It is common for SMEs based in Perth to send their staff and team overseas while operating a business. Or if staff choose to work remotely in another country. It is important to gauge the tax traps that Perth SMEs can encounter when their team is working offshore.
The simple case
If you send your team to a short conference, they will travel to another country. So, while they might be working for you at the meeting, you will not need to change your employment position with that person.
If you send your team overseas, the workers might enjoy frequent flyer point benefits. However, it would be best to consider reward programs’ tax impact when planning your affairs.
Tax residency of staff working overseas
Tax residency becomes a factor when your staff work overseas for an extended period. Tax laws vary across countries, and the classification of an individual as a resident or non-resident can have significant implications. It’s important to remember that residency for tax purposes may not align with residency for migration purposes. Considering these factors, you can demonstrate your responsibility and tax governance in managing your international workforce.
From an Australian tax position, it has generally been more straightforward for individuals moving overseas to qualify as non-residents (provided they meet the necessary criteria). In such cases, they would typically be taxed only in the foreign country where their employment is based.
However, what happens when the employer remains based in Australia and only the employee relocates abroad? How will this scenario be addressed by the Australian Taxation Office (ATO) and the foreign tax authorities?
This issue became prevalent during Covid 19 when staff found themselves “stranded” in a foreign country or Australia (for expats working in Perth). The ATO gave people like this a temporary administrative position. And these positions no longer exist.
Working remotely for an Australian employer
If your team chooses to work overseas (say Bali) and remotely do their job, your Perth SMEs have tax issues to consider. Classically, an employer will take the view that they have no business operations in that country (so Bali), and the entire position is ignored.
The net impact is often that:
1. PAYG withholding is often deducted from the employee’s gross salary (including Medicare).
2. Employer superannuation contributions (including Super Guarantee Levy) are made.
3. Wages are treated as taxable for West Australian payroll tax purposes.
4. The SME business accountants prepare their business activity statements as usual.
However, none of these actions are typically the correct approach for a non-resident employee working abroad.
In foreign countries, payroll arrangements are frequently ignored. So, your team is either unaware of their obligation to declare their salary to the local tax authority or they are required to engage with tax authorities personally.
In most cases, local tax laws will apply to any salary earned by an employee physically working in their country. The rules detailing how the different countries can tax income are often detailed in a Double Tax Agreement.
A Double Tax Agreement between Australia and a foreign country generally includes a provision granting exclusive taxing rights to the country where the services are performed.
The Australian tax withheld by the employer is ordinarily not a taxable credit in the local jurisdiction. So, the employee can face a double taxation position – one for the error made by the Perth SME and one for the local country, which properly taxes their resident’s generating income.
This creates a risk that the Australian employer should not have withheld and remitted tax to the ATO on income not subject to Australian tax. At the same time, the employee may still be required to report the salary in their local tax return and pay taxes in their country of residence, with limited options to claim a credit for taxes paid in Australia.
The most effective and administratively challenging solution is for Perth SMEs to adjust their payroll reporting (including Single Touch Payroll) for the periods and seek a refund of the tax withheld and remitted to the ATO.
Superannuation on departure
If your team members are Australian citizens, they cannot access their superannuation simply because they are no longer Australian tax residents (except for those moving to New Zealand).
If your team are temporary Australian residents, they might be able to access their superannuation even though they are not yet of age or retired.
The rate of tax on superannuation leaving Australia is high. The Departing Australia Super Payment ranges from 35% (for those not working holiday makers) to 65% (for working holiday makers in an untaxed super fund).
Permanent establishment issues
Suppose your business is sending staff to another country to establish markets. If the team spends so long in that country that they become tax residents, you have another issue – your business might have started a permanent establishment in another country.
The creation of a permanent establishment overseas creates a raft of taxation and business issues that need advice from both their Perth tax accountant and the tax accountants in the other country.
Reducing tax + HR risk
If your team works remotely, you should include contract clauses that they remain Australian tax residents. And if you are sending team members overseas for an extended period, you should approach your Perth tax accountant for tax advice on the worker’s tax residency. At Westcourt, our connection with GGI Global Alliance gives us access to local on-the-ground knowledge about overseas staff’s tax practices and administrative tax attitudes and the risk of your starting a permanent establishment. And giving a single piece of tax advice covering Australia and the offshore jurisdiction simplifies your business risk considerably.
At Westcourt, we focus on commercially focused family-owned businesses – especially those expanding overseas. If your company is growing and staff are moving abroad, either by lifestyle choice or by opportunity, you should use an accountant who is committed and capable enough of growing with you. Why not gives us a call?
