Australian ‘backpacker tax’ discriminatory – but it’s not all good news for working holiday makers

Tax Insights

On Wednesday 3 November 2021, the High Court upheld the appeal by British citizen Catherine Addy in the matter of Addy v Commissioner of Taxation [2021] HCA 34.   

The High Court decision brings to an end the dispute between Ms Addy and the Commissioner of Taxation (‘Commissioner’) and certainty to the issue of whether the controversial ‘backpacker tax’ introduced in 2016 contravened the anti-discrimination provisions of the Double Taxation Agreement (‘DTA’) between Australia and the United Kingdom (‘UK’). 

The High Court appeal centred around the interpretation of Article 25(1) DTA and whether the working holiday maker tax rates (otherwise known as the ‘backpacker tax’) under Part III Sch 7 of the Income Tax Rates Act 1986 (‘Rates Act’) contravened Article 25(1) DTA and accordingly, were discriminatory.  The Article provides,

Nationals of a Contracting State [the United Kingdom] shall not be subjected in the other Contracting State [Australia] to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State [Australia] in the same circumstances, in particular with respect to residence, are or may be subjected.”

Background

In 2015, Ms Addy was granted a working holiday visa, a temporary visa that enables eligible travellers holidaying in Australia to engage in paid employment while supporting their holiday.

Ms Addy first travelled to Australia in 2015, she then travelled to several countries in South-East Asia. After applying for a further working holiday visa in 2016, she returned to Sydney where she commenced work as a waitress. In 2017, the Commissioner amended Ms Addy’s income tax assessment for the 2017 year on the basis Ms Addy was a ‘working holiday maker’ and as such unable to claim the benefit of the tax-free threshold.  Instead, the tax rates under Pt III Sch 7 Rates Act applied, rates that applied a higher tax burden on working holiday makers compared to Australian tax residents.


Ms Addy objected to the Commissioners amended assessment on the basis she was entitled to the tax-free threshold as she was a resident of Australia for tax purposes during the relevant period and because of Article 25(1) DTA, she was not subject to the ‘backpacker tax’ because it applied a more burdensome tax liability on her than if she had been an Australian resident national. The Commissioner did not accept Ms Addy’s objection.


Ms Addy commenced proceedings in the Federal Court appealing the objection decision and was successful in the first instance, with Logan J finding she was an Australian resident for tax purposes and consequently, the ‘backpacker tax’ was discrimination against Ms Addy based on her nationality.   The Commissioner appealed to the Full Federal Court, challenging both Ms Addy’s residency and the question of whether the anti-discrimination clause under Article 25(1) DTA applied on the basis of nationality. On Wednesday 3 November 2021, the High Court upheld the appeal by British citizen, Catherine Addy in the matter of Addy v Commissioner of Taxation [2021] HCA 34.  

On the issue of residency, the Commissioner was successful in arguing Ms Addy was not a resident under ordinary concepts.  However, the full Federal Court held Ms Addy was a resident under the 183-day test, not only because she had been in Australia for more than 183 days in the relevant period, but importantly, as the Commissioner had failed to turn his mind to the application of the test to Ms Addy’s circumstances. 

Whilst the Commissioner was unsuccessful in challenging the status of Ms Addy’s residency status, he was successful on the issue of discrimination with Justices Steward and Derrington finding in the Commissioner's favour holding he did not contravene Article 25(1) DTA. 

Ms Addy sought, and was granted, special leave to appeal to the High Court.  The High Court ultimately found in the favour of Ms Addy and held that the rates under Part III Sch 7 Rates Act did impose taxation that was more burdensome than which applied to an Australian resident national; and that the more burdensome taxation was owing to Ms Addy’s nationality. 

The High Court held the ‘backpacker tax’ contravened the anti-discrimination provisions under Article 25(1) DTA because the tax rate was more onerous for Ms Addy compared to an Australian national doing the same work, for the same income, under the same taxation laws.

The Impact

Whilst the case is a win for Ms Addy, it is our view the decision will not have broad application to holders of working holiday visas who have been assessed under the more burdensome ‘backpacker tax’ rates. 

The decision will only have application where:Backpacker taxes for international workers

  • A double taxation agreement is in place between the country of origin of the working holiday maker and Australia; and
  • The double taxation agreement contains an anti-discrimination clause consistent with the one in the UK/Australia DTA; currently, this only includes Chile, Finland, Japan, Norway, UK, Turkey, Germany, and Israel; and
  • The working holiday maker satisfies the ‘residency’ requirements of section 6 of the Income Tax Assessment Act 1936 (‘ITAA 1936’).

Given the fundamental purpose of a working holiday maker visa is to enable a foreign resident to work while holidaying in Australia, establishing Australian tax residency will impose an extremely high, if not insurmountable burden on working holiday makers.  Whilst Ms Addy was successful in establishing residency under the 183-day test, other working holiday makers may not be so fortunate, and residency will need to be determined on a case-by-case basis.

The High Court decision is cause for celebration for those with a keen interest in jurisprudence, but not so much for ‘backpackers’ anticipating a windfall refund of tax paid in Australia. 

Determining Australian tax residency is complex and requires careful consideration of the individual facts and circumstances of each case and the relevant application of the law.  Impacted individuals who believe they should be taxed as a ‘resident’ of Australia should obtain specialist advice on tax residency before seeking to amend previously lodged income tax returns. 

No action is required by employers of working holiday makers.

For more information

If you require further advice on the impact of the High Court decision on you or your employees, contact your local RSM office.

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