?           

Intention is important but if an individual is present in Australia longer than 183 days, an individual’s future intentions may not matter in determining whether they are a tax resident.

Given that we are now well into the 2021 income year, the 183-day test has become increasingly important. Even if an individual is living in Australia on a temporary basis and intends to return to their home country, they may be considered to be an Australian resident where they were still in Australia on 1 January 2021 (on the basis that their stay in Australia exceeds 183 days in an income year).  Where the individual does not have a usual place of abode outside Australia, the individual is considered a resident of Australia. Recent case law regarding the 183 day test (FCT v Addy) suggests that where an individual has a usual place of abode outside Australia, the Commissioner must be satisfied that this is the case, suggesting an approach must be made to the ATO for confirmation that the individual is not a resident under the 183 day test.

TIP: Those individuals that find themselves in this scenario are encouraged to seek advice, consider approaching the ATO and have supporting documentation where they have maintained a home overseas, still have foreign employment and importantly are able demonstrate their intention to return overseas.

Visa data matching           

The ATO has recently announced that it will be seeking visa data from the Department of Home Affairs, with the ATO estimating that approximately 10 million individuals’ records will be obtained each financial year.  The data will be matched with ATO data to identify non-compliance with Australia taxation and superannuation obligations, including:

  • Ensuring appropriate taxation treatment is being applied by employers of visa holders including registration, lodgement, reporting and payment obligations for pay as you go (PAYG) withholding, fringe benefits tax and super guarantee; and
  • Ascertaining whether a foreign person has been onshore for 183 days or more.

This announcement, whilst being a continuation of the ATO’s existing data matching program including review of travel data, signals that the ATO will identify candidates and take action.

You are a resident – so what?      

Australian tax residency comes with the requirement to lodge an Australian tax return and pay Australian tax (and possibly the Medicare Levy and surcharge) on income from all sources. Importantly, Australia has deemed acquisition and disposal rules for assets under the Capital Gains Tax (CGT) rules.

Under these rules, an individual is deemed to have acquired all of their foreign CGT assets (i.e. shares, property, managed fund investments) for market value at the time they became a resident.

Establishing the date of residency will therefore be a critical factor and depending on the particular asset, the resetting of an asset’s cost base to market value could have varied results, which may or may not be advantageous to the individual. The date of residency is dependent on the individual’s circumstances and may be the date the individual arrived in Australia, the date the individual formed an intention to remain in Australia more permanently or another relevant date, depending on the residency test satisfied.

Furthermore, should the individual ultimately leave Australia (i.e. where COVID restrictions are eased) they will be deemed to have disposed of their assets (other than Australian property and property interests) for market value at the date they cease being an Australian tax resident.  The likelihood of being taxed on an asset that hasn’t been disposed of and to which no proceeds have been received, is likely to be a significant worry for affected individuals. 

It is also noted that the CGT discount will not be available if a foreign asset is sold (or deemed to be sold) prior to 12 months from the individual becoming a resident.

NOTE:  Individuals can elect to disregard a deemed disposal, however in doing so, the assets are effectively taken to be Australian assets that will be subject to Australian tax (and possibly foreign tax) when the asset is actually sold.

TIP: Tax relief from double tax payable in both Australia and another country may be available in certain circumstances. This depends on the source of the income and whether Australia has a Double Tax Agreement with the foreign country.

Other tax implications    

Where an individual becomes an Australian tax resident, the following non-exhaustive tax implications may also occur:

  • Foreign employment income will be taxable in Australia when received, regardless of whether it was in respect of work performed prior to the change in residency;
  • The impact of COVID and accidental Australian residency may have the unwelcome effect of dual residency – i.e. where two jurisdictions consider an individual to be a tax resident and tax them accordingly.  Relief from double taxation may be available where a Double Tax Agreement between the jurisdictions exists – see below for further detail;
  • Foreign companies owned and controlled by a now Australian resident may also be subject to a residency change;
  • Withholding tax exposure may exist on foreign loans;
  • Loans made by private foreign companies to an Australian resident may trigger the deemed dividend rules;
  • Distributions from certain funds or pension plans that are not considered to be a foreign superannuation funds for Australian tax purposes may be taxable.

Individuals that decide to stay in Australia permanently may wish to consider the transfer of their foreign pensions to Australia.  Where such a transfer is being contemplated, it is strongly advised that tax advice be sought prior to any transfer, as there are a number of considerations and getting it wrong can have significant adverse tax implications.

Dual residents – tax relief?             

Many of Australia’s Double Tax Agreements (DTA’s) contain tie-breaker clauses for dual residents that provide a methodology for establishing residency based on the individual’s facts and circumstances.  For example, many DTA’s consider the location of an individual’s permanent home or habitual abode to be a key indicator of residency.  Failing that, the DTA’s may consider other factors such as economic and personal ties or the place of citizenship to determine residency. 

