Tax Time 2022: Implications of international travel restrictions

We hope you enjoy our 2022 Tax Time blog series.

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The international travel restrictions, including quarantine, vaccination and COVID-19 testing as a result of the COVID-19 pandemic over the past two years disrupted the plans and intentions of many individuals to live in a one country or another at a particular point in time.

The ATO released Tax Time 2021 guidance to assist taxpayer and practitioners in considering the impact of delayed international travel on Australian tax obligations. The worldwide travel disruptions continued well into the 2021–22 income year, so with Tax Time 2022 now upon us, it is an opportune time to revisit this guidance.

Lodging Australian tax returns

An Australian resident for tax purposes is taxed on income from worldwide sources.

A non-resident, or foreign resident, is taxed on Australian sourced income, including capital gains from CGT assets which are taxable Australian property.

An individual may need to lodge an Australian tax return for 2021–22 if:

  • they are an Australian resident for all of the income year
  • they became an Australian resident during the income year
  • they ceased to be an Australian resident during the income year
  • they are a foreign resident who earned income that is taxable in Australia.

Change of tax residency due to COVID-19

The ATO guidance states that if a taxpayer is a foreign resident in Australia temporarily for some weeks or months due to COVID-19, they will not become a tax resident if they:

  • usually live overseas permanently
  • intend to return there as soon as they are able.

However, the individual will need to review their residency status if they:

  • end up staying in Australia for a lengthy period
  • do not plan to or do not return to their country of residency when they are able to do so.

Relevant facts and circumstances include the individual’s:

  • intention and purpose of coming to and remaining in Australia
  • living arrangements while in Australia
  • family and business/employment ties in Australia.

Note

The taxpayer choosing to stay in Australia when they were able to leave is a factor that will point towards them being a resident. This includes if they have been able to leave but did not do so, because of conditions or restrictions that apply, or may apply, such as quarantine requirements on re-entering Australia.

Factors to consider in determining whether the individual had been able to leave Australia include:

  • government restrictions prevented the taxpayer from leaving Australia or entering the foreign country
  • a lack of commercial flights.

Implications for residents affected by COVID-19

Temporarily overseas

If the taxpayer usually lives and works in Australia but was temporarily overseas due to COVID-19, their Australian tax obligations do not change.

Implications for foreign residents affected by COVID-19

Note

A double tax agreement may apply to a foreign resident in respect of Australian sourced income taxed in both countries under domestic law.

Source of employment income

For a foreign resident, in some circumstances the employment income they earn working remotely from Australia may not have an Australian source.

Employment income

Foreign sourced employment income the taxpayer earns while in Australia temporarily will generally be paid leave or salary or wages.

If the foreign resident usually works overseas and earns foreign sourced employment income and they have been on paid leave in Australia, the income from the foreign employer for this leave is not from an Australian source and it is not assessable in Australia.

Salary or wages earned from continuing foreign employment working remotely while in Australia temporarily

The source of income depends on the facts.

The ATO accepts that if the remote working arrangement is short term — three months or less — the income from that employment will not have an Australian source.

For working arrangements longer than three months, the individual’s circumstances need to be examined to determine if their employment is connected to Australia.

The taxpayer’s employment income is likely to have an Australian source if:

  • they had chosen to stay in Australia despite being able to leave
  • they agree with their employer that Australia can be their usual place of work until they travel again.

This is because Australia is no longer a place where the taxpayer temporarily and unexpectedly performs their work, but a usual and longer-term place of employment.

However, the individual’s employment income may not have an Australian source where the following apply:

  • the only thing that has changed about their employment is that they are now doing it from Australia
  • there are no other connections to Australia
  • they intend to, and do, leave Australia as soon as they can
  • the country in which they normally reside does not have a double tax agreement with Australia (which may deem the employment may deem the employment income to have an Australian source).

Effect of a double tax agreement

Australia’s DTAs provide that, in certain circumstances, employment income earned by a resident of another country while working in Australia for a short period is not taxable in Australia (the short-term visit exception).

If the short-term visit exception does not apply, the employment income may be deemed to be from sources in Australia.

Generally, employment income will not be assessable in Australia if:

  • the taxpayer is not present in Australia for more than 183 days in aggregate
  • the taxpayer’s salary and wages are paid by, or on behalf of, an employer that is not a resident
  • the taxpayer’s salary and wages are not deductible against the profits of an Australian permanent establishment of their employer.

The conditions vary between DTAs.

SMSF residency relief

An SMSF must be an Australian resident superannuation fund at all times during the income year to be a complying superannuation fund. The SMSF must meet three residency conditions.

If a trustee is stranded overseas due to COVID-19 restrictions, and this causes them to be out of Australia for more than two years, this may affect whether the fund meets the residency conditions. In particular, it may affect whether the:

  • central management control of the fund is ordinarily in Australia
  • fund satisfies the active member test.

Provided there are no other changes in the SMSF or relevant circumstances affecting other conditions, the ATO will not take any compliance action to determine whether the fund meets the residency test.

This is one of the administrative relief measures for SMSFs which apply for the 2019–20, 2020–21 and 2021–22 income years.

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