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Pay As You Earn

PAYE Bulletin 6

Deducting Tax from Payments made to Australian Residents Working Overseas and to Non-residents Working in Australia An Employer's Guide

Date of Issue: 1 July 1999


Valid from 1 July 1999

About this bulletin

This bulletin explains in general terms the obligations of employers under the Pay As You Earn (PAYE) system in regard to payments of salary and wages to employees who are:

  • A. Australian resident employees working overseas; or
  • B. Non-resident employees working in Australia.

Who is an Australian resident?

The word resident is used in the Income Tax Assessment Act 1936 to describe a person who lives in Australia, including a person:

  • • whose place of residence is in Australia, unless the Commissioner is satisfied that their permanent place of residence is outside Australia;
  • • who has actually lived in Australia for more than one half of the year of income, unless the Commissioner is satisfied that their usual place of residence is outside Australia and that they do not intend to live permanently in Australia; or
  • • who is either a member of the Superannuation Scheme established under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976 or is the spouse or child under 16 years of age of either of the above.

A non-resident is simply a person who is not a resident.

Employees who are in doubt as to their residency status should contact the Tax Office for assistance.

A. Australian resident employees working overseas

Generally, Australian residents are required to pay tax in Australia on income from Australian and overseas sources. Income tax law, however, exempts from tax certain income earned from:

  • • employment overseas; or
  • • approved overseas projects.

This law applies to Australian resident employees who are employed overseas for at least 91 days. Where an Australian resident employee meets the requirements of these exemption provisions, employers do not have to make tax instalment deductions from the relevant payments of salary or wages.

Employers who are unsure whether the period of employment overseas meets the requirements for exemption should contact the Tax Office for assistance.

Even if the income earned is exempt, details of this income should be provided to employees as they will need it to prepare their income tax return.

Income from overseas employment

Income received by an Australian resident taxpayer from overseas employment consisting of at least 91 days foreign service is exempt from tax if certain conditions are met.

If the income is exempt, employers are not required to make tax instalment deductions from these payments.

What is foreign service?

Foreign service is a period of employment in a foreign country as an employee or an office holder. For the purpose of defining foreign service, an employee includes a person employed by a government or an authority of a government, by an international organisation or by a member of a disciplined force.

The total period of foreign service includes:

  • • a period where the person is absent from work on recreation leave which is attributable to the foreign service; or
  • • absences due to accident or illness, including short term compassionate leave, as approved by the employer.

Periods where the person is on long service leave, leave without pay or reduced pay do not form part of foreign service.

What is foreign earnings?

Foreign earnings means income consisting of salary, wages, commissions, bonuses and allowances. Foreign earnings do not include:

  • • continuing pensions, annuities or superannuation payments;
  • • exempt foreign termination payments;
  • • the tax free amount of a bona fide redundancy payment or of an approved retirement scheme payment made on or after 1 July 1994;
  • • payments made by way of an advance loan, restraint of trade payments or payments for personal injury; or
  • • transfers between superannuation funds.

A full exemption from Australian income tax on foreign earnings will not apply if this income is exempt from tax in the foreign country solely because of a:

  • • double tax agreement or a law of a country giving effect to such an agreement; or
  • • law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations; or
  • • general feature of that country's law in relation to employment income, for example, tax havens.

Employers are required to make tax instalment deductions from foreign earnings if any one of these three exceptions apply.

Double tax agreements

Australia has entered into international agreements called 'double tax agreements' with a number of other countries to transfer taxing rights and to prevent tax avoidance.

The general purpose of these agreements is to:

  • • reserve taxing rights over certain classes of income entirely to the country of residence of the person earning the income; and
  • • ensure that all other income earned by that person is taxed in the country in which the income is earned.

Where the income is taxed both in the country of residence and the country in which it is earned, a credit is granted by the country of residence against the tax levied by the foreign country.

Approved overseas project

An 'approved overseas project' is an eligible project which is, or will be, in the national interest, and is approved by the Minister for Trade. Under current arrangements, applications for approved project status should be made to Austrade (the Australian Trade Commission).

Income earned by an Australian resident taxpayer from at least 91 days foreign service on an approved overseas project is exempt from tax.

If the Australian resident employee will be engaged in foreign service for at least 91 days employers are not required to make tax instalments deductions from these payments.

