Attention Backpackers, some amazing news for you all! On Wednesday, October 30th, 2019, the Federal Court has ruled that the 15% Tax applied to backpackers (Backpackers Tax) is invalid because in violation of bilateral agreements with certain countries. Read on to know all the important information about this historic decision and why the backpacker tax got overturned.
UPDATE : On November 3 2021, the High Court of Australia decided the ‘backpacker tax’ would not be imposed on wages earned in Australia whilst on a working holiday visa for certain foreign countries. Indeed citizens from a NDA (non-discrimination article) country being from Chile, Finland, Japan, Norway, Turkey, the UK, Germany or Israel may be eligible to be taxed on the same basis as a resident Australian national.
Most important facts
About 150,000 backpackers travel to Australia every year on a working holiday visa, and many of them find work in the agriculture or hospitality industry. In 2017, after a full on debate, the Australian government applied a controversial tax rate of 15% for holiday visa makers on 417 and 462. Prior to this date, working holiday-makers were imposed a tax system much more flexible and were eligible to earn up to $18,200 tax-free. They could even benefit from the resident status if they stayed more than 6 months in the same area.
Since the application of the new regulation in 2017, backpackers no longer benefit from the resident status for tax purposes and are taxed automatically at 15% on all income up to $37,000. Thereafter, ordinary income tax rates applied.
More information: Backpacker Tax 2017
The Federal Court Decision
The Federal Court is a superior court which has jurisdiction to deal with most disputes arising from the Commonwealth legislation (federal law) such as, matters relating to taxation, trade practices and immigration.
In early 2017, Taxback.com, a tax accounting firm, initiated a lawsuit to have the tax waived. The company took the case to the Australian courts on behalf of a British tourist who worked in Australia between 2015 and 2017, claiming that the tax violated several international agreements. It is important to note that this traveller had mainly lived in Sydney during her working holiday visa and had only made short trips interstate.
On Wednesday, the Federal Court ruled that the tax could not be applied to a British citizen living in Australia on a working holiday visa. The reason behind this conclusion is, that this tax was a “form of discrimination based on nationality” and could not be applied to a British woman living in Australia on a working holiday visa because it was in contravention of a non-discrimination clause in the double taxation agreement between the UK and Australia. This agreement provides that parties shall not tax citizens from the other country in a “more burdensome” way than their own citizens, residents for tax purposes.
Similar treaties exist between Australia and the United States, Germany, Finland, Chile, Japan, Norway and Turkey. The Court, therefore, stated that this tax could not apply to citizens of these eight countries who had been employed on 417 or 462 visas.
The tax was a form of discrimination based on nationality
In his decision, Logan J. characterised the tax as a “disguised form of discrimination based on nationality”. “It is but a more particular variant of the disguised discrimination example given in the OECD commentaries, at 332, of different treatment of individuals based on whether they hold, or are entitled to, a passport issued by the State”.
What may happen next…
On Wednesday the Court ruled that the backpacker tax constituted a form of “discrimination based on nationality”. The judge concluded that taxes could not be collected on some backpackers who would also be Australian tax residents, as this violates agreements with other countries.
Working holidaymakers from countries including the US and Britain may be eligible for a refund of the backpacker tax!
Australian Tax Office sought to downplay this decision, claiming that most working holidaymakers would be unaffected by the decision.”This decision concerns only the tax rates applicable to a minority of backpackers who work and who also reside, and only to those of countries concerned by a similar clause in the bilateral double taxation agreements”. Judge Logan’s decision would also not affect WHV makers in countries with which Australia has not signed a double taxation agreement.
Assistant Treasurer, Michael Sukkar said it would be up to the Commissioner of Taxation, Chris Jordan, to decide whether the government would appeal or not. He said “The government will wait for the finalisation of any legal action before determining if a political response is needed”
Thus, if the decision is not appealed by the ATO, concerned taxpayers will be treated the same way as other Australian tax residents. Meaning that they will be entitled to the benefit of the tax-free threshold of $18,200.
It is important to note that this decision will only affect WHV makers with resident status, i.e. those who have had a fixed address for 6 months or more during their stay in Australia. The status of tax residence will, therefore, have an impact on the reimbursement or not of the fees paid to the ATO.
However, this interpretation is likely to also face a challenge. Indeed, another recent ruling from Judge Logan may play a role here! In this ruling, he said a backpacker who intended to move to Australia for 10 months, and does so, would become a resident for tax purposes.
Sources : bbcnews