LESS TAX FOR SOME WORKING HOLIDAY MAKERS?

A recent Federal Court decision on Australia’s “backpacker tax” has received wide-ranging media coverage and been seen by some as a win for all working holiday makers. However, taking a closer look it is clear that the case has a much narrower application than some have reported. It’s likely only to apply to certain working holiday makers who are considered to be tax residents of Australia at the time, and are subject to a specific clause in a double taxation agreement (DTA) between their home country and Australia. Coupled with the ATO still considering an appeal, this area of law is far from settled.

The working holiday tax rate (commonly known as the “backpacker tax”) has generally applied from 1 January 2017 to individuals that have either subclass 417 (working holiday) or 462 (work and holiday) visas. In essence, the first $37,000 of “working holiday taxable income” is taxed at 15%, and then the balance is taxed at the standard rates applicable to residents.

Thus, working holiday makers are taxed at a higher rate on the first $37,000 than residents, because the holiday makers do not get the benefit of the Australian tax-free threshold ($18,200 for 2019–2020).

The recent case centred on a British citizen (Ms Addy) who lived in Australia for a period of almost two years. Unlike many working holiday makers, during most of her time here she lived in the same share house accommodation in Sydney with a friend, and only left for short stints to travel to other parts of Australia. Essentially, the case came down to whether or not Ms Addy was a resident of Australia and, if she was a resident, whether the non-discrimination clause (Article 25) in the Australia–United Kingdom DTA prevented her from being taxed in a more burdensome way.

The Federal Court answered both of these questions were answered in the affirmative. Due to her lack of transience during her stay in Australia, Ms Addy was found to be an Australian resident for tax purposes. Following on from that, the Court also found that the DTA prevented Ms Addy from being taxed at the higher working holiday tax rate.

The practical significance of this decision seems quite limited. Firstly, the individual would have to be on a specific working holiday visa for the tax to apply. Secondly, most individuals on that visa would not be tax residents due to the transient nature of their stay. For example, another recent case involved a United States citizen who during her stay in Australia worked in more than one city, moved houses relatively frequently and travelled in Australia quite extensively, and thus was not found to be a resident for tax purposes. Finally, not all DTAs have a non-discrimination clause such as the one between Australia and the United Kingdom; hence, a working holiday maker from a country lacking a DTA, or having a DTA without an anti-discrimination provision with Australia, would still be taxed at the working holiday rate even if they are found to be tax residents.

According to analysis from the ATO, the decision would only apply to working holiday makers from Chile, Finland, Germany, Japan, Norway, Turkey and the United Kingdom. In 2018 only around 36% of the total number of working holiday maker visas were issued to individuals from these countries. Therefore, this decision will only affect a small percentage of individuals, of which an even smaller proportion would be considered Australia tax residents. The ATO has noted that it is still considering the decision of the Court and may appeal, so stay tuned.

If you would like to know more please contact one of our accountants on 07 4639 1099 or come in and see us at 14 Russell Street Toowoomba.