PAYG Withholding for Foreign Resident Employees: WHM, Foreign Resident Schedules and No Tax-Free Threshold

Foreign resident PAYG schedule

Employers must apply Schedule 9 to PAYG when an employee declares foreign tax residency. This involves using the foreign resident tax table, which differs from the standard Australian resident tax rates. The 2024-25 foreign resident rates are 32.5% on income up to $135,000, 37% from $135,001 to $190,000, and 45% on income over $190,000. STP Phase 2 reporting obligations apply to these withholdings.

Unlike Australian residents, foreign resident employees do not receive the $18,200 tax-free threshold; tax is withheld from the first dollar of Australian-source wages. Employers must also ensure the ‘no’ box is ticked on the employee’s TFN declaration to indicate the Medicare levy does not apply.

If an employee does not quote a Tax File Number (TFN), the employer must withhold at the no-TFN rate of 45%. This rate also excludes the Medicare levy, as foreign residents are exempt.

Working holiday makers (subclass 417/462)

Working holiday makers holding a subclass 417 (Working Holiday) or 462 (Work and Holiday) visa are subject to PAYG withholding under Schedule 15. This means they do not have access to the standard Australian tax-free threshold. Working holiday maker tax and super (417/462) outlines specific details relating to their tax obligations.

Employers can register with the ATO as a WHM employer via the ATO’s online portal, a free process. If registered, tax is withheld at a flat 15% on income up to $45,000. Income above $45,000 is taxed at progressively higher rates: 32.5% to $135,000, 37% to $190,000, and 45% above that.

If an employer is not registered as a WHM employer, the higher foreign resident schedule applies from the first dollar of income, with rates starting at 32.5%+. Failure to register and apply the correct withholding rates can result in additional withholding liability for the employer. Working holiday maker tax and super (417/462) provides further information.

Determining tax residency

Determining tax residency is a key factor in PAYG withholding obligations. It is important to understand that tax residency is distinct from immigration status; an individual may hold a temporary visa but be considered a foreign resident for tax purposes, or vice versa. Several tests determine tax residency, including residence according to ordinary concepts, domicile, the 183-day test, and the Commonwealth superannuation test. Corporate tax residency reform status does not affect these individual residency tests.

The application of these tests can result in varied outcomes, impacting an employee’s tax obligations and the employer’s PAYG withholding responsibilities. For example, temporary residents, such as those holding a subclass 482 visa, may have a different tax position, particularly concerning foreign-source income which is largely exempt.

It is crucial to correctly assess an employee’s residency status to ensure appropriate PAYG withholding. Failure to do so can lead to incorrect tax deductions and potential penalties. Foreign residents generally do not receive the tax-free threshold.

Employer compliance steps

Employers must take steps to accurately determine and manage PAYG withholding obligations for foreign resident employees. This begins with capturing the residency status on the Tax File Number (TFN) declaration and regularly reconfirming this status, particularly when circumstances change, such as a visa alteration or departure from Australia. Working holiday maker tax and super (417/462) provides further information on specific requirements.

When reporting income, employers must use the appropriate PAYG withholding schedule. PAYG Schedule 9 (foreign residents) or Schedule 15 (WHM) should be used, ensuring standard resident tax scales are not applied. Reporting through Single Touch Payroll (STP) Phase 2 requires the use of correct income type codes: SAW for standard income, FEI for foreign employment income, and WHM for working holiday maker income.

Superannuation guarantee obligations remain in place for foreign resident employees, currently at 11.5% (FY25). Departing Working holiday maker tax and super (417/462) may be eligible for the Departing Australia Superannuation Payment (DASP), which is taxed at 65% for WHM accounts.