PAYG withholding and employees who work in a foreign country
PAYG withholding and employees who work in a foreign country
If you have any employees that are working in a foreign country, you need to be aware of your pay as you go (PAYG) withholding obligations.
Foreign earnings that do not meet any of the exemption conditions are assessable income and subject to PAYG withholding requirements. These earnings should be included in your employee's income tax return as assessable income. They may be entitled to a foreign income tax offset for amounts of foreign tax paid.
Some payments for foreign services that relate to certain development projects, and charitable or government activities are exempt from tax - see Who is entitled to an exemption?
If you have any employees working in a foreign country and their payments do not meet any of the conditions to be exempt, you should:
If an employee is not a resident of Australia, then you do not withhold tax.
Who is entitled to an exemption?
Employees are only eligible for the foreign employment exemption if they are an Australian resident individual who earns foreign employment income from continuous foreign service of 91 days or more and their employment must be directly attributed to:
- your delivery of Australian official development assistance
- your activities in operating a public fund declared by the Treasurer to be a developing country relief fund; or a public fund established and maintained to provide monetary relief to people in a developed foreign country that has experienced a recognised disaster
- your activities as a prescribed charitable or religious institution that is exempt from Australian income tax because the prescribed institution is located outside Australia or pursues its objectives outside Australia
- their deployment outside Australia as a member of a disciplined force (if you are part of the Australian Government or an authority of the Australian Government).
Australian official development assistance (ODA) is delivered through the Australian Government's overseas aid program, which is administered by the Department of Foreign Affairs and Trade and the Australian Agency for International Development (AusAID).
Michelle is employed by AusAID. She is posted to the Solomon Islands, for 150 continuous days, as a project advisor on an Australian ODA project aimed at improving the quality of early childhood education.
Michelle's foreign service is directly attributable to the delivery of Australian ODA by her employer. Therefore, her foreign earnings for this period are eligible for the foreign employment exemption.
Eric is a motor mechanic employed by Nordic Engineering Pty Ltd - a private company contracted to provide personnel who deliver AusAID development programs. Eric is employed to teach young people motor mechanic skills. He is posted to Vanuatu for 180 continuous days.
Eric's foreign service is directly attributable to the delivery of Australian ODA by his employer. Therefore he is eligible for the foreign employment exemption on his foreign earnings.
A public fund must be either a developing country relief fund or public disaster relief fund.
Developing country relief fund
A developing country relief fund is a fund established by an organisation solely for the purpose of providing relief to people of a developing country as declared by the Treasurer.
The organisation must be an approved organisation as declared by the Minister for Foreign Affairs. The country must be a developing country as declared by that Minister.
Maria is a social worker employed by Peace Group - a charitable organisation that provides assistance to developing countries. Maria is posted to Nigeria for 120 days to help provide relief to people in distress.
Peace Group is an organisation that has also been approved by the Treasurer as operating a developing country relief fund.
Maria's is eligible for the foreign employment exemption on her foreign earnings.
Public disaster relief fund
A public disaster relief fund is a fund established and operated by a public benevolent institution in response to an event recognised as a disaster.
In order to be eligible for the foreign employment exemption, a person must work for a prescribed charitable or religious institution that is exempt from Australian income tax.
Such organisations are either:
- located outside Australia
- have a physical presence in Australia but incur their expenditure and pursue their objectives principally outside Australia.
A disciplined force refers to a defence force, including a peacekeeping force and a police force.
A person is eligible for the foreign employment exemption if their foreign service is directly attributable to deployment outside Australia as a member of a disciplined force by an Australian Government (or an authority of the Australian Government).
If you have an employee working in a foreign country and their earnings do not meet any of the conditions to be exempt, you may need to:
You do not need to issue a payment summary to a non-resident of Australia who is employed by you in a foreign country and works in a foreign country.
You will need to provide this payment summary if the earnings are not exempt and any of the following conditions apply:
- You have withheld and paid foreign tax to a foreign government on behalf of your employee.
- Your employee is in any foreign country for a consecutive period of at least 60 days.
- The earnings have a foreign source.
The period of 60 consecutive days commences at the time that the employee starts work in the foreign country. This period includes non-working days and will end if an employee returns to Australia.
