Impacts of COVID-19 on tax residency

Tax Insights

With individuals’ FY22 Australian income tax returns soon falling due, it is appropriate for individuals whose movement has been restricted by the COVID-19 pandemic, and their employers, to take stock of prevailing guidance from the Australian Taxation Office (ATO) and the relevant implications thereof.


Background

In March 2020, amidst the uncertainty of the evolving COVID-19 situation, the ATO issued guidance on the resultant tax implications for impacted internationally mobile employees and their employers.

Key issues covered were:The ATO issued guidance on the resultant tax implications for impacted internationally mobile employees and their employers.

  • Individual tax residency and source of employment income;
  • Corporate tax residency; and
  • Permanent establishment (PE).

The ATO’s guidance was both concessionary and consistent with guidance issued by the Organisation for Economic Co-Operation and Development (OECD) around the same time.

Broadly, the guidance provided that no adverse tax implications would arise for employees or their employers where employees were temporarily dislocated as a result of COVID-19 (e.g., government-imposed travel bans).

For example, individuals who ordinarily resided abroad and intended to permanently return as soon as they were able to do so would not be regarded as Australian tax residents, even though they may prima facie satisfy the applicable statutory tests.

This guidance was always subject to the caveat that employees must return to their ordinary country of residence once they were able to do so.


Prevailing Position

In January 2021, the OECD updated its guidance to more clearly direct the point of volition.

Specifically, the OECD articulated that its guidance was intended to only address employees’ temporary dislocation and that it would cease to apply in the absence of pertinent public health measures.

The ATO correspondingly updated its guidance a few months later in August 2021 to:

  • Distinguish, for the purposes of determining Australian tax residency, between persons who had been or were able to depart Australia but chose not to and persons unable to leave Australia (with the former denied concessionary treatment);
  • Provide a 90-day ‘bright line’ test for the source of income from remote working arrangements in Australia, whereafter various principles (including volition) must be considered;
  • Terminate its concessionary approach with respect to PEs effective 31 December 2021, instead inviting applications for early engagement regarding subsisting arrangements; and
  • Maintain a practical and concessionary approach with respect to assessing the central management and control of foreign-incorporated companies, where a decision has been made to halt international travel.

Practical Implications

The ATO’s prevailing position, while arguably consistent with its guidance from the outset, signals its intention to take a firmer stance in relation to voluntary arrangements. Australian tax residency

While this is a sensible approach, the implicit onus on taxpayers to demonstrate that their circumstances merit concessionary treatment may be problematic for some individuals and their employers.

For example, while China’s borders are ostensibly open to some extent, the practical difficulty of traveling there (e.g. lack of financially palatable commercial airfares ex-Australia) brings into question whether remaining in Australia can be construed as a ‘choice’.

Correspondingly, individuals who have remained outside Australia following the advent of COVID-19 should consider whether their tax residency may have ceased, and the relevant implications (e.g. an owned company or companies being ‘foreign controlled’ and therefore subject to the thin capitalisation rules contained in Division 820 of the Income Tax Assessment Act 1997).


For more information

Should you have any questions or concerns regarding the ATO’s prevailing position and its implications for you, please contact Mary Lai Rick Kimberley or your local RSM office

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