A recent case on the "backpacker tax" received wide ranging media coverage and was hyped as a win for all working holiday makers. However, take a closer look, and it is clear that the case has a much narrower application than reported. For example, it would only apply to certain working holiday makers that are considered to be tax residents of Australia and have a specific clause in a Double Taxation Agreement from their home country with Australia. Coupled with the ATO still considering an appeal, this area of law is far from settled.
In a decision that was hailed by various media outlets as monumental, the Federal Court's decision that a backpacker would not have to pay extra "backpacker tax", was touted to have wide ranging application to all holiday makers. However, upon further analysis, the impact of the decision is very much narrower than first thought.
The working holiday rate ("backpacker tax") generally applied from 1 January 2017 to individuals that have either a 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 as they do not get the benefit of the tax-free threshold ($18,200 for 2019-20).
The case centred on a British citizen (Ms Addy) who lived in Australia for a period of almost 2 years, unlike other 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 that if she was a resident, would the non-discrimination clause (Article 25) in the Australian-UK Double Taxation Agreement (DTA) prevent her from being taxed in a more burdensome way.
The answer to both of these questions were answered by the Court 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.
From the facts, it can be seen that the practical significance of the decision is 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 US 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 UK, hence, a working holiday maker from a country lacking a DTA or a DTA with 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 UK. 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 Australia tax residents. The ATO noted it is still considering the decision of the Court and may appeal, so stay tuned.
Are you a working holiday maker?
If you're unsure whether this decision affects you, we can help you work out whether you're a tax resident and whether you may be eligible to pay less tax on your working holiday income. Remember, different individual circumstances could mean very different outcomes, contact us today for tailored advice.
