The COVID-19 pandemic caused fundamental changes in the way employees managed their roles. In many cities, remote working moved from being an employee benefit to the “new normal”. As many Melburnians will attest, this has changed the business landscape.
The downstream effect is a shift in how companies now attract and manage talent. Some employers have leveraged the opportunity to open the talent pool into new geographies (or internationally) by employing candidates on a permanent remote basis.
So where does leave your business in respect to taxation implications? Here are two considerations which are important to stay across if you have a remote workforce – especially across different regions.
New deduction method available for Individuals working from home during COVID-19
The ATO has introduced a temporary shortcut method to simplify the way in which individuals can claim deductions for work from home expenses. You can claim a deduction of 80 cents for each hour you worked from home for the period between:
- 1 March 2020 to 30 June 2020 in your 2019–20 tax return
- 1 July 2020 to 30 June 2021 in your 2020–21 tax return.
- Were working from home to fulfil your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls.
- Incurred additional running expenses as a result of working from home.
Important: It is critical to note that records such as a timesheet must be kept as evidence. Individuals can also use the Fixed rate method or Actual cost method to claim work from home deductions.
Permanent Establishment risk for foreign companies employing Australians to ‘work remotely’
The ATO has publicly stated that it will implement a relaxed compliance approach for determining whether a permanent establishment (PE) has been created by a foreign company until June 30, 2021 with regard to employees displaced by COVID-19 and temporarily working in Australia.
The end to the ‘relaxed approach’ is inevitable, however the trend of employers from foreign jurisdictions hiring individuals to ‘work from home’ in Australia is showing no signs of slowing down. This will expose many employers to potential PE risk that must be carefully assessed. Determining whether a PE exists usually requires an in-depth analysis of the facts of the specific employment situation and the applicable Double Taxation Agreement (if Australia has an agreement with the relevant foreign country).
In the past, the ATO has ruled that taxpayers do have a PE in Australia despite their only presence being the home of an employee who is performing their duties in a ‘work from home’ arrangement. Australia is not alone with this view, as in Georges Simenon v. Commissioner of Internal Revenue (1965) 44 T.C. 820 the United States Tax Court held that an authors home office was a PE as it was a fixed place of business where an enterprise was carried on.
Ultimately whether a PE exists is a question of fact to be determined on the specific facts and circumstances of each case. As a general rule, the more significant the scope, breadth, and permanence of activities, the greater the likelihood that a PE exists.
Whilst these are two key alerts that Andersen in Australia have identified with respect to ‘work from home’ arrangements, it is crucial to note that there are a range of other factors that employers and individuals must be aware of. Please contact your Andersen in Australia advisor if you need more information or guidance through managing these changes.