COVID-19 has had a major impact on the way employees are choosing to work, with employers offering more attractive work experiences, better work-life balance and greater flexibility, to attract and retain talent.
It is no surprise that the COVID-19 pandemic has forced organisations around the world to adapt to new ways of working. In our latest Working in Australia webinar series, our BDO experts discuss the challenges and opportunities for companies in navigating a post-pandemic future of work.
In our first webinar – Working in Australia – Working from anywhere - we explored the challenges of the post-pandemic workplace, including:
- Managing a decentralised workforce
- Cross-jurisdictional working and state tax obligations
- Expatriates and immigration.
Watch the webinar or read on to find out more.
The COVID-19 pandemic has had a major impact on the way employees are choosing to work, with employers now offering more attractive work experiences, such as better work-life balance and greater flexibility, to attract and retain quality talent.
Over the past couple of years, we have seen an emerging trend of long-term assignments no longer being as attractive to employees as they once were. In addition, employees now realise they no longer need to be limited to working in a particular location.
We are now seeing employees choosing – or in some cases demanding – to work from anywhere, forcing employers to offer greater flexibility and adapt to remote working conditions to keep their employees happy.
The other trend we have seen is a rapid increase in skilled migration from interstate or overseas following border restrictions being removed. In addition, the Federal Government has recently announced its decision to raise the cap on skilled migrants, which alone will result in an influx of skilled workers migrating to Australia.
What does this mean for expatriate taxes?
If you employ an overseas worker in Australia, or send an employee to work overseas, it is critical to investigate the tax obligations - both in Australia and the host country - in order to ensure compliance.
Some of the common tax obligations to consider include:
The test for being an Australian tax resident is not always clear cut as there are a number of factors to consider. However, generally if an employee arrives in Australia to work for longer than six months, this will likely trigger Australian Tax Residency. For those leaving Australia to work overseas, breaking Australian Tax Residency is a little harder and requires the employee to establish a fixed home in that overseas country for at least two years. In addition, the employee must demonstrate they have broken ties with Australia. Examples of the factors that may support the ceasing of Australian residency include:
- Taking their family with them on assignments
- Renting or selling their Australian home
- Closing their Australian bank accounts
- Notifying the Australian Electoral Commission (AEC) that they are planning to depart Australia.
It is important for the employee to be aware of their Australian Tax Residency, as this ultimately determines both the employee’s scope of liability and the employer’s obligations.
Employers must also consider any potential permanent establishment risks, particularly when allowing remote working arrangements. For example, if an Australian citizen returns home after several years of employment within a United Kingdom (UK) company and continues to undertake work for them, they could potentially create a permanent establishment for that UK company in Australia. This may lead to corporate income tax and employer tax obligations for the UK employer in Australia.
Where an employer has an employee working in Australia, this will generally create employer tax obligations, such as PayAsYouGo Withholding (PAYG), Superannuation, Fringe Benefits Tax (FBT), Payroll Tax and WorkCover. Employers must be mindful of these obligations as significant penalties can be incurred for non-compliance.
Most overseas countries do not have an FBT regime that taxes the employer on non-cash benefits provided to employees. Rather, in many jurisdictions, any non-cash benefits are typically considered part of an employee’s income and are processed through payroll. However, in Australia, the FBT regime applies and imposes FBT on certain non-cash benefits – the resulting FBT liability is the employer’s obligation. If an employer has an inbound employee from an overseas company, they may need to report on behalf of the overseas entity for FBT purposes.
Superannuation must be considered for inbound employees on temporary visas, as there are certain obligations and exemptions that may apply.
If an inbound employee on a temporary visa has a Certificate of Coverage in place, and there is a bilateral agreement between Australia and the employee’s home country, the employer may be exempt from paying superannuation.
However, if an employer is not going to contribute superannuation, it is important that they keep the Certificate of Coverage on file should the Australian Taxation Office (ATO) require this.
Australia has a number of double tax treaties with other countries, where exemptions may be available under the treaty. However, employers need to carefully consider applying for the treaty relief, particularly for assignments of less than six months.
