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Issue 3: Expanding business into Australia - a tax perspective

Any great journey begins with a single step

This Issue:

  • Secondment of Staff
  • Residency and Source
  • Operation of DTAs
  • Employer Obligations

The idea of tapping into a new market may seem easy enough, but the difficulty is knowing where to start. Although new horizons present new opportunities, there are also underlying risks and uncertainties associated with new or unfamiliar business environments. This is the dilemma faced by virtually all growing businesses, especially those wanting to expand globally.

Knowing and understanding new markets is therefore critical to business expansion. Seconding staff for this purpose is often a strategic and cost effective way for your business to take its first step in charting new markets.

Secondment of Staff

There may be one, two or perhaps several employees within an organisation who are central to its operations and will be crucial to its growth. Secondment of such personnel to Australia for the purpose of assessing business opportunity and risks or even determining where to establish a local branch or operations can assist greatly in finding the inside track before any commercial decisions to expand are made.

Although seconding employees to Australia may be a practical strategic move, consideration must also be had of the associated taxation implications.

Income Tax Implications

Various taxation issues may arise when an overseas employer seconds an individual employee to live and work in Australia, even if only temporarily. Careful forward planning is therefore fundamental to ensure such activities to not trigger avoidable Australian income tax imposts on the overseas employer.

Taxation of an Australian Permanent establishment

Even though an overseas employer may have no or minimal physical business presence in Australia, they can still be subject to Australian income tax.

Of importance to overseas entities are double taxation agreements (DTAs) that Australia has entered with a number of its major trading partners. Broadly, DTAs determine which signatory state has taxing rights over income potentially attributable to more than one source. Ultimately, this prevents double taxation. Importantly, however, DTAs also contain provisions that potentially apply in a secondment context.

Under DTAs, Australian sourced business profits or income will generally be taxable in Australia to the extent that those profits are attributable to an Australian ‘permanent establishment’ (PE). PEs are commonly defined to include branches, offices, factories and other fixed business premises.

In a secondment context, however, where an employee habitually exercises authority on behalf of an employer to conclude contracts in Australia, many of Australia’s DTAs will deem the employer to operate an Australian PE. To this end, business income/profits attributable to these contracts will generally levy Australian income tax. For this reason, it is important to consider the specific role and autonomy of seconded employees whilst in Australia.

There are helpful exceptions to the DTA PE rules. For instance, premises maintained for limited purposes such as storage, collecting information or conducting activities of a preparatory or auxiliary nature generally do not qualify as PEs exposed to Australian income tax. Further, contracts concluded by seconded employees for these limited purposes are unlikely to enliven the PE rules.

Corporate Tax Residency

Where the overseas employer is a company, there is further potential that it may be an Australian tax resident even though not incorporated in Australia. This will occur when the company carries on a business in Australia and its ‘central management and control’ are also located in Australia.

For this reason, it is important to consider whether the seconded staff member is, either currently or will be, heavily involved in high level strategic and managerial decision making of the overseas company. If the seconded employee merely reports back to their employer and in turn the company board, this is less likely to be a concern. However, this assessment should be made on a case-by-case basis.

Other Obligations

Given the breadth of the income tax considerations alone for an overseas entity when seconding staff to Australia, it is easy for overseas employers to be caught out by their additional Australian legal obligations. You may recall some of these obligations were highlighted in Issue 2. Critically, these obligations can apply even where an employer itself is not an Australian tax resident.

PAYG Withholding

Broadly, the ‘pay as you go’ (PAYG) regime requires employers to withhold income tax on an employee’s salary/wages and remit this to the Australian Taxation Office. An overseas employer will be subject to the PAYG regime where a seconded employee is considered an Australian tax resident.

An individual’s Australian tax residency is determined by various statutory tests as interpreted by Australian Courts. These intricate and complex tests need to be assessed on a case-by-case basis. However, the activities and length of stay of a seconded employee are important considerations in determining whether they are an Australian tax resident. As a rule of thumb, if the employee resides in Australia for more than half the income year, they will be an Australian tax resident unless their usual place of abode is outside Australia.

There can be circumstances where the employee will be a dual tax resident of Australia and their country of origin. In turn, both jurisdictions will seek to tax their income. In these instances, regard must again be had for Australia’s DTAs, which contain various “tiebreaker” rules to determine an individual’s tax residency status and the source of their income. Ultimately, this informs which jurisdiction has the right to levy income tax on their salary and wages.

Matters can be further complicated where an employee is not only a dual tax resident, but a dual resident for immigration purposes. Fortunately, administrative relief is available for employers in respect of their PAYG obligations upon application to the ATO.

Fringe Benefits Tax (FBT)

Wherever an employer has PAYG withholding obligations, in turn they will also be subject to the FBT regime. You will recall from Issue 2 that fringe benefits tax is payable on certain non-cash remuneration paid or provided to employees and/or their associates.

Superannuation

All employers are required to make superannuation contributions on behalf of employees working in Australia subject to limited exceptions.

Where overseas employers are concerned, Australia has entered into a number of bilateral social security agreements with some of its major trading partners. For administrative ease, these agreements enable overseas employers to enter into arrangements with their domestic taxation or social security authority. The effect of these arrangements is to ensure the overseas employer is only required to pay superannuation or related benefits as required by their own domestic laws rather than be subject to Australian superannuation obligations.

For jurisdictions where these agreements do not exist with Australia, it is likely that compulsory superannuation contributions will have to be made by employers on behalf of its seconded staff members.

Payroll Tax (PRT)

Liability of employers for state-based PRT on employee wages (refer to Issue 2) may arise whenever an employee performs services within an Australian State or Territory. However, an employer will only be subject to the PRT regime once total employee salary/wages exceed maximum monthly thresholds that extend into tens of thousands of dollars per month. Although on its face PRT may not be an immediate concern for overseas employers, it may potentially determine the type and/or number of staff which are seconded by an employer to Australia.

Workcover

Although not a direct taxation consideration, employers also need to be aware of worker insurance and compensation schemes operating within each state and territory. Appropriate workers compensation needs to be arranged accordingly, unless a limited exception applies.

Next Issue

Now that we have broadly considered your first steps of seconding staff to Australia, in our next issue we consider the tax implications of a business taking its next step on its journey into Australia in establishing a domestic Australian company.

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