Living away from home allowance

If a living away from home allowance is paid to employees whilst working overseas a Fringe Benefits Tax liability may arise. If you have any questions about this call the Fringe Benefits Tax Hotline on 13 33 28 .

B. Non-resident employees working in Australia

Employers are required to make tax instalment deductions from payments of salary or wages made to non-resident employees for work undertaken in Australia. These tax instalment deductions should be made according to the Non-resident Tax Instalment Schedule. Non-residents are not entitled to receive the general exemption, (i.e. the tax free threshold).

An employee will indicate their residency status on their Employment Declaration form. Employees should contact the Tax Office for assistance if they are uncertain about their residency status for taxation purposes.

An employer wanting to employ an overseas visitor in Australia should ensure that this person is able to work legally in Australia. Visitors, other than New Zealand citizens, must hold a current visa which allows them to work in Australia. A Tax File Number, driver's licence, bank account, Medicare card or referral from Centrelink is not evidence that a person is entitled to work in Australia. It is also important to remember that a person holding a working visa is not a resident of Australia.

Tax instalment deductions are not required when paying salary or wages to a non-resident employee for work to be undertaken overseas, as this income is specifically exempt from income tax.

For further information on establishing a person's rights to work in Australia, see the section called 'Who is entitled to work?' in the PAYE Employers' Payment Book, or contact the Department of Immigration and Multicultural Affairs on 13 18 81 .

Eligible termination payments

The same source and residency rules that generally apply under income tax law also apply to eligible termination payments.

In particular, a non-resident is subject to tax in Australia on an eligible termination payment if it is derived from sources in Australia. The source of a superannuation fund is the location of the particular fund or branch of the fund against which the payment is finally charged, and not the place where the employee's work is undertaken. An eligible termination payment charged against a superannuation fund that is established and controlled in Australia has its source in Australia.

Tax instalments should be deducted from all eligible termination payments sourced in Australia. Where eligible termination payments are sourced in a foreign country, tax instalments need only be deducted where these are paid to an Australian resident.

Examples

1. Sven has come to Australia from Sweden. He has a working visa and you want to employ him for December and January. He indicates that he is not an Australian resident on his Employment Declaration. Sven is not entitled to the general exemption and you should deduct tax according to the rates in the non-resident schedule.

If Sven did not provide you with a completed Employment Declaration, or did not provide a Tax File Number on this form, you should deduct tax at the highest marginal rate.

2. Joe, an Australian resident, has been asked to set up a company branch in China. This is expected to take a year to finalise, during which time Joe will be paid by his Australian company. His employer wants to know whether tax instalments should be deducted from payments made to Joe.

As this employment contract will be for more than 91 days continuous foreign service, and assuming that the exclusions to this exemption do not apply, this income will be exempt from tax in Australia. Joe's Australian employer is not required to make tax instalment deductions from these payments.

3. ABC Pty. Ltd. wants to establish a subsidiary outlet in Russia. Trevor, an Australian resident employee, has been asked to research the viability of this initiative. As part of this task he will be working in Russia for two months. ABC Pty. Ltd. want to know whether they should deduct tax instalments from payments made to Trevor during this time.

As he is an Australian resident and his period of foreign service is less than 91 days, the employer is required to deduct tax instalments from payments made during this period.

4. Danielle, a senior lecturer at a leading NSW University, has been sent to France by the University to teach for 15 months. Danielle remains a resident of Australia. She will be overseas for longer than 91 days, but the income she will receive is exempt from tax in France solely as a result of the French Double Tax Agreement. The NSW University, therefore, is required to make tax instalment deductions from payments of salary or wages made to Danielle during this period.

Do you need more information ?

If you have any questions or need more information about deducting tax from payments made to Australian residents working overseas or to non-residents working in Australia, you can contact your local Tax Office:

  • • by telephone on our national enquiry number 13 28 66 . You can ring this number from anywhere in Australia for the cost of a local call;
  • • in person by visiting the enquiries counter at the Tax Office. Addresses for the Tax Office are listed in TaxPack, as well as in the White Pages telephone directory;
  • • by A Fax from Tax, our 24 hour fax information service. Simply call 13 28 60 (local call cost) on your phone or fax and follow the voice prompts; or
  • • at our Internet site, ATOassist www.ato.gov.au

Flow chart of employer's PAYE obligations for payments made to resident employees performing services overseas

ATO references:
NO NAT 2613-7.99

Related Rulings/Determinations:
PAYE Bulletin 6 - Notice of Withdrawal


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