The ATO recently (3 February 2021) updated its guidance on ‘whether the presence of employees in Australia, due to the impacts of COVID-19, may create a permanent establishment’.
The updated guidance, applicable until 30 June 2021, states that the ATO:
‘will not apply compliance resources to determine if you have a permanent establishment in Australia if:
- you 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
- you have 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.’
Whether a person has a permanent establishment in Australia depends on the domestic definition and, if Australia has a Double Tax Agreement (DTA) in place with the foreign country where the person is located, the definition is in the respective DTA.
A ‘permanent establishment’ is defined in the ITAA 1936 as ‘a place at or through which the person carries on any business’. The definition is then expanded by referring to specific matters that will be treated as a permanent establishment such as, a place where the person is carrying on business through an agent, or has, is using or installing substantial equipment, or is engaged in a construction project.
There is no express reference in the domestic definition to a person having a permanent establishment if they have employees in Australia. However, where a person has employees in Australia this is a general indication that the activities of the employee are part of the activities of the person who employs them. We do note that excluded from the definition of permanent establishment is:
‘a place where the person is carrying on business through an agent … who does not have, or does not habitually exercise, a general authority to negotiate and conclude contracts on behalf of the person’.
By way of illustration, we will refer to the Australia-USA DTA.
The definition of permanent establishment in the AUS-USA DTA ‘means a fixed place of business through which the business of an enterprise is wholly or partly carried on’.
Similar to the domestic definition it goes on to expressly include or exclude certain activities, and states that:
an enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State if:
(a) it carries on business in that other State through a person, other than an agent of independent status to whom paragraph (5) applies, who has authority to conclude contracts on behalf of that enterprise and habitually exercises that authority in that other State, unless the activities of such person are limited to those mentioned in paragraph (3) which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph’
We note that the terms of the DTA take priority over the domestic definition.
Therefore, according to the AUS-USA DTA, where a person (e.g. a foreign (US) company) has employees in Australia, and those employees work from a ‘fixed place’ (e.g. an office rented by the US company that is made available to the employees in Australia), this would be sufficient for that ‘fixed place’ to be a permanent establishment in Australia.
However, in the context of COVID-19 and travel restrictions it is possible that a US company does not have any office in Australia but due to travel restrictions may have had employees temporarily caught in Australia. Such circumstances where employees were caught by travel restrictions could include either:
- from time to time the US company had sent employees of the US company to engage with Australian customers. For example, US employees were in Australia to discuss new business, and possibly negotiate terms of new contracts, etc; or
- employees of the US company were in Australia on holidays.
In both cases, if travel restrictions were imposed and the employees were not able to return to the US, they would be in Australia and continuing to carry on their normal duties as employees.
In such circumstances, even if there is no obvious fixed place (e.g. no office) and the employees were ‘working from home’ (such as in a hotel, serviced apartment or rented residence), this may be considered a ‘fixed place’, and a permanent establishment.
Even if it is assumed there is no fixed place, further enquiries will need to be made to determine if those employees have the authority to conclude contracts in Australia on behalf of the US company and whether they do in fact habitually exercises that authority whilst in Australia. Again, where this is the case, such activities would only be considered a permanent establishment if those decisions were in relation to activities other than those listed in subparagraph (3) (which essentially refers to activities that are deemed not to comprise a permanent establishment).
So, if circumstances arise where employees of a foreign entity find themselves in Australia, the ATO’s updated guidance indicates that provided each of the conditions contained in the ATO’s guidance are met, the ATO will not apply compliance resources to determine if the foreign person has a permanent establishment in Australia.
So let’s look at the conditions:
You did not otherwise have a permanent establishment in Australia before the effects of COVID-19
This is a question of fact, but let’s assume this condition is met.
The temporary presence of employees in Australia continues to solely be as a result of COVID-19 related travel restrictions, and those employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions
This condition will only be met where the employee remains in Australia solely as a result of COVID-19 related travel restrictions. Where there are clear travel restrictions this test may be easier to meet. However, there may be circumstances where restrictions are eased gradually or temporarily, and/or re-imposed with new infections or outbreaks. Other factors to be considered include whether the person is able to re-enter their home country. If it is possible for the person to depart Australia, but there are external circumstances making it difficult to depart (such as limited seat availability), this may or may not cause this condition to be met. We further note that travel restrictions that apply to Australian residents/citizens may not apply to foreigners seeking to return home. Also, if a person chooses not to leave due to other factors (inflated costs, home country entry restrictions or quarantine requirements, etc) this may cause this condition to not be met.
You have 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
Again, this is a question of fact.
The ATO’s updated guidance is welcome and takes into account the unusual circumstances we all find ourselves in since the COVID-19 pandemic. It also highlights how such unexpected events outside the control of the business could give rise to inadvertent tax consequences. Hopefully, if such matters are reviewed, the tax authorities will exercise practical judgement and common sense.
This article provides a general summary of the subject covered and cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.