In addition to the information provided in our preparation article, a new Phase 2 requirement is to assign an income type for each payment made to an employee. There may be instances throughout the financial year where payments are reported against multiple income types. For example, a working holiday maker who has then been granted permanent residency would change from a 'Working holiday maker' income type to 'Salary and wages' income type.
For a short video on income types and country codes click here.
Some income types also require a country code to be reported. For example, if you make a payment to an Australian resident working overseas, you'll need to provide information about the host country. This requirement is explained in further detail below against each income type description.
Configuring an employee's income type classification for STP purposes is done via the employee's Pay Run Defaults screen or Tax File Declaration screen, depending on the employee's circumstance. Specifically, an employee's income type will either be configured via the:
- 'STP income types' dropdown in the Pay Run Defaults screen (this is a new section that will be available to users in the coming weeks)
or - 'Tax calculation options' section in the Tax File Declaration screen
Income types
Following is a description of each income type and instructions on how to assign the appropriate type (and country code, if required) against an employee:
- Closely held payees/employees: An employee who is directly related to the entity, from which they receive payments, such as family members of a family business, directors or shareholders of a company, or beneficiaries of a trust. Where employees have already been classified as closely held in platform, there is no further configuration required. This setting has been consolidated with the other income type settings in the employee Pay Run Defaults screen and will be retained when the new settings are made available. For new employees, you can select the closely held income type by selecting the 'Closely held employee' option from the 'STP income types' dropdown in the Pay Run Defaults screen. A sub-setting option will appear that must also be selected to indicate whether you want to report the closely held employee on a quarterly basis or on a per pay run basis. There is no requirement to assign a country code to this income type.
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Inbound assignees to Australia: This is a new setting that will be available to users from 30 November. Some multinational employers exchange, or transfer, employees between affiliated entities in different tax jurisdictions. This is done for business and commercial purposes. This income type refers to an employee that is employed by an offshore entity and is seconded to work in Australia, where all or part of their base salary and other remuneration is paid by the offshore entity. To categorise an employee as an Inbound assignee, select the 'Inbound assignee to Australia' option from the 'STP income types' dropdown in the Pay Run Defaults screen. Employees classified as inbound assignees must also be linked to the "home" country of the foreign (offshore) employing entity. Instructions on how to do this are further below.
- Working holiday makers: Foreign resident employees working in Australia on a Visa subclass 417 (Working Holiday) or 462 (Work and Holiday) only. An employee is identified as a working holiday maker when the 'Is approved working holiday maker (and business is a registered employer of working holiday makers)' checkbox is selected from the 'Tax calculation options' section in the Tax File Declaration screen. Employees classified as working holiday makers must also be linked to the country of the visa (“home” country) of the employee, as per their Visa arrangements. Instructions on how to do this are further below.
- Seasonal worker programme: Employees engaged in regional programmes for government-approved employers, administered by the Department of Employment, Skills, Small and Family Business. This does not include workers under the Pacific Labour Scheme. Additionally, it does not include tax residents of Papua New Guinea or Kiribati AND in Australia for less than 90 days in the financial year, as there is no PAYG withheld and therefore not in scope of STP. An employee is identified as a seasonal worker when the 'Is a seasonal worker (and business is an approved employer of the SWP)' checkbox is selected from the 'Tax calculation options' section in the Tax File Declaration screen. There is no requirement to assign a country code to this income type.
- Foreign employment: This is a new setting that will be available to users from 30 November. This income type relates to assessable income paid to employees that are employed by an Australian entity, and who are Australian tax residents, where such income is subject to tax in another country, for work performed in that country, if the qualification period is met. The employer must pay (or be liable to pay) the foreign government for the tax to qualify as foreign employment income. On finalisation, the income type must include an amount for foreign tax paid. If no foreign tax is paid (or payable) by the end of financial year then the income should be reported as "Salary and Wages". To categorise an employee as foreign employment, select the 'Foreign employment' option from the 'STP income types' dropdown in the Pay Run Defaults screen. Employees classified as foreign employment must also have their income linked to the "host" country of the foreign country where the employee is working, for the qualifying period. If the employee meets the qualification period for more than one country in the financial year, each country YTD amounts must be reported against the income relevant to the host country. Instructions on how to do this are further below.
- Labour hire: This is a new setting that will be available to users from 30 November. This income type relates to payments made by a business that arranges for persons to perform work or services, or performances, directly for clients of the entity. This pertains to income for contractors only, not employees. To categorise an employee as labour hire, select the 'Labour hire' option from the 'STP income types' dropdown in the Pay Run Defaults screen. There is no requirement to assign a country code to this income type.
