The ongoing COVID-19 pandemic has played havoc with international travel and employment arrangements around the world. Many Australians are now stuck outside of the country or have returned home temporarily. 

On top of this, other Australian citizens and permanent residents have been banned from leaving the country and are stranded. Will the expats who have come back to Australia temporarily due to the coronavirus crisis be allowed to continue working with companies outside of the country?

This is a daunting question for many people and can give rise to uncertainty when it comes to tax residency and taxation of foreign employment income. 

It is possible that prior to the COVID-19 pandemic most expats did not consider themselves to be Australian residents for tax purposes. However, does their return to Australia, temporary as it may be, change that status? If they continue to work remotely for a foreign employer, will they be taxed in Australia?

The official guidance on these questions in Australia is fluid and continues to change. While the COVID-19 pandemic has created a range of unique and unusual circumstances far beyond anyone’s control, taxpayers should still seek to understand their tax status and ensure they proactively prepare for any Australian Taxation Office (“ATO”) enquiries. 

Where you have experienced the following circumstances, you may need to consider your tax status in more detail:

  • Your arrangement with your foreign employer or business has changed (e.g. you have a foreign employer remote work arrangement) 
  • You have begun working temporarily in Australia whilst remaining a foreign tax resident 
  • Your housing or accommodation arrangements have changed 
  • You are considering staying in Australia beyond the original “lockdown” period 

Each of these factors may indicate a change in your residency status or the taxation of your foreign income. With all these different unknowns, it would be worth the effort to gather and generate evidence around your intentions and whether you are a tax resident or not, given ATO scrutiny in this area. 

What Is Tax Residency?

An individual may be considered a tax resident of Australia in the first instance taking into account many factors, including employment, living arrangements, family, location of assets, personal relationships, memberships, health cover, intentions to reside in Australia, and so on.

Further, an individual can be automatically considered an Australian resident where they have a “domicile” in Australia or have physically been in Australia for more than half of the income year.

To be clear, the tax residency rules applied by the ATO differ from the criteria used by the Department of Home Affairs to determine citizenship. The ATO could consider you a resident even if the immigration office does not. 

If you are an Australian tax resident, you: 

  • Must file an Australian income tax return with the ATO
  • Must declare your income from all sources around the world 
  • Become entitled to the tax-free threshold, meaning that you don’t have to pay taxes up to a certain amount 
  • Will have to pay the Medicare levy (subject to the thresholds). 

Alternatively, if you are not an Australian tax resident, you:

  • Only pay tax on income that is “sourced” in Australia (note you may get relief from Australian tax depending on the country you are working in)
  • Must file an Australian income tax return with the ATO if you have Australian sourced income
  • Do not receive the tax-free threshold, meaning you are taxed on income from the first dollar
  • Will not have to pay the Medicare levy

With many people now coming back to Australia – or unable to leave – because of COVID-19, the issue of tax residency and source is thrown up in the air. 

Does Being Stuck in Australia Impact Tax Residency?

The ATO recently issued updated guidance on how it plans to approach tax implications for Australian expats living in Australia right now. The ATO has indicated that if you are a foreign resident here temporarily due to COVID-19, you will not become an Australian tax resident if you:

  • Usually live overseas permanently
  • Intend to return overseas as soon as you are able 

However, if you end up staying in Australia or do not intend to return when able, you should review your residency status.

These guidelines are not binding on the ATO and the ordinary residency rules outlined above should still be considered on a case by case basis. Thankfully, the guidelines appear to indicate a common-sense approach to tax residency by the ATO considering the COVID-19 restrictions.

Foreign Employment Income 

If foreign tax residents are temporarily stuck in Australia due to COVID-19, the ATO has indicated the following:

  • Paid Leave – If you receive paid leave from an overseas employer whilst living in Australia, such as annual leave, the ATO will not consider it Australian income, and so you won’t need to declare it in Australia. 
  • Working Remotely – The ATO has indicated a ‘rule of thumb’ for remote working for 3 months or less will not be considered Australian-sourced income. A remote working arrangement that extends beyond 3 months will need to be considered carefully from an Australian tax perspective.

These indications are helpful to provide some clarity to Australian expats who have returned to Australia temporarily whilst continuing to work for a foreign employer. Given that the situation continues to evolve, the ATO will continue to update its guidelines as necessary. 

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If your foreign employment circumstances have changed due to COVID-19 and you are unsure how to apply the ATO guidelines, get in touch with your accountant or tax adviser to assist you. 

The issues of tax residency and income source are complex and may differ based on your personal circumstances, so don’t hesitate to contact the experts.