Santa Claus can still come to town – what about the rest of us travelling from overseas?

Travel exemptions

The Australian international borders remain closed, and there is no firm guidance on when temporary visa holders will be permitted to resume travel to Australia.

With the festive holiday season in reach, temporary visa holders are weighing their options for visits home and employers will need to consider the extent to which they can accommodate these requests.

Temporary visa holders in Australia do not need an exemption to depart Australia but, with inbound travel restrictions continuing to apply, those temporary visa holders needing or wanting to travel, may seek ‘pre-approval’ and apply for an inwards exemption before they leave Australia if:

  • they meet the requirements for an individual exemption from Australia’s Inward Travel Restrictions (such as having critical skills or working in a critical sector), and
  • they have a strong compassionate or compelling reason to leave Australia supported by relevant documentary evidence, for example:
    • attending the funeral of a close family member overseas, visiting a close family member who is seriously or critically ill, or seeking necessary medical treatment not available in Australia, or
    • travel is essential for business/employment purposes.

Where an exemption is not granted and individuals still choose to depart Australia, employers need to be aware that the visa holder may not be permitted to return to Australia until restrictions are lifted. The implications of having a sponsored visa holder displaced overseas are potentially broad and varied. Employers will need to consider any potential exposure to immigration compliance breaches or the implications of overseas remote work. It is important to remember that a blanket approach in your travel policy may not be adequate to handle the additional restrictions currently in place and requests for leave during this time should be managed case-by-case.

Australian tax considerations

Where a travel exemption is not granted and individuals still choose to depart Australia, employers need to be aware that the visa holder may not be permitted to return to Australia until border restrictions are lifted.

While the immigration risk of not being able to return to Australia may present the biggest concern for individuals, individuals still need to be mindful that working remotely from a location which is not their ‘usual’ place of employment may create unforeseen personal tax implications and other obligations for their Australian employer which will need to be considered.

Therefore, Australian employers will need to be prepared to identify and address the corporate risks of having these individuals working offshore. For example, does this individual have the relevant rights to work in that foreign location? Even if they do, is a taxable permanent establishment for the Australian entity created in that foreign country as a result of the remote working arrangement?

An individual’s tax residency, which requires careful consideration of all their personal facts and circumstances, remains the key item in determining the individual’s tax implications and any associated employment tax obligations. Followed next by determining the source of the employment income, with sourcing principles varying across jurisdictions based on the countries’ domestic tax rules. Generally, the place where the employment is exercised will determine whether it is Australian or foreign sourced employment income and therefore whether income is taxable in Australia and/or any other foreign location.

For example, where an individual who is normally working in Australia gets unexpectedly stuck overseas in a foreign jurisdiction, the Australian Taxation Office (ATO) has outlined its view that the source under domestic tax law would in many cases still be considered Australian (even though the individual is performing services in a foreign country).

The situation gets even more complicated when the individual is also considered to be a ‘resident’ for tax purposes in that foreign country. In this, case it is necessary to consult the relevant double taxation agreement (“DTA”) to determine which country has the primary taxing rights to the employment income.

There is guaranteed additional complexity, if you do get to the point of reviewing the ‘dependent personal services’ article under a DTA because the person exceeds 183 days in the overseas location. In this instance, the individual will not be able to exempt the income in the foreign location under the short-term visitor exemption.  Amendments to the individual’s payroll in Australia would be required to modify the taxation in Australia. More cumbersome will be determining and applying all the employer reporting obligations that may arise in the foreign State (and backdating may be required in some instances).

Items for Australian employers to consider

  • Whether you have income tax withholding and other employment tax obligations for your employees working remotely in the foreign location depends on their individual facts and circumstances. Employers will need to have a process in place for:
    • identifying where the individuals are working from;
    • re-reviewing the individual’s facts and circumstances to determine their tax residency (in both Australia and the foreign country) and any associated tax implications; and
    • to communicate this to the relevant internal stakeholders (i.e. insurers, health and security teams, immigration teams, tax teams, human resources teams, payroll teams and sometimes even to executives or members of the board).
  • Under an applicable DTA, the short-term visitor exemption may apply to ensure that employment income earned in the foreign location is exempt from foreign taxation. However, you will need to check each DTA carefully – wording, conditions and time periods vary between DTAs. If the short-term visitor exemption does not apply, a DTA may deem employment income earned by a resident working overseas to be foreign sourced and taxable only in the foreign country.
  • PAYG withholding will continue to apply until such time as the employment income becomes taxable solely in the foreign location – employers will need to consider whether their payroll service provider and technology has the ability to handle these unusual changes and that they are receiving timely updates regarding changes to an individual’s taxability and/or payroll arrangements.
  • It follows that where there is no requirement to withhold PAYG withholding in Australia, then there will not be a requirement to pay Fringe Benefits Tax (FBT) – employers should consider whether benefits being provided to the individual will be taxed in the foreign location and similarly, what processes will need to be implemented to ensure these taxes are remitted to the foreign tax authorities.·
  • In better news, state-based payroll tax will not apply to any form of compensation for an individual who is working in another country for more than 6 months.
  • Insurances should also be considered for any illness, accident or even death that may occur whilst in the foreign country – will the employer’s insurance policy cover any of these events while the individual is working in a remote location? Does the employer need to consider increasing its insurance coverage or take out a different policy in the foreign country?
  • Employment law obligations including leave entitlements – it is likely there will be changes required in both Australia and the foreign country.
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