COVID-19 and the creation of a permanent establishment in Australia
Australia closed its borders to foreign travellers in March 2020 and caught foreign nationals off-guard with their inability to return home. So what happens from a tax residency perspective when the presence of employees in Australia triggers scrutiny on permanent establishment?
One of the unintended consequences of Australia’s COVID-19 travel restrictions is whether the presence of employees in Australia for longer periods of time could cause non-resident businesses to have a permanent establishment in Australia.
However, in what has been an extraordinary 18 months, the Australian Tax Office has released new guidance on what happens to companies with employees in Australia that are unable to return home and what may cause it to consider whether permanent establishment has occurred.
How will the ATO approach the possibility of permanent establishment?
The guidance indicates that for the period up to 31 December 2021 the ATO will not be applying compliance resources to determine whether a permanent establishment arises if:
- The business did not otherwise have a permanent establishment in Australia before the effects of COVID-19;
- The temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions;
- Those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions; and
- The business has not recognised those employees as creating a permanent establishment or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.
Start planning now if your arrangements are likely to continue into 2022
From 1 January 2022, foreign companies will need to consider whether ongoing arrangements give rise to permanent establishment in Australia, which could be a risk from a tax perspective.
We recommend engaging with Bates Cosgrave early to understand the implications of ongoing arrangements after that date and where necessary, engage with the ATO on your behalf.
Contact our International Tax Team on 02 9957 4033 if you or your business are impacted by travel restrictions within Australia.
Last updated July 2021. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.