Many companies have global policies in place to protect their employees from tax disadvantages. Generally, tax equalisation policies are more suited to long-term assignments. This is because they ensure the employee continues to pay the same amount of tax as they would if they were in their home location.
With fewer long-term assignments occurring, employers are being forced to rethink their global policies and may be less likely to offer tax equalisation where an employee has chosen to work in a different location.
If an employee is working overseas but continues to be paid by an Australian company, we recommend seeking advice on withholding pay and contributing to superannuation, as this will be dependent on the employee’s residency status.
Prior to the pandemic, it was not uncommon for employers to expect employees to work exclusively in the office. In a post-pandemic world, employees working five days in the office has become increasingly uncommon.
As a result, we are seeing an increase in cross-jurisdictional working. This can lead to complexities in determining and complying with state-based obligations, particularly around payroll tax and WorkCover.
Payroll tax is imposed on taxable wages in the jurisdiction where an employer is based, and where an employee provides services. An employer is typically required to lodge monthly returns between July and May of the following year, with an annual reconciliation lodged in June.
If an employee works wholly in one jurisdiction during a calendar month, there are nexus provisions that apply in each state and territory. These provisions consist of a four-tiered test to determine the jurisdiction in which an employer has payroll tax obligations.
- Test 1: The first test looks at an employee’s Principal Place of Residence (PPR) during that calendar month. If the employee has more than one PPR, the employee’s PPR on the last day of the month is deemed to be the PPR for the whole month
- Test 2: If the first test is not applicable, the second test looks at an employer’s ABN address, or Principal Place of Business (PPB), during that calendar month. If the employer has more than one PPB, the employer’s PPB on the last day of the month is deemed to be the PPB for the whole month
- Test 3: If both the first and second test do not apply, the third test considers the jurisdiction in which wages are paid or payable during that calendar month
- Test 4: Finally, the fourth test considers the jurisdiction in which the services the employee provided were mostly performed during that calendar month (i.e. > 50 per cent).
SCENARIO ONE: John Smith is a resident of Albury, New South Wales (NSW) and works for ABC Pty Ltd, which is located in Wodonga, Victoria (VIC). Until the pandemic, John worked exclusively from the office. Post-pandemic, ABC Pty Ltd implemented a hybrid working arrangement, allowing employees to work up to two days from home meaning John now works two days in his home office in Albury.
Because John is now working in two Australian jurisdictions in any given month, Test 1 determines that his PPR is NSW. As a result, ABC Pty Ltd is required to register and pay payroll tax in NSW, which is outside the jurisdiction their company operates from.
SCENARIO TWO: Taylor Tax is a resident of Albury, NSW and works exclusively from the office of her employer DEF Pty Ltd, which is located in Wodonga, VIC. DEF Pty Ltd has offices located in all Australian jurisdictions. In September 2022, Taylor worked for one week in Wodonga, then took three weeks of leave and travelled to Italy. She planned to stay in Italy for an additional two weeks in October and work remotely. Taylor stopped over in Queensland (QLD) for one week on her way home and worked from DEF Pty Ltd’s Brisbane office. She arrived home in the last week of October and returned to work in the Wodonga office.
As payroll tax is a monthly obligation, DEF Pty Ltd’s payroll tax obligations in each month need to be considered separately. In September, Taylor worked exclusively from the office in VIC therefore the payroll tax liability for DEF Pty Ltd exists in VIC. In October however, Taylor’s services are performed partly overseas, as well as in QLD and VIC. Test 1 requires consideration of Taylor’s PPR, which in this case is NSW. As a result, DEF Pty Ltd has a payroll tax liability in NSW for the month of October, despite no services being performed in that state during that month.
There is a payroll tax exemption for wages paid or payable, where they relate to services performed in an overseas country for a continuous period of more than six months. For services performed overseas for less than six months, the exemption does not apply and wages are fully taxable in the applicable Australian jurisdiction.
