Updated ATO guidance dealing with residency and source of income for COVID-19 impacted mobile employees

12 August 2021

In brief

The Australian Taxation Office (ATO) has provided an update to its previously published guidance in relation to residency and the source of income for individuals who have been working remotely in Australia for an extended period as a result of the COVID-19 pandemic.

The updated guidance draws a distinction between someone who is able to depart Australia but chooses to remain in Australia working remotely and someone who is unable to leave Australia. An individual who chooses to remain in Australia is more likely to be a resident of Australia and their employment income will be considered to have an Australian source.

In detail

As anticipated, the updates that were made on 10 August 2021 reflect the ATO’s view that, where an individual chooses to remain in Australia for an extended period, the more likely they will become a resident of Australia for tax purposes.

From discussions that PwC has had with the ATO, it is acknowledged that it is sometimes difficult to determine that point in time when residence has changed. All facts and circumstances should be considered to determine if and when an individual's tax residence status has changed, including:

• intention and purpose of coming to Australia; 
• living arrangements in Australia; and
• family and employment ties in Australia.

Importantly, the updated guidance draws a distinction between someone choosing to remain in Australia versus someone who has been unable to leave. The ATO states:

Choosing to stay in Australia when you have been able to leave is a factor that will point towards you being a resident. This includes if you have been able to leave Australia but did not do so, because of conditions or restrictions that apply, or may apply. For example, quarantine requirements or restrictions on re-entering Australia.

Factors to consider in determining whether you have been able to leave Australia include:

- government restrictions preventing you from

- leaving Australia

- entering your usual country of residency.

- a lack of commercial flights available to enable you to return to your country of residency.

In relation to the source of employment income, the ATO had previously indicated that COVID-19 presents a special set of circumstances and that income from employment will not have an Australian source if the remote working arrangement is three months or less.

For arrangements extending beyond three months, it is necessary to examine the details of the arrangement to determine if the employment is connected to Australia. The ATO has now added that employment income is likely to have an Australian source where an employee chooses to remain in Australia and has agreed with their employer that Australia can be their place of work.

The takeaway

Factors beyond the individual’s control (e.g. travel restrictions or flight availability) will be more persuasive in an argument for non-residence. An individual’s decision to stay in Australia due to concern about safety in the foreign country would of itself not be sufficient to remain a non-resident of Australia.

Affected individuals will need to consider the updated guidance when completing income tax returns for the year ended 30 June 2021. Employers should be aware of the update and their obligations in relation to PAYG tax withholding and reporting.