- Other specified payments: This is a new setting that will be available to users from 30 November. There is no requirement to assign a country code to this income type. This income type relates to individuals who receive any of the following payments as specified by regulation 27 of the Taxation Administration Regulations 2017:
- payments for tutorial services that are provided to improve the education of Indigenous people and are financially supported (directly or indirectly) by the Commonwealth;
- payments for translation and interpretation services provided for the Translating and Interpreting Service (also known as TIS) conducted by the Department administered by the Minister administering the Migration Act 1958;
- payments under a contract to an individual engaged as a performing artist to perform in an activity in which the individual (i) endorses or promotes goods or services, or (ii) appears or participates in an advertisement - unless the individual is engaged primarily because he or she is a sportsperson;
- payments of green army allowance (within the meaning of the Social Security Act 1991).
- Salary and wages: This income type relates to assessable income paid to payees for work performed in Australia, other than that included in the other income types. This includes income paid to Pacific Labour Scheme workers, company directors, office holders, religious practitioners and death beneficiaries. There is no specific setting that users need to configure for this income type - rather, the system will recognise and report this income type automatically. Additionally, there is no requirement to assign a country code to this income type.
- Voluntary agreement: This pertains to a written agreement between a payer and a contractor payee to bring work payments into the PAYGW system. The payer does not have to withhold amounts for payments they make to contractors. However, the payer and a contract worker (payee) can enter into a voluntary agreement to withhold an amount of tax from each payment they make to the contractor. The contractor must have an ABN and is an individual person. This income type will not be supported in this payroll platform.
Assigning country codes
Where income involves other tax jurisdictions, the income must be provided for the specific country for that tax jurisdiction. Australia has tax treaties with many countries to reduce or eliminate double taxation caused by overlapping tax jurisdictions. These treaties:
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Provide a level of security about the tax rules that will apply to particular international transactions; and
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Prevent avoidance and evasion of taxes on various forms of income flows between treaty partners.
New treaties are regularly formed with foreign countries. Since September 2018, the ATO receives and exchanges financial account information with participating foreign tax authorities. As such, specific income types must report their YTD income by country code to assist Australia to meet its international commitments.
Please note: the instructions provided below in assigning a country code are new settings that will be made available from 30 November.
The following income types must report a country code against their earnings:
- Inbound assignees to Australia: The country that must be reported for this income type is the "home" country of the foreign (offshore) employing entity. Because this relates to the employing entity of the employee, the country assigned will be done at the employing entity level as opposed to the individual employee level. Where a business has only one employing entity set up (the default entity) and this entity is recorded in the 'Business Details' screen (ie Payroll Settings > Details), we will have a new 'Is this a foreign (overseas) entity?' checkbox displayed next to the 'Legal name' field on this screen. When this checkbox is ticked, you will then be able to select the applicable country from a dropdown list. This will then automatically assign the country code to all earnings associated to employees employed by this entity and with this income type. Where a business has multiple employing entities set up within the one payroll account, and the foreign entity is set up via the Employing Entities screen, the same process will apply. On the 'Employing Entities' screen, click on the foreign entity to expand the details, tick the 'Is this a foreign (overseas) entity?' checkbox and then select the applicable country from the dropdown list.
- Working holiday makers: The country that must be reported for this income type is the country of the employee's visa (“home” country), as per what is stated on the employee's Visa. As each working holiday maker employed in the business could originate from a different country, the country code for this income type must be configured at the individual employee level. To assign the country, go to the employee's Tax File Declaration screen > 'Tax calculation options' section. The 'Is approved working holiday maker (and business is a registered employer of working holiday makers)' checkbox should be ticked which will then allow the user to select the applicable country from the dropdown list.
- Foreign Employment: The country that must be reported for this income type is the country where the employee performed the work. Because there is potential for an employee to perform work that meets the qualification period for more than one country in a financial year as well as having other employees employed by the entity work in more than one country in a financial year, the country code assigned for this income type will be done at the location level as opposed to the individual employee level. To assign the country at a location level, go to the Payroll Settings screen > Locations. Click on the location where the employee's earnings are being costed to expand the details and select the applicable country from the 'Country' dropdown list. This will then automatically assign the country code to all earnings associated to that specific location for any employee with this income type. It is essential that an employee assigned to this income type has earnings reported against a location that has a country allocated to it, otherwise there will be validation issues when reporting the employee's earnings through STP Phase 2. Additionally, if there are multiple employees of this income type working in multiple countries, you must ensure there is a unique location created for each relevant country.
If you have any questions, please let us know via support@paycat.com.au.