The High Court has just handed down what could be a death knell for the so called backpacker tax. Essentially, the Court found that by taxing certain working holiday makers at a higher rate than other Australian residents contravened the non-discrimination clause in the Australian-UK Double Tax Agreement. The decision is expected to apply to working holiday makers from all countries that have a DTA with Australia which includes a non-discrimination clause (ie Chile, Finland, Germany, Japan, Norway, Turkey, Israel, and the UK).

In a decision with wide reaching implications, the High Court has confirmed once and for all that the so called backpacker tax imposed on a working holiday maker from the UK contravened the non-discrimination clause in the Australia-UK Double Tax Agreement (DTA) and allowed the taxpayer’s appeal.

By way of background, the working holiday rate (“backpacker tax”) generally applied from 1 January 2017 to individuals with 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 2021-22).

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 DTA prevent her from being taxed in a more burdensome way.

The Federal Court initially found in favour of Ms Addy, finding that she was both an Australian resident for tax purposes, and that the DTA prevented Ms Addy from being taxed at the higher working holiday tax rate. However, on appeal, the Full Federal Court held (by majority) that Ms Addy should be taxed at the special rates applicable to working holiday makers as she was not discriminated against on grounds of nationality, rather the backpacker tax imposed tax at differential rates due to the taxpayer in question holding a particular type of visa.

The taxpayer then appealed the decision to the High Court, which found that the more onerous backpacker tax was imposed on Ms Addy due to her nationality. It noted that an Australian national in same circumstances, that is, deriving taxable income from the same source during the same period, would have been taxed at a lower rate. Thus, the High Court found that the non-discrimination clause (Article 25) in the DTA was contravened.

The important thing to note from this case is that this decision will not apply equally to all working holiday makers with either the Subclass 417 (working holiday) or 462 (work and holiday) visas. It will only apply to working holiday makers from countries that have a DTA with Australia that includes a non-discrimination clause. In addition, such working holiday makers will need to first clear the hurdle of meeting the requirements to be an Australian resident for tax purposes.

“A working holiday maker’s residency status for tax purposes is determined by the taxpayer’s individual circumstances. Most working holiday makers will be non-residents consistent with their purpose of being in Australia to have a holiday and working to support that holiday.” – Australian Taxation Office

Countries that have a DTA with Australia which includes a non-discrimination clause consist of Chile, Finland, Germany, Japan, Norway, Turkey, Israel, and the UK. Individuals 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 Australian tax residents.

Need to amend your return?

While the ATO notes that most working holiday makers will be non-residents and hence the decision will not affect them, a small percentage may be entitled to a refund. Guidance is currently being formulated by the ATO, but if you believe you meet the requirements for a refund, we can help you confirm your eligibility and amend your return, if necessary.

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