COVID-19: tax residency and source of income

The ATO has released guidance on the implications of changes to tax residency and source of income for individuals impacted by COVID-19.

Individuals may need to review their residency status for tax purpose if they end up staying in Australia for a lengthy period and do not plan to return to their country of residency when able to do so.

Whether individuals are residents for tax purposes in Australia is a question of fact and requires consideration of their particular circumstances.

Australian residents

Australian residents affected by COVID-19 include those who are temporarily overseas and those who have had to return to Australia early from certain foreign service.

For individuals who usually live and work in Australia but are temporarily overseas, their Australian tax obligations do not change. If they are required to pay foreign income tax overseas, a foreign income tax offset will ordinarily be applied to reduce the Australian tax payable.

Australian residents who have had to return to Australia early from foreign service due to COVID-19, where their foreign service income may otherwise have been exempt under s 23AG of ITAA 1936, are affected as follows:

  • • if they had already completed 91 days of continuous foreign service and met all the other requirements
    • – the earnings from that period of foreign service will continue to be exempt. This is so even if they are paid after their return (eg wages paid in arrears and paid annual or holiday leave that accrued during the period of foreign service)
    • – the earnings earned after their return to Australia, even if they are in relation to previous foreign service, are not earned undertaking foreign service, and therefore will be assessable in Australia
  • • if they had neither completed 91 days of continuous foreign service (taking into account available exceptions) nor met all the other requirements, foreign earnings from that period of foreign service are not exempt and therefore will be assessable in Australia.

Foreign residents

Foreign residents who are temporarily staying in Australia for some weeks or months due to COVID-19 will not become Australian residents for tax purposes if they:

  • • usually live overseas permanently, and
  • • intend to return there as soon as they are able to.

Foreign residents usually working overseas and earning foreign-sourced employment income and have been on paid leave (such as annual or holiday leave) since arriving in Australia do not need to declare it as it is not from an Australian source.

If the remote working arrangement is short term (three months or less), the income from that employment does not have an Australian source. For working arrangements longer than three months, the individuals’ circumstances need to be examined to determine if their employment is connected to Australia. These include whether:

  • • the terms and conditions of their employment contract change
  • • the nature of the job changes
  • • the individuals start performing work for an Australian entity affiliated with their employer
  • • the economic impact or result of their work shifts to Australia
  • • their economic employer — the entity for which they are providing services — is in Australia (see Taxation Ruling TR 2013/1)
  • • they perform work with Australian clients
  • • the performance of their work is wholly or to a significant degree dependent on their being physically present in Australia to complete it
  • • Australia become their permanent place of work
  • • their intention towards Australia changes.

In some limited situations, their employment income may not have an Australian source. This may be the case if all the following apply:

  • • the only thing that has changed about their employment is that they are now doing it from Australia as a result of COVID-19
  • • there are no other connections to Australia, and
  • • they intend to leave Australia as soon as they are able to do so.

Source: ATO website, 3 August 2020.

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