Interpretation of tax residence guidelines throughout COVID-19

With strict travel restrictions still in place due to COVID-19, it may seem a bit premature to think about the residency status of people arriving in and / or departing from Australia. But what about those who had to go home from overseas earlier than expected or were stranded (inside or outside Australia) due to COVID-19? How will their changed circumstances affect their residence status or the obligations of the foreign companies they employ? And how does this in turn determine which countries have which tax rights and obligations for whom? This article highlights some of the implications of COVID-19 for the application of Australian income tax law and characterizes the ATO and OECD’s response to them.

A relatively straightforward application of the law seems to be expected for certain individuals who come home earlier than expected. As set out in an ATO leaflet, Australian residents returning from overseas earlier than planned due to COVID-19 will only be able to access the income tax exemption for overseas income under ITAA 1936 s 23AG if they meet the normal requirements of the regulation ( The main requirement is an overseas service of 91 days or more.

Absences from overseas service because the taxpayer returned to Australia due to COVID-19 and started work in Australia is not considered a temporary absence from overseas service as the taxpayer returns without knowing when to resume overseas service can. Australian taxpayer time also cannot be described as short work-related trip.

However, the application of other tax laws, especially to foreign residents and businesses, is not as straightforward. COVID-19 has created a number of special circumstances that must be taken into account when assessing the source of the labor income of a foreign resident who normally works overseas but instead does the same overseas employment in Australia.

The ATO believes that a foreign resident who has lived in Australia for a few months due to COVID-19 will become non-resident for tax purposes in Australia if they normally live abroad permanently and intend to return there as soon as possible. However, an individual will need to check their residency status if they are in Australia for an extended period and do not plan to return to their country of residence if possible.

As a guideline, the ATO states that the income from this employment will not have an Australian source if the remote work arrangement is short term. However, for employment agreements that are longer than 3 months, an individual’s personal circumstances must be investigated to determine whether the employment is related to Australia.

Originally, overseas companies were not expected to register for PAYG withholding if the only reason an employee was working in Australia was because of the impact of COVID-19 on travel and the employee was expected to arrive would depart on June 30, 2020 The pandemic has caused the ATO to adjust both its expectations and requirements.

As of July 1, 2020, overseas companies will need to check whether they need to withhold PAYG amounts from their employee’s earned income, which requires an understanding of both the employee’s personal circumstances and an applicable double taxation agreement (DTA). In relation to DTAs, a short-term visit exemption may apply to ensure that Australian labor earned is not taxed here. However, the wording, terms and time periods vary between DBAs so this cannot be assumed. Foreign companies typically also have to pay a super fee or super guarantee fee for Australian residents and overseas employees who work in Australia.

The potential impact of COVID-19 on other cross-border tax issues has been highlighted in both the ATO and OECD guidelines on permanent establishments and DTAs. For example, if the only reason for holding board meetings in Australia or for directors attending board meetings from Australia is for the impact of COVID-19, the ATO has advised that it will not use compliance resources to determine if the company is centrally managed and control is in australia.

With respect to the ATO, it was previously stated that compliance resources will not be used until January 31, 2021 to determine whether a foreign company has an establishment in Australia if:

• The overseas company did not have a permanent establishment in Australia prior to COVID-19

• Temporary staff presence in Australia continues to be solely due to COVID-19 related travel restrictions

• Employees temporarily in Australia will move overseas as soon as possible after the international travel restrictions are relaxed

• The overseas company has not recognized that these employees are operating in Australia or generating Australian sources of income for the tax laws of any other jurisdiction.

The ATO has meanwhile extended this license to June 30, 2021 and stated that from July 1, 2021, the question of the permanent establishment of foreign companies must be examined.

For its part, the OECD was initially also of the opinion that an extraordinary and temporary change caused by COVID-19 would have no impact on the establishment of a permanent establishment and / or the residence of companies or individuals. However, the OECD guidelines on the operation of DTAs during COVID-19, first published in April 2020, were revised in January 2021 to include additional factual samples that emerged over the course of 2020 and to outline various government responses to the situation. In January 2021, the OECD also published Transfer Pricing Guidelines, clarifying how the arm’s length principle and OECD Transfer Pricing Guidelines apply to unique issues arising from COVID-19.

In a time of persistent uncertainty, the government’s various responses to COVID-19 and the ATO and OECD guidelines on this are indeed to be welcomed. However, they serve to highlight how quickly the law can evolve and how its application can be qualified, which in turn can affect the application of an established precedent. Practitioners need to stay on their toes to successfully maneuver through such moving mazes.

More information – Residency Topic Guide on CCH iKnow.