It is important to note that unlike income tax, there is no apportionment of wages for payroll tax purposes, as wages are aggregated and fully taxable in the applicable jurisdiction. For example, where an employee is paid a bonus in June that relates to their performance for the whole financial year, only the services performed in June will be taken into account to determine the jurisdiction in which wages are taxable. In addition, the total bonus amount will be taxable in June.
WorkCover / Workers’ Compensation
Employers are required to maintain WorkCover/Workers’ Compensation insurance in the jurisdiction/s in which they employ, in the event an employee has a workplace accident or injury. Unlike payroll tax, WorkCover is an annual obligation and employers need to provide an estimate of rateable remuneration in advance of the financial year. At the end of the financial year, employers must submit their actual rate of remuneration.
Some challenges may arise when an employee works in two or more jurisdictions, they do not have a fixed place of employment, or the jurisdiction where they reside is not the jurisdiction where they work. The ‘state of connection’ provisions enacted across various jurisdictions provides that workers are to be insured in the jurisdiction to which they are connected. It is important to note, the WorkCover / Workers’ Compensation regimes are not aligned across the various jurisdictions, and unique legislation applies in each State and Territory. However, the ‘state of connection’ provisions are, in most cases, not too dissimilar across the various jurisdictions.
We set out below the five tests that apply in Victoria, to determine an employee’s ‘state of connection’. Notwithstanding our comments above, care should be taken to account for any differences in the provisions for each jurisdiction.
- Usually works test: If a worker usually works in one state/territory, then that state/territory is the applicable jurisdiction. Consideration is given to the worker’s work history with the employer over the preceding 12 months.
- Usually based test: If a worker is usually based in one state/territory, then that state/territory is the applicable jurisdiction. However, factors to be considered include any place specified in the employment contract and any place provided by the employer, where equipment or materials for employment are stored.
- Business management or control test: If there is a principal place in Australia where the employer’s business activities are managed or controlled, that is the applicable jurisdiction. Other factors include any place where the employer’s officers direct, control, and coordinate business activities, any place held as ‘head office’, and ASIC/ABN records.
- Ship worker test: This applies to workers on a ship, where the applicable jurisdiction is the state/territory where the ship has most recently been registered.
- Place of injury test: The applicable jurisdiction is the state/territory where the worker was when the work injury occurred. This is not relevant if there is a place outside Australia where the worker may be entitled to compensation for the injury.
Challenges facing today’s decentralised workforce
The respective tests for payroll tax and WorkCover do not contemplate some of the challenges that companies are now facing in today’s decentralised workforce. The nexus provisions for payroll tax were last amended in 2009, while the ‘state of connection’ tests for WorkCover were introduced prior to the pandemic.
A key challenge with these provisions is the differing tests for each obligation and the potential for a different outcome for payroll tax and WorkCover purposes.
EXAMPLE: John from Albury, NSW works two days per week from home and three days from his employer’s office in Wodonga, VIC. In this instance, a payroll tax obligation exists in NSW as a result of the first test, where his PPR is in NSW. However, a WorkCover obligation exists in VIC as a result of the business management or control test.
This example highlights the complexities of the different regimes, as well as the inevitable challenge of 100% compliance with the payroll tax and WorkCover provisions. However, there are several risks to be considered in the event of an incorrect disclosure of wages / remuneration:
- The financial risk of understated taxable wages for payroll tax purposes, or understated insurance premiums for WorkCover purposes
- The reputational risk of an employee not being insured in the correct jurisdiction and not being entitled to compensation in the event of a workplace injury.
Given the current uncertainties around these provisions, we encourage organisations to consider whether any policies are in place in relation to remote working, and how employers are tracking employee working arrangements. Remote working and a decentralised workforce has the potential to hinder an employer’s compliance with state-based obligations such as payroll tax and WorkCover. As such, it is of upmost importance that employers consider implementation of robust processes and procedures in relation to employee working arrangements, and the ability to record employee’s working locations at any given time.
In the current global war for talent, employers are struggling to meet their skilled workforce needs. The pandemic has accelerated the shift towards remote working, with more companies relying on an increasingly mobile workforce to succeed in today’s global economy. With the increased acceptance of borderless work, companies may find themselves facing difficulties when competing in the current environment.
