Court rules on so-called ‘BackPacker Tax’.
Critics said that the policy discouraged non-citizens from applying for Working Holiday visas, despite the fact the government had greater numbers of Working Holiday visa makers to work in the agricultural sector by performing harvest work such as fruit picking. The laws were also potentially discriminatory and undermined worker conditions by creating a second tier of worker in the labour force.
Three years on, the Courts have found that the policy was, in fact, discriminatory, and that people considered residents for tax purposes cannot be taxed at a higher rate where a double taxation regime applies. While the implications of the case itself are limited by the facts of the proceedings, the ruling should give the government cause for concern about how the laws were drafted and the potential for them to be further undermined by subsequent cases.
For those interested in the details, please see our summary of the case.
Summary of Addy v Commissioner of Taxation  FCA 1768
A tax-free income threshold applies to resident taxpayers in Australia, whereby the first $18,200 of income is exempt from tax. However, in 2016 the Australian government introduced a ‘Backpacker Tax,’ which meant that people who came to Australia on a Working Holiday Visa (WHV) would pay a tax rate of 15% from the first dollar earned.
Catherine Addy, a UK Citizen, arrived in Australia on a working holiday visa in 2015, working in the hospitality industry before returning to the UK in May of 2017. She mainly lived in a share house in Earlwood, New South Wales, during her working holiday and made only brief visits interstate.
The Australian Tax Office (ATO) dealt out a tax bill for her work in Australia, which she disputed as part of this case.
In the 2017 Income Year, the lowest tax rate for a working holiday maker’s (WHM) income of up to $37,000 was 15%. WHMs cannot claim tax-free threshold benefits regarding their working holiday taxable income. Furthermore, WHMs who earn less than $37,000 after the 1st of January 2017, and who are non-residents are required to pay tax at a rate of 15% of their working holiday taxable income.
Ms. Addy was at least exempt from income tax on overseas sourced ordinary and statutory income, as a ‘temporary resident’ under a working holiday visa.
Counsel for Addy argued she should be taxed at the same rate as an Australian citizen (i.e. not taxed).
ISSUES & QUESTIONS:
- Was Addy considered a ‘resident’ for working holiday taxable income purposes?
- Was the tax a form of discrimination based on nationality? How did it fit in with international taxation treaties?
ULTIMATE DECISION: Logan J
- Addy was considered a ‘resident’ given her involvement with the Earlwood property through social contributions, bank statements, medical issues, etc.
- Article 25 of the Double Taxation
Agreement (DTA) between Australia and UK means party States shall not tax
nationals of the other State in a more burdensome way than their own nationals
in the same circumstances.
- S.4 of the International Tax Agreements Act 1953 (Cth)provides that the DTA has paramountcy over inconsistent provisions imposing Australian tax.
- The working holiday taxable income was more burdensome than the rate of tax for Australian nationals.
- Thus, the tax here was considered a form of ‘disguised’ discrimination based on nationality (because only non-citizens could have a WHV), breaching DTA; tax ‘overturned’.
- Appeal allowed, remitted to Commissioner for making of a consequential amended assessment.
- The decision does NOT affect the Working Holiday Makers tax rate applying to WHMs who are non-residents. There is a limited scope of impact given most WHM’s are not residents for tax purposes.
- If the decision is NOT appealed, taxpayers in circumstances similar to Addy will be treated the same as other Australian tax residents; i.e. they are entitled to the benefit of a tax-free threshold of $18,200, after which marginal rates of tax apply, starting at 19 cents per dollar.
- Although the judgement specifically references an international tax treaty between Australia and the United Kingdom, the court has recognized that the same reasoning may be applied to additional international agreements with other states
- Specifically, tax treaties with United States, Germany, Finland, Chile, Japan, Norway and Turkey have been highlighted as being affected by this decision
- As such, the ‘backpacker tax’ cannot be applied to citizens of these countries where there is a similar clause to that of the UK treaty (that foreign nationals of these countries cannot be taxed further)