When an employee works remotely from one country for an employer based in another, while potentially maintaining connections to a third country, standard tax rules start to break down. Australia’s double tax agreements (DTAs) do provide a framework for resolving these conflicts, but they were not designed with fully distributed remote work in mind. The practical answer is this: which country gets to tax the income depends on where the employee is a tax resident, where the work is physically performed, and whether the employer has created a taxable presence (a “permanent establishment”) in the employee’s location. Getting any one of those three elements wrong leads to double taxation, ATO compliance failures, or unexpected foreign tax liabilities [1][6].
TL;DR
- Australia’s DTAs allocate taxing rights over employment income based on tax residency, where work is performed, and permanent establishment risk.
- A non-resident Australian working overseas is generally taxed only where they perform the work, not in Australia, provided they meet the relevant DTA conditions.
- Where no DTA exists between Australia and the employee’s country, double taxation risk is higher and must be managed through the Foreign Income Tax Offset.
- Employers face permanent establishment exposure when remote workers habitually conclude contracts or operate as a fixed place of business in a foreign country.
- The tax residency test Australia applies is the first question to resolve, because residency status determines which set of rules applies.
What is the core framework Australia’s DTAs use for employment income?
Australia’s DTAs follow the OECD Model Tax Convention as their structural foundation, meaning most of Australia’s bilateral agreements allocate taxing rights over employment income using a consistent three-part test [1]. This article discusses the 2025-26 financial year framework. Under this framework, a resident of one country who earns employment income from working in another country may only be taxed in the country of residence if all three of the following conditions are met:
- The individual is present in the other country for 183 days or fewer during any twelve-month period commencing or ending in the relevant tax year (2025-26).
- The remuneration is paid by, or on behalf of, an employer who is not a resident of the other country.
- The remuneration is not borne by a permanent establishment that the employer has in the other country.
If any one of these three conditions fails, the country where the work is performed gains the right to tax that income [6]. For Australians living abroad who are non-residents for Australian tax purposes, this framework effectively means foreign employment income earned overseas is generally not subject to Australian tax at all, since Australia has relinquished its right to tax under the relevant DTA [1].
How does Australian tax residency status change the entire equation?
Tax residency is the gateway question. Whether Australian tax rules apply to your foreign employment income at all comes down to whether you are classified as an Australian tax resident or a foreign resident. The tax residency test Australia uses involves four distinct tests applied by the ATO: the Resides Test, the Domicile Test, the 183-Day Test, and the Commonwealth Superannuation Test [7].
| Test | Who It Primarily Applies To | Key Factor |
|---|---|---|
| Resides Test | Anyone with ongoing physical presence in Australia | Behavioural and physical connection to Australia |
| Domicile Test | Australians who have left Australia | Whether your permanent place of abode is now overseas |
| 183-Day Test | Foreign nationals arriving in Australia | Physical presence exceeding 183 days in an income year (2025-26) |
| Commonwealth Superannuation Test | Australian government employees abroad | Membership of an eligible super fund |
An Australian who has relocated overseas and established a genuine, permanent place of abode abroad will typically be classified as a foreign resident under the Domicile Test. Once classified as a foreign resident, Australia’s right to tax foreign-sourced employment income is significantly reduced, and obligations shift to lodging a non-resident Australian tax return only for Australian-sourced income [7].
What happens to foreign income tax in Australia when no DTA exists?
Building on the residency framework above, a harder problem emerges when an Australian tax resident earns income in a country that has no DTA with Australia. In that scenario, both countries may assert full taxing rights over the same income, creating genuine double taxation.
Australia’s domestic remedy is the Foreign Income Tax Offset (FITO). Foreign income tax Australia residents pay to a foreign jurisdiction can be credited against their Australian tax liability, reducing the effective rate of double taxation [7]. However, FITO is not a complete solution in every case:
- The offset is capped at the Australian tax that would otherwise be payable on that foreign income.
- It applies only to taxes that are substantially similar in character to Australian income tax.
- It does not eliminate foreign filing obligations or compliance costs in the source country.
Australia has DTAs with over 40 countries [1][3], covering most major expat destinations including the United States, United Kingdom, Singapore, Japan, Germany, and the UAE (under a more limited arrangement). Where a DTA exists and is correctly applied, double taxation is structurally prevented rather than remedied after the fact [1].
What is permanent establishment risk and why does it matter to remote employers?
Stepping back from the employee’s individual obligations, a separate concern affecting employers is permanent establishment (PE) risk. A permanent establishment is created when a company is deemed to have a taxable presence in a foreign country, typically because it has a fixed place of business there or an agent with the authority to habitually conclude contracts on its behalf [5][2].
Remote work can inadvertently trigger PE status. Key risk factors include:
- An employee who works exclusively from a home office in their country of residence, providing a “fixed place” for the employer’s business [4].
- An employee with authority to sign contracts, approve proposals, or make binding decisions on behalf of the employer [5].
- An employer with multiple remote employees in the same country, creating an aggregated presence that tax authorities may treat as a branch.
When PE is triggered, the employer becomes subject to corporate income tax in the employee’s country on profits attributable to that establishment. The evolving landscape of post-2025 OECD guidance is actively influencing how bilateral treaties interpret PE thresholds in remote work contexts [5], and employers operating across borders should not assume legacy interpretations still hold.
Frequently Asked Questions
About ODIN Tax
ODIN Tax is Australia’s specialist tax agent practice for non-residents and Australian expats, operating as part of the ODIN GROUP alongside ODIN Mortgage. As a Registered Australian Tax Agent headquartered in Hong Kong, ODIN Tax is built around the specific compliance landscape that Australian expats and cross-border earners face every day. With 10,000+ clients served across 40+ countries and a 4.9/5 Google rating from over 330 verified reviews, ODIN Tax brings deep pattern recognition to tax residency determinations, DTA applications, non-resident CGT, and Foreign Income Tax Offset claims. Unlike generalist accounting firms, ODIN Tax focuses exclusively on non-resident and expat Australian tax, which means complex cross-border scenarios involving foreign income tax in Australia are handled as standard practice, not as exceptions.
Navigating remote work income across multiple tax jurisdictions requires more than a general accountant. ODIN Tax specialises in exactly this.
Disclaimer: This article contains general information only and does not constitute personal tax advice. Tax outcomes depend on individual circumstances, applicable legislation, and current ATO rulings. All rates, thresholds, and rules cited relate to the 2025-26 financial year unless otherwise stated and are subject to change. You should seek advice from a Registered Australian Tax Agent before making decisions based on this content.
References
- US-Australia tax treaty explained: how to avoid double taxation (www.taxesforexpats.com)
- Remote working in Australia: A guide for international employers 2024 (www.ashurst.com)
- Australia – Tax treaty documents | Internal Revenue Service (www.irs.gov)
- Working Remotely Abroad Guide Australian Employers | Frontier Software (au.frontiersoftware.com)
- Navigating permanent establishment risk in a remote work … (kpmg.com)
- Remote Work Taxes in 2026: What Employers and Employees Need to Know (pamgro.com)
- Foreign Income Tax: A Practical Guide For International Earners – ITP Accounting Professionals (itp.com.au)
