Australian employment dream, foreign employer’s potential tax nightmare

When you are considering allowing an employee to work in Australia, you should be aware of the taxation obligations. This way you can make an informed decision about the relocation and avoid penalties.

We outline below some of the key implications which need to be considered.

Australian business taxation – permanent establishment

As a foreign employer, you may potentially become liable for Australian income tax arising from your employee performing services in Australia.

Foreign entities are subject to income tax on Australian sourced income. This liability will be limited to income derived from a permanent establishment (“PE”) where a double tax agreement applies. A PE arises where you have a fixed place of business through which your business carried on, subject to specific inclusions and exclusions.

The Australian Taxation Office (“ATO”) has recently determined in several decisions that a foreign employer had a PE in Australia from a single employee working from their home (“home office”) in Australia even though:

·         the employer does not have an office located in Australia; and

·         the employee does not have any authority to enter into and conclude contracts on behalf of the business.  

The key factor for determining a PE exists is whether the home office is “at the disposal” of the employer.  For this purpose, it is immaterial whether the home office is owned or rented by the employer.  What is relevant is whether the employer has the effective power to use that location, the extent of the presence of the business at that location and the activities the employee performs there. 

To determine whether the employee’s presence in Australia will give rise to a PE will require an examination of all the facts and circumstances surrounding the employment. This will include examining the activities undertaken in Australia and the terms of the applicable double tax agreement. Where the employee is dealing with Australian customers it is more likely that a PE exists.

Where a PE exists, the foreign entity will be liable for taxation in Australia on the income derived through the PE. This will require an appropriate allocation of the income to the PE.

Employment taxes

Irrespective of whether you have a PE in Australia, you will be required to comply with Australian employment related taxes. Some of the key employment taxes are outlined below. 

1.    PAYG withholding

You will be required to register for pay-as-you-go (“PAYG”) withholding. Under this system you must deduct, remit and report to the ATO taxes from the employee’s salary.

PAYG withholding will not be required where the employee is exempt from Australian tax under a double tax agreement. The terms of the exemption depend upon the agreement but will generally require:

·         you do not have a PE in Australia; and

·         the employee remains a foreign resident and is present in Australia for less than 6 months.

Failure to meet the PAYG Withholding requirements will expose you to the PAYG withholding liability plus penalties of 100%. Directors of companies may also be made personally liable for any unpaid PAYG withholding liabilities.

2.    Superannuation guarantee

You will be required to provide the employee with minimum superannuation (also known as social security or pension) support while working in Australia under the superannuation guarantee scheme.  From 1 July 2024, minimum superannuation support of 11.5% of the employee’s ordinary time earnings (subject to an earnings cap) must be provided on a quarterly basis. Contributions must be received by the employee’s superannuation fund strictly within 28 days of the end of the quarter.

If the conditions are not met a penalty tax known as superannuation guarantee charge (“SGC”) will be imposed which is:

·         calculated at the same percentage rate, but is imposed on salary and wages, plus daily interest and administration charges; and 

·         is not tax deductible to the employer.

If the requirements are not met, penalties of 200% of the SGC may be imposed on the employer. Directors of an employer company may become personally liable for the SGC.

3.    Fringe benefits tax (“FBT”)

You will be subject to FBT on fringe benefits (i.e. non-cash benefits) which are provided to the employee while in Australia. Popular fringe benefits include health insurance, meal entertainment, car, accommodation and living away from home allowances.  An exemption will apply for benefits provided to an employee that is exempt from Australian income tax under a double tax agreement.

FBT is imposed at the rate of 47% on a grossed-up value of the benefit unless a concession or exemption applies. The gross-up is imposed to ensure the overall tax payable is the same as if the employee was on the top marginal tax rate and had received sufficient salary to purchase the benefit after tax.

4.    Employee share scheme reporting

Where the employee participates in an employee share scheme (“ESS”) including an option scheme, while in Australia, you will have a reporting requirement in Australia. This applies even if the options or shares were granted prior to coming to Australia and do not vest while in Australia. Reporting is required whenever part of the vesting period was served in Australia.

The timing of the reporting will depend upon the specific terms of the ESS. Reporting may be required after the employee has left Australia.

Navigating the complexities of Australian taxation and employment regulations can be challenging, especially for foreign employers. If you have questions or require assistance with the tax implications of having employees work remotely from Australia, our experienced team is here to help.

For assistance, please speak to your usual Forvis Mazars advisor or alternatively one of our specialists via the form below or on:

Author: Gaibrielle Cleary

Published:  6 August 2024

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.

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