Remote workers – if you are an Australian expat who works remotely for an Australian employer, you’ll want to read more (you should not ignore this article)!
In recent months, an alarming issue for remote workers (discovered by our team here at Expat Taxes), has come to light concerning the approach taken by the Australian Taxation Office (ATO) towards expatriates who work remotely for Australian businesses and employers.
It has come to our attention that without consultation with stakeholders, tax professionals or the public at large, and although no new legislation has been passed, nor any new common-law judgements on the issue having been decided by Australian courts, the ATO has silently and abruptly reversed its long-held approach for determining where employment income earned by remote workers (non-resident employees who work for Australian businesses and employers from overseas) is deemed sourced!
The ATO’s sudden and contradictory reversal, if unchallenged, will cause substantial problems for remote workers, who face being taxed by Australia at non-resident rates on income that was formerly exempt from Australian taxation!
The ATO’s Abrupt Policy Shift
Traditionally, the source of an employee’s income was identified as being the place where the employee physically performed their services. This principle, enshrined in Australian common-law, consistent with principles negotiated and agreed in Australia’s double-taxation treaties, and consistent with global, international tax norms, has been suddenly upended by the ATO’s seismic shift in policy.
A recent review of the ATO’s Private Binding Ruling register has revealed that over the past 6 months or so, the ATO has issued rulings that reversed their long-held approach, now suggesting that employment income is sourced is where the benefit of the service is felt or given effect to. For an example of this, take a look at PBR EV/1052043976663 issued in October 2022 – in that ruling the ATO determined that although the taxpayer was a non-resident. The ATO argued that the income earned by the taxpayer from work performed in the taxpayer’s country of residence, was Australian-sourced however.
The ATO’s rationale for deeming the income to be Australian-sourced was that the governing law clause of the contract was Australia, because payment was made in Australia and although disputable, because the ATO deemed that the place where the taxpayer’s work was given effect to, and where the outcome of the work occurred, was with the employer in Australia.
As a consequence, the ATO argued that notwithstanding that the taxpayer performed the work overseas in their country of residence, that the income was Australian-sourced and thus taxable in Australia.
This view starkly contrasts with Australia’s historical tax principles, double-tax treaty network and global, international standards.
The Crux of the Problem – Implications for Remote Workers
For Australian expatriates who work remotely for Australian employers the implications of the ATO’s policy reversal are profound!
It has significant implications, not only for remote workers, but for any foreign individual or business, seeking to provide services to any Australian consumer or business, particular where the service will be provided from countries without any tax treaty with Australia.
This abrupt policy shift reclassifies income that was traditionally viewed as foreign-sourced and exempt from Australian tax, to now being considered Australian-sourced, and fully taxable at non-resident rates.
These rates are notably high, commencing at 32.5% from the very first dollar earned mean that Australian expats who work remotely from overseas stand to lose at least one third of every dollar earned (at a bare minimum)! For Australians and others living in countries that do not have a tax-treaty with Australia, the ATO’s policy reversal will likely expose remote workers to extremely harsh, punitive double taxation.
Remote workers could find themselves in the dire double-taxation predicament of having their income taxed fully, both in Australia, and their country of residence, with no practical means to claim tax relief (in the form of foreign tax credits overseas, or foreign income tax offsets in Australia).
This abrupt change, and this scenario not only places an unfair and excessive financial strain on remote workers, but also raises serious concerns about the fairness, equity and consistency of the Australian taxation system and of the ATO’s management of that system.
This abrupt reversal of approach by the ATO, has been implemented without consultation, without new legislative provisions or guidance and without new judicial decisions or precedents, has raised substantial concerns among Australian expatriates, tax professionals, and among international businesses who also stand to be affected by this new stance.
The Case of the Taxpayer in Portugal: A Stark Example
Consider the case of a taxpayer residing in Portugal, a non-tax treaty country with Australia (Editors Note:Although Australia in the process of negotiating a tax treaty with Portugal, as at the time of writing, negotiations have not yet been concluded, and the treaty is not yet in force.) Under Portugal’s individual income tax code (Article 18 – 1(a)), the taxpayer’s income is considered Portuguese-sourced, as the employment activities are carried out in Portugal. Consequently, Portugal taxes the entire employment income at resident tax rates of up to 48%.
Simultaneously, the ATO’s new stance could deem this income as Australian-sourced, leading to an additional tax burden of up to 45% for the non-resident Australian. With no possibility of claiming foreign tax credits in either country due to the mismatch in ‘source’ interpretation, the taxpayer faces an effective tax rate approaching 93%. This outcome is not only unfair but also stands in stark contradiction to the principles of equitable and rational taxation.
Consider the example of an high income earning, Australian expatriate living in Portugal, a non-tax treaty country, who works remotely for an Australian employer.
Under Portugal’s individual income tax code (Article 18 – 1(a) of Código do Imposto Sobre o Rendimento das Pessoas Singulares), the taxpayer’s income is considered as Portuguese-sourced, as their employment activities are carried out in Portugal. Consequently, Portugal taxes the entire employment income at Portuguese resident tax rates of up to 48%.
Applying the ATO’s new stance, Australia deems that same income as Australian-sourced income becaused the benefit of the employee’s services are felt/received by the employer in Australia.
Thus, Australia taxes the person at non-resident tax rates of up to 45% (in addition to the tax levied by Portugal at 48%)
Where two countries tax the same income, double-taxation is usually avoided by the application of tax credits (tax paid in the foreign country).
However, despite being taxed in Australia, Portugal does not provide a Foreign Tax Credit for the income earned, as it’s not considered foreign-sourced from the Portuguese perspective.