Kai is an accountant who goes to the USA to work with the parent company, but continues to be paid by his Australian employer. Kai's duties with the foreign country are unrelated to the work that he performs for his Australian employer. Kai works with the parent company from 22 February 2011 to 16 May 2011, and during this time returns to Australia for the period 20 April to 27 April 2011. Although Kai is in the USA for more than 60 days, he is not there for a consecutive period of more than 60 days. Kai's Australian employer would only be required to report the earnings and amounts withheld on a PAYG payment summary - foreign employment if they determine that the earnings have a foreign source. After reading When does a payment of foreign earnings have a foreign source? Kai's employer would determine that the earnings do in fact have a foreign source.
Earnings have a foreign source where:
- the work is performed offshore and foreign tax was paid
- the business paying the person is located offshore
- the work was not incidental to work performed in Australia.
Generally, earnings do not have a foreign source where an employee:
- attends a conference
- travels on work
- undertakes the work as an incidental part of their Australian activities.
Harry works for a software developer company in Australia. In May 2011, as part of a contract held by the company, Harry is required to go to New Zealand for a period of six working days to present and test some software. During these six days, Harry continues to be paid by his Australian employer. Harry's employer determines that his earnings for the six day period would not have a foreign source. As such, Harry's employer would not be required to provide him with a PAYG payment summary - foreign employment.
Renee's Australian employer sends her to Hong Kong for two weeks to finalise an important acquisition. Whilst in Hong Kong, Renee is offered an opportunity to stay there for a further four weeks by an affiliate company. Although this work is unrelated to her duties in Australia, her Australian employer agrees to continue to pay her as it is seen to be a good opportunity to develop Renee and the relationship with the affiliate. For the initial two week period, Renee's employer determines that her earnings do not have a foreign source, and payments made and tax withheld will be reported on the PAYG payment summary - individual non-business form.
For the following four week period, however, Renee's employer determines that her earnings do have a foreign source and these will need to be reported on a PAYG payment summary - foreign employment.
Reduction of PAYG withholding amounts to take into account foreign tax
If your employee's foreign earnings are assessable in Australia and you withhold and pay tax to a foreign government on their behalf, you should reduce the PAYG withholding amount that would normally be withheld in Australia by the Australian dollar equivalent of the amount of tax withheld and paid to the foreign country.
If the resulting Australian withholding amount is zero or negative, there is no amount to withhold.
Norman is an Australian resident who has been sent to work in Papua New Guinea for four months from July 2010. Norman will be paid in local currency, the Papua New Guinea Kina (K), by his Australian employer. He receives K3,850 weekly. You have established that you are required to withhold $598.84 (AUD) for Papua New Guinea income tax.
Norman has claimed the tax-free threshold with respect to his Australian employment but is not eligible for any tax offsets. He does not have a Higher Education Loan Program or Student Financial Supplement Scheme debt. Norman is not entitled to leave loading.
For the purposes of this example, the exchange rate that applies for converting Papua New Guinean kina (K) to Australian dollars (A$) is 2.36.
Convert the earnings in K to A$:
Calculate the Australian amount to be withheld from the amount calculated at 1, in accordance with the relevant pay as you go withholding tax table:
Amount to be withheld from $1,631.99
Convert the amount withheld and paid to the foreign country to A$:
Reduce the amount calculated at 2 by the amount calculated at 3:
Amount to be withheld = $397 - $598.84
Round to the nearest dollar
The amount to be withheld for Australian PAYG withholding purposes from the payment of K3,850 is A$0.
You will only be required to apportion leave that has accrued from employment in a foreign country where the foreign employment has resulted in earnings that are either exempt from tax or required to be reported on a PAYG payment summary - foreign employment.
Suresh worked for her Australian employer in Fiji for a period of 12 weeks. Her employer determines that the earnings from this period of foreign employment are required to be reported on a PAYG payment summary - foreign employment, as she was in Fiji for 84 consecutive days. During this time, Suresh accrued one week of annual leave. That week's leave, when taken, would need to be reported on a PAYG payment summary - foreign employment.
If you have an Australian resident employee who works overseas and their foreign employment income is not exempt, you may have a fringe benefits tax liability.
A fringe benefits tax liability may arise where you provide a fringe benefit to an employee (or associate).
You may also be required to record the value of fringe benefits provided to an employee if the grossed-up value of the fringe benefits provided exceeds $2,000 in a fringe benefits tax year. This amount should be recorded on a payment summary provided to your employee.
You may be liable for a failure to withhold penalty if you do not withhold amounts from payments to Australian resident employees engaged in overseas service.
However, the penalty may be waived if you:
- were not aware that you were required to withhold from payments
- your systems could not be updated to do this for you.
Payers in this situation should phone us on 13 28 66.
Last Modified: Friday, 14 September 2012