Working Remotely outside Australia – Broad Tax Implications
Over the years we noticed a gradual increase in the number of Australian and other nationalities working remotely for Australian companies while resident overseas, but this increased remarkably during (and following) the Covid pandemic - employees are often enthusiastic and employers can vary significantly in the degree of support provided.
While international remote working can be very productive for both employers and employees our experience is that, outside of major international employers, much more care needs to be taken in terms of how employees are remunerated and taxed, and indeed whether individuals should remain employees. Seeking professional advice at the start of these arrangements can avoid some serious tax implications and consequences that can be very expensive and take years to unravel with the ATO and other tax authorities.
To provide some perspective, bear in mind the general comments made below:
Individuals who are not Australian tax residents and who are resident in a foreign country (other than on a short-term basis) are likely to be only taxable in that country with respect to any earned remuneration, rather than in Australia, even if their income has an Australian source.
In this context, it is usually not appropriate to maintain individuals on an Australian payroll, deducting PAYG, because this will require employees to later lodge an objection with the ATO to recover incorrect PAYG tax withholdings. Indeed, the ATO has recently demonstrated a reluctance to repay these withholdings on the basis that the individual simply shouldn't have been on an Australian payroll. This disregards the fact that even establishing an individual's tax residence can be difficult - particularly with new residency tests now pending - and is very dependent on their unique circumstances. Furthermore, fringe benefits tax (FBT) will not be applicable in relation to a non-resident employee unless it relates to former employment in Australia.
Whilst the law in this area is settled and clear - and includes High Court judgements - it is apparent that the ATO will sometimes adopt the position that the income should be taxed in the location where the benefit of the service is felt of derived - such as in Australia if an individual was working remotely for an Australian employer - rather than where the services were performed. Experienced professional advice is required in these situations.
An Australian employer does not need to make superannuation guarantee (SG) contributions in respect of a non-resident employee for services performed outside of Australia, unless a "Certificate of Coverage" has been issued under a bilateral Social Security agreement.
Bear in mind, however, that regardless of the individual being non-resident for Australian purposes, Australian employers may still be required to make social security contributions in relation to their employee in the employee's country of residence and individual advice should be sought. Employer contributions to Australian superannuation may also be taxable as income in the individual's country of residency.
With respect to payroll tax, where employees are working in another country, with an assignment duration of more than six months, state or territory based payroll taxes will not normally be payable.
Having an employee based overseas may result in the company being regarded as having a "permanent establishment" in the country in which the employee is resident - and this can have very significant tax implications - both in terms of compliance and liabilities.
A number of countries - see the map below - have introduced "digital nomad" visas. Visa conditions differ significantly, but they typically allow individuals to remain in a country for proscribed periods as long as they are gainfully employed (by an overseas employer) and can meet certain income requirements. In most situations individuals will not be taxable in the visa country but taxable elsewhere depending on their individual circumstances. This can be complicated and specific tax advice may be required for both individuals and their employers, as above.
In summary, where there are only a small number of individuals involved, many employers either engage an “Agent” in a foreign jurisdiction to act as the employer or move to change the nature of their engagement with individuals to contractors rather than employees. This should see individuals become entirely liable for their own tax and social security reporting in the country of residence, but the new arrangements need to be structured carefully, from both a legal, tax, HR and administrative perspective.
It is not adequate enough - as we have seen - to simply ask an employee or former employee to seek an ABN and then continue paying them on the same contractual basis - bearing in mind that non-residents will typically not qualify to hold an ABN except in very specific circumstances.
Digital Nomad Visas
As we mention above, a wide range of countries now offer digital nomad visas - and, while they greatly simplify the conditions around entry and continued residency in the individual countries, they do not significantly impact the tax and legal issues associated with working overseas. The map below illustrates countries offering visas as at the beginning of 2024.
As a matter of practice note that many digital visas are of relatively short duration - and not necessarily consistent with the requirements to break Australian tax residency. Some commentators have indeed suggested that the new tax residency rules will make it almost impossible for Australians to take advantage of nomad visas when it comes to accessing lower levels of tax - that is incorrect. However, it will make it very important to first consider whether the country offering the nomad visa has a double tax agreement (DTA) with Australia and the "tie breaker" provisions within that DTA. Additionally, the absence of a DTA leaves open the possibility of double taxation of income in situations where tax residency has not been broken. Specific professional advice is very much recommended prior to moving overseas.
Other Issues
Apart from taxation and payroll arrangements there are a wide range of issues associated with leaving Australia to work abroad, which we touch on in the Expat Checklist available for download below.
Just as a postscript, many of the issues addressed above apply equally to individuals moving to Australia and looking to continue employment with their current overseas employer. They will likely be taxable in Australia on their foreign remuneration and significant tax issues may arise should the arrangements give rise to their employer being considered to have established a permanent establishment in Australia. Prior professional tax advice in essential and see our webpage focused on individuals in Australia working remotely for overseas employers.
If you would like to arrange professional advice please complete the Inquiry form below providing details and you will be contacted promptly.