Whether an individual is considered to be a resident of one country and not the other under a DTA tiebreaker clause is only relevant in respect of allocating taxing rights to income and gains between the countries.  As such it is important to remember that an individual that is considered a tax resident of Australia under Australia’s domestic laws but not under an applicable DTA will still be subject to Australian tax on all other tax matters not dealt with under the DTA. The relevant DTA should always be considered however this does not change whether an individual is a resident under domestic tax law.

Still a foreign resident…?       
Expatiate employment income

Ordinarily, and subject to any relevant DTA, foreign residents will only be taxed on Australian sourced income.  This may include employment income earned whilst being stranded in Australia.

For those foreign residents who have earned salary and wages from short term remote working arrangements (less than 3 months), it is likely that their employment income will not be taxable in Australia.

However, those foreign residents whose working arrangements in Australia have or will continue for longer than three months, should apply careful consideration to their employment terms and other matters, including their intention to leave or stay, when contemplating whether Australian tax is payable.

In many circumstances, where a foreign resident earns employment income whilst working in Australia remotely for a foreign employer, the employment income is deemed to have an Australian source and is taxable in Australia. Where the foreign employer has withheld foreign tax on the employment income, Australia will not allow a foreign tax offset in respect of the foreign tax paid. In this case, it will be up to the individual to apply for a refund of foreign tax in the foreign country.

An example of this is where a UK resident has been working remotely in Australia for more than 183 days commencing or ending in the year of income, regardless of whether the UK resident remains a foreign resident whilst in Australia, the employment income will still be taxable in Australia. The income is also deemed to be of an Australian source and therefore Australia will not give a credit for UK tax paid on the income.

Short-term visit DTA exception

Where the income of a foreign resident is considered to have an Australian source and a short-term visit exception exists under a relevant DTA, the employment income will not be taxed in Australia.  This will generally be the case if:

  • If the individual is a resident of a country with which Australia has a tax treaty;
  • If the individual is not present in Australia for more than 183 days in either an income year or a 12-month period (depending on the applicable DTA); and
  • If the individual’s employer is not an Australian resident or the individual’s salary and wages are not deductible against the profits of an Australian permanent establishment of their employer.

NOTE: In some DTA’s, the 183 days do not necessarily all have to be in the same income year, and there may be breaks in the aggregate and as such any relevant DTA should be carefully considered.

Employer obligations

From 1 July 2020, foreign resident employers must withhold PAYG for any:

  • Australian resident employees; and
  • Foreign resident employees whose employment income is Australian sourced income.

Exceptions may apply for foreign residents earning Australian sourced employment income, where they satisfy the requirements for the short-term visit treaty exception (see above).

Superannuation Guarantee (SG) contributions, fringe benefits tax, payroll tax obligations and workers compensation obligations may also apply.

TIP: Employers with displaced foreign employees should have re-assessed any tax compliance obligations that exist post 1 July 2020 and taken steps to manage these obligations.  Importantly, employers should continue to make enquiries as to the residency status of any employees as this may have changed.

TIP: SG exemptions may apply where International Social Security Agreements exist, however where they do not and Australian superannuation is accrued, some foreign residents may access their super when they permanently leave Australia.  Departing Australia Superannuation Payments (DASP) are subject to the satisfaction of certain requirements and are subject to specific withholding tax rates.

Key takeaways  
Individuals
  1. Confirm time periods spent in Australia, whether 183 days in total and 183 days in the relevant year of income;
  2. Remember intention needs to marry up with actions;
  3. Consider the terms of the relevant DTA (if any) – even as a non-resident, employment income earned whilst working remotely in Australia may be taxable here;
  4. If uncertainty exists – seek advice and consider whether early engagement with the ATO should be made;
  5. Where individuals plan to return to their overseas home and lives, it is strongly advised that they document and demonstrate their overseas ties and their intention to return;
  6. Where Australian residency is confirmed under the tests, consideration of the date of residency change must be carefully considered and documented.
Employers
  1. Confirm the conditions and time periods of the relevant tax treaty (if any) for any short-term tax exemptions on Australian employment obligations;
  2. Check in with employees and understand their circumstances and intentions around staying in Australia.  It is important to remember that despite any relief available, employers must withhold tax if they believe at the time that employment income is paid, based on the facts and circumstances, an employee is likely to remain in Australia for more than the applicable time period;
  3. For foreign employers who are required to withhold tax in respect of employees working in Australia, register as a foreign employer with the ATO;
  4. While exemptions for PAYG withholding may apply – other employment obligations (i.e. SG Contributions) may still apply and penalties will apply for non-compliance.
WHERE WE CAN ASSIST YOU

If you would like to understand in further detail what the impact of a longer than planned stay in Australia has for you please contact our Leader in Human Capital, Rachel Pritchard of Cooper Partners, on 08 6311 6900.

This newsletter is current as of 8 February 2021, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
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