Is it fair that backpackers have not just a working holiday but a tax holiday as well?

It’s not fair according to the Commonwealth Government which imposed a flat tax of 15¢ in each $1 upon wages backpackers earn while working in Australia. The tax commenced on 1 January 2017.

Before the tax was imposed, backpackers who were classified as ‘resident’ in Australia for tax purposes could earn up to $18,200 before they paid one dollar in tax, just like Australians who pay no tax until they reach that tax threshold. This was the so-called ‘tax holiday’.

This ‘working holiday makers tax’ was calculated to bring in more than $250 million in tax revenue over 4 years. So it was a handy addition to the budget.

Catherine Addy, a British backpacker from Kent, worked as a food and beverage waitress at the Menzies Hotel, Sydney and at the Novotel, Pyrmont. She earned $26,575 and paid the extra tax on the first $18,200. She lived in a share house at Earlwood which made her a resident in Australia for tax purposes. She was on a working holiday visa (a 417 visa).

She believed that she was a victim of tax discrimination, and sought the protection of a little known law called the Australian-UK Double Taxation Agreement of 2003.

Double Taxation Agreements