Similarly, under section 770-10(3) of the Income Tax Assessment Act 1997 (ITAA1997), Australia similarly denies the person a Foreign Income Tax Offset because the tax paid in Portugal is on that the ATO deems to be Australian-sourced.
The outcome? The Australian expat, working remotely for their Australian employer faces an effective tax rate of up to 93%, a result that is grossly egregious, unfair and harshly punitive.
Inconsistencies with International Tax Norms and Australian Law
The ATO’s position diverges sharply from internationally accepted tax principles, such as those in the OECD Model Tax Convention, and from Australian common-law, as evidenced by cases like FC of T v French (1957), C of T (NSW) v Cam & Sons Ltd (1936), and FC of T v Efstathakis (1979).
With this latest approach by the ATO, Australia’s position is increasingly seen as being out of step with internationally generally accepted international tax principles. These principles, as laid out in the OECD Model Tax Convention and followed by most countries, including Australia (upon which most of Australia’s tax-treaties are), typically recognise the source of employment income as the location where the work is performed.
Additionally, Australian common-law, established through cases like C of T (NSW) v Cam & Sons Ltd, FC of T v French, and FC of T v Efstathakis, consistently identified the physical location of work performance as the determining factor for the source of employment income and there continues to remain significant judicial support for that approach to this very day.
Contradictions within Existing Australian Tax Legislation
Inexplicably, the ATO’s revised approach also conflicts with various sections of Australian tax law, including Section 83A-25(2) of the ITAA 1997 and Section 23AF and 23AG of the ITAA1936.
Each of these provisions distinguish between the employment income performed within Australia or performed overseas and all of which apply the principle that services performed outside Australia should not be taxed as Australian sourced income.
Furthermore, Section 27 of the Superannuation Guarantee (Administration) Act 1992, likewise distinguishes between employment services performed in Australia or overseas, such that superannuation is not required to be paid to non-resident employees who perform their work overseas!
Inconsistencies with Previous ATO Rulings
Historically, the ATO has issued numerous Private Binding Rulings (PBRs) affirming the approach taken in Australian common-law decisions (e.g. FC of T v French (1957), C of T (NSW) v Cam & Sons Ltd (1936), and FC of T v Efstathakis (1979)) that the source of employment income is where the employment activities are performed.
The abrupt reversal of this long-standing approach has introduced unnecessary uncertainty and concern among taxpayers, tax professionals and global service providers alike.
Broader Implications for Global Service Providers
As indicated previously, The ATO’s stance doesn’t just impact remote workers. In fact, it has far-reaching implications, potentially affecting a vast array of foreign remote workers, gig-economy participants, virtual assistants, and other foreign service providers.
If applied broadly, this stance could dissuade international businesses and individuals from engaging with Australian entities, fearing double taxation without relief and increased business costs.
Faced with significant Australian income tax liabilities based on where the service recipient is located, rather than where the services are performed, foreign service providers will likely be deterred from engaging with Australian businesses and consumers.
That outcome will likely increase costs for Australian businesses reducing Australia’s competitiveness internationally, and potentially risking Australia’s standing in international markets.
Potential Challenges and Australia’s Reputational Risk
This sudden policy shift by the ATO, without apparent consultation with stakeholders or the public, raises questions about Australia’s commitment to a fair and equitable taxation system and of the ATO’s commitment to fairness and impartiality, in the management of Australia’s tax system.
It poses risks to Australia’s global reputation as a fair and reasonable tax jurisdiction and it may discourage Australians from pursuing global opportunities.
Our Ongoing Battle for Fairness & Equity in Australian Taxation
At Expat Taxes, we are actively addressing these challenges, advocating for a fair and consistent application of tax laws.
As of the date of writing are in currently challenging the ATO’s policy reversal on this issue on behalf of one of our clients who risks being taxed on employment income in Australia, when previously this would have been tax-free.
To date we’ve lodged 180 pages of submissions to the Australia’s Tax Commissioner, and we’ve been advised that the issue has been escalated to very senior ranks with ATO, with our submissions being discussed and debated by the ATO’s Tax Counsel Network, and by the Chair of the Office of the Tax Council.
Our ongoing battle with the ATO is not just for one client but for all Australian expatriates who find themselves in similar situations. We are committed to ensuring that the principles of fairness, equity, and consistency in the application of tax laws are upheld.
For Australian expatriates and international service providers, the ATO’s policy shift represents a significant upheaval as it has significant implications for Australian expatriates and global commerce.
This sudden, unannounced policy reversal without public or stakeholder consultation highlights the need for fairness, equity, clarity and consistency in Australia’s tax legislation and in the administration of that system, not just for Australians but for the global community seeking to engage with Australian businesses.
Addressing this issue fairly and promptly in a manner that is consistent with the sprit and intent of Australian taxation law, and which accords with established Australian common-law principles and international tax norms is crucial.
Thus, we urge the ATO to reconsider its stance and align its practices with established legal principles and international norms.
Clarity and consistency in tax laws are crucial for maintaining taxpayer confidence and compliance, and for preserving Australia’s standing in the international community.
Got Questions? Reach Out
If you believe that you may be impacted by these developments, have any questions, or are feeling worried or concerned about the potential implications for your tax situation, please do not hesitate to reach out to us at Expat Taxes.
With over 16 years of experience working in the expatriate tax space and clients located in over 100 countries worldwide, our team of experienced expatriate tax professionals are well-placed to assist specific solutions tailored to your unique situation.
We understand the complexities and nuances of tax issues faced by Australian expats and are dedicated to helping you navigate these challenges effectively.