As of August 2021, 41 per cent of all employed Australians regularly worked from home - up from 32 per cent in August 2019. In 2022 more than 1 million Australians are currently living and working overseas, forming part of the 281 million international migrants globally – the highest number on record.
According to global research company Gartner, 65 per cent of workers are considering the role that work plays in their lives post-pandemic, with 73 per cent considering location essential to their job satisfaction.
These findings indicate we are at the start of a ‘work from anywhere’ revolution. The Australian Bureau of Statistics (ABS) has reported a 47 per cent increase in job openings in Australia over the past year, along with a 16 per cent increase in turnover. This means the current job market is an employee market.
In this environment, companies must consider how they can attract candidates and employers who are willing to embrace the ‘work from anywhere’ model may find themselves ahead of the pack.
In the near future, there is no doubt more organisations will adopt a borderless approach to attract and retain the best candidates.
Navigating Australia’s immigration system
Australia has one of the most highly regulated immigration systems in the world. The Migration Act 1958 comprises more than 2,000 pages of legislation and the frequent changes in complexity can this a minefield for visa holders and employers.
Businesses who employ foreign workers, need to check what, if any, work restrictions apply to the person. If an employer cannot evidence that they took reasonable steps at a reasonable time to verify the person’s visa status and/or work rights, the employer (and others) can be subject to significant civil and/or criminal sanctions.
We recommend that all employers check the status and work rights of a prospective employee and that visa holders understand and comply with their work restrictions and avoid Visa cancellation because of work limitation breaches.
Information on obtaining a work rights check is available here.
Data collection and tax compliance
Australia is a highly regulated jurisdiction and the Federal Government has an unprecedented commitment to protecting and managing our borders, while endeavouring to meet Australia’s economic needs. The Department of Home Affairs continues to advance its digital processing to deliver better regulatory compliance, as well as improving risk identification and management.
Data matching is being increasingly used by Commonwealth and State Agencies to effectively detect and manage compliance risks. The ATO collects information directly from the Department of Home Affairs on active and newly granted visas. This data is then matched against the ATO’s records to ensure visa holders, sponsors, migration agents, and lawyers are meeting their tax and superannuation obligations.
Find out more about the new age of data sharing here.
From working in Australia to working around the world
Technical revolutions such as ‘Wi-Fi’ and portable computer technology, has seen the ‘work from anywhere’ arrangement become a reality for an increasing number of organisations and employees.
As of June 2022, more than 25 countries and territories have launched ‘Remote Work for Digital Nomad Visas’ that allow foreign nationals working independently, or for an employer outside their own country, to work remotely for a specified period.
Over the coming years, it is likely that many countries will continue to take steps to factor-in remote work to their immigration systems. However, until then, individuals must ensure they meet local immigration and tax laws whenever they travel overseas and undertake work, whether it be for a local or overseas company.
With the increased global movement of people and the changing nature of the workforce, individuals and organisations need to prepare for ‘working from anywhere’. Rethinking the immigration system for these new ways of remote working presents both challenges and opportunities. For Australia, the focus remains on highly specialised skills and workers in critical industries, which will aid Australia’s economic growth.
Ultimately, ‘working from anywhere’ presents an opportunity for companies to meet their talent needs, regardless of geographic constraints, while individuals can negotiate the work location that best suits their needs.
As the war for talent across the globe continues, embracing the ‘working from anywhere’ model will best position both individuals and companies to thrive in the post-pandemic world.
For expert guidance on expatriate and employment tax obligations and visa considerations to comply with the relevant laws and regulations, both locally and internationally, contact your local BDO adviser.
Our BDO Migration Services team provides end-to-end, holistic migration services, along with comprehensive, seamless support on every aspect of migration law. If you require assistance with any of these issues, contact Maria Jockel or Rebecca Thomson.
Register now for the remaining sessions in our ‘Working in Australia’ webinar series, featuring expert panellists discussing the challenges and opportunities for companies to navigate when it comes to mobility, risk, and compliance.