Working with overseas, non-resident workers can be a great opportunity for Australian businesses, but it also brings some important tax responsibilities. Let’s break this down in simple terms to help you understand the basics.
Understand the Worker’s Status
Before anything else, you need to figure out if the worker is an employee or an independent contractor. This is important because tax rules apply differently to each type. The Australian Taxation Office (ATO) provides guidance on this in their Employee or Independent Contractor resource, but if you’re unsure, seeking professional advice is a good idea.
Tax Rules for Employees
If the worker is classified as an employee and they are not a resident of Australia for tax purposes, here are the main things you should know:
- Tax on Income
Non-resident employees are generally taxed in Australia only on income earned from an Australian source. For instance, if the work is done entirely overseas, it might not be taxed in Australia.
However, you must check if a Double Tax Agreement (DTA) between Australia and the worker’s home country applies. Australia has around 45 DTAs, which help decide how income is taxed in such cases. For example, the DTA between Australia and the Philippines (Article 15) typically prevents Australia from taxing income unless the work is done within Australia.
- PAYG Withholding
Normally, you don’t need to withhold Pay As You Go (PAYG) tax if the employee is a non-resident and earns income from a foreign source. - Superannuation
If the worker is a non-resident and performs all work overseas, superannuation contributions are not required under Australian rules. However, you’ll need to check the worker’s local laws to see if superannuation or similar payments are necessary in their home country. - Local Tax Advice
It’s essential to get advice from a tax expert in the worker’s home country. They can guide you on obligations like withholding taxes or pension contributions.
Tax Rules for Independent Contractors
If the worker is a genuine independent contractor (or operates through a trust or company), here are the key points:
- Tax on Income
Non-resident contractors are taxed in Australia only on income earned from an Australian source. For example, under Article 7 of the DTA with the Philippines, Australia generally cannot tax the contractor’s income unless they have a permanent establishment in Australia. - PAYG Withholding
In most cases, you won’t need to withhold PAYG tax if:- The contractor has an Australian Business Number (ABN).
- The DTA prevents Australian taxation.
- The contractor isn’t conducting a business in Australia.
If the contractor works entirely overseas with no physical presence in Australia, they likely don’t carry on a business in Australia.
- Reporting to the ATO
Payments to foreign contractors might need to be reported in the Taxable Payments Annual Report (TPAR) if your business operates in areas like construction, cleaning, IT, or security services.
What About Permanent Establishments?
Hiring overseas workers could lead to your business being seen as operating in their home country. This is called a permanent establishment, and it might mean you have to pay tax in that country.
A permanent establishment usually refers to having a fixed place of business in another country, like an office or warehouse. However, each DTA has its own definition, so it’s important to understand how the rules apply to the specific country you’re working with.
Why Get Professional Advice?
The rules around international workers and taxes can get complicated quickly. Mistakes can lead to unnecessary taxes or penalties. That’s why it’s always a good idea to:
- Seek advice from tax professionals in both Australia and the worker’s home country.
- Understand your obligations clearly to avoid surprises.
By handling these details carefully, you can focus on making the most of your international partnerships while staying on the right side of the law.
Pitt Martin Group is a CPA accounting firm, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
Pitt Martin Group qualifications include over fifteen years of professional experience in accounting industry, membership certification of the Australian Society of Certified Practising Accountants (CPA), Australian Taxation Registered Agents, certified External Examiner of the Law Societies of New South Wales, Victoria, and Western Australia Law Trust Accounts, membership certification of the Finance Brokers Association of Australia Limited (FBAA), Registered Agents of the Australian Securities and Investments Commission (ASIC), certified Advisor of accounting software such as XERO, QUICKBOOKS, MYOB, etc.
This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
By Angela Abejo @ Pitt Martin Tax
