Employees planning to work remotely overseas need to carefully consider their tax arrangements prior to leaving Australia or risk a complicated mis-match in the way their remuneration is taxed in each country, according to HLB Mann Judd Sydney tax partner, Peter Bembrick.

COVID has meant that employees are not only working from home in their city or interstate, but many have relocated abroad and remain unaware of cross-jurisdictional tax obligations.

“Unfortunately, tax laws in Australia and other countries have not kept pace with social and technological changes arising from protracted periods of lockdown, and this is producing some unexpected outcomes.

“Tax residency status in particular can be a grey area, as tax laws will generally apply differently in most countries depending on whether someone is a tax resident or a non-resident, which can differ from residency for migration purposes.

“From an Australian tax perspective, when taking up a position overseas it has traditionally been cleaner to qualify as a non-resident (subject to applying the complex and subjective tax residency tests to their specific circumstances), in which case, they should be taxed on their foreign-sourced salary only in the foreign country. What happens, however, when your employer is based in Australia and it is only the employee who has moved overseas?  How will this be treated by the ATO and the foreign tax authority?” he said.

Mr Bembrick said while tax authorities were sympathetic to stranded employees during COVID, providing guidance and allowances, such concessions are no longer being offered.

“These situations were quite frequent during lockdown periods when workers were effectively stuck in either a foreign country or their home country, but the ATO have indicated people working overseas can no longer count on administrative concessions and they will instead be taxed according to where they are working,” he said.

To avoid any potential mismatch in tax payments, Mr Bembrick said if it is reasonably clear to the employee they will be a non-resident once they relocate, this conclusion should be clearly communicated to the employer before they leave Australia. The employer should then make the appropriate adjustments to the payroll arrangements, including not reporting the wages to the ATO and not deducting and paying tax.

“In the other country, however, it is likely the Australian employer will have some form of obligation to set up an overseas payroll and comply with all the requirements of being an employer in that country, while potentially having no other activities or presence there, which could be quite onerous.

“In some cases, contracting arrangements, perhaps involving a private company owned by the employee, are considered. These may be effective in shifting all of the employer obligations to the individual providing the services, but the whole question of employee versus contractor is a difficult, subjective and ever-changing debate, and arrangements may also be subject to specific tax rules in the overseas country,” he said.