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If you plan to bring overseas employees to Australia, there are crucial tax and residency issues.
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What to tell your foreign worker about tax
08 July 2022
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11 minute read
If your company has any interest in overseas markets, there is a good chance you will have employees moving to Australia, and you should know what to expect in terms of taxes.
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Australia offers guidance on how to interact with the ATO, which covers the tax here for foreign workers, but there are several factors to weigh up before you buy plane tickets.
When bringing employees to Australia consider what your future plans for their stay are. How long does your employee have to stay in the country and what is the future of your company here? Will you start an Australian branch and have Australian clients? Are you working together with other Australian-based companies or just using the time zone for convenience with other foreign offices?
These are all questions that impact your tax status in the eyes of the Australian government, and are important to consider before you make the move Down Under.
Moving to a new country is an endeavour. Tax code is just the start after you realise the currency, rental structures, policies and traditions are all different.
What income is taxable in Australia?
A foreign employee’s income is not generally taxed in Australia as they are doing work for and receiving payment from a foreign company. This largely applies to short-term visitors or temporary visitors to Australia but also applies to employees who:
- Are a resident of another country, though this applies mostly for double tax treaty purposes
- Are not in Australia for more than 183 days over an annual period or a standard income year
- Stricter changes to the tax code as of 2021 may specify that if an individual is in Australia for more than 183 days, they are automatically treated as a tax resident. If an individual was counted as a resident for the previous year, they are counted for the current year without the 183-day test.
- Under the changes, residents would either need to apply for a commencing residency test if they were not a resident the previous year, or a ceasing residency test if they were a resident the previous year.
- Receive their salary, wages or payment from an employer that is not a resident of Australia
- Has salary, wages, or payment that is not considered deductible from the profits of a permanent Australian employer.
Short-term work visits are generally considered to be less than three months. If a visit lasts longer than this, the ATO may investigate if the employment is connected with Australia in any way. This can include if the employee’s work contract changes, the nature of their job, if their job has had any impact on the economy of Australia, if they have Australian clients or if their employer has any connection to Australian entities, and if it seems Australia has become their permanent place of residence.
Note that COVID has made necessary certain easements of these policies. If your employee is staying in Australia for a longer-than-three-month period as a result of COVID, these investigations will likely be waived. These audits also end once it is determined that they have no other connections to Australia besides living there and if they can prove they intend to leave Australia as soon as possible.
What is pay-as-you-go withholding?
The ATO refers to withheld funds from an employer for tax purposes as pay as you go (PAYG). When an employer pays an employee of their company, it is necessary to withhold a certain amount of their salary for the amount of taxes they will likely have to pay at the end of the tax year. The employer then sends that money to the tax agency of their government.
PAYG taxes apply to you if your employee is earning income from Australian residents or their income is sourced in Australia.
What is Australian residency tax?
If your employee stays in Australia past the three-month period and does not intend to return to their home country, they will likely have to apply for residency. Residents of Australia are subject to a tax residency status, which means that their worldwide income is now taxable by the ATO. If your employee becomes a resident, note that even if your business remains outside the country and has no connections to Australia, you will still need to withhold funds for taxes.
Whether you plan to host your employee long term or just as long as needed, knowing how the ATO taxes foreign residents is a critical component of your budget. Either way, Australia has a lot to offer for expats and foreign businesses. The tax codes are only a small part of what could be an excellent business opportunity.
John Marcarian is founder of Expatland, an expat-focused business community of international tax companies and other global mobility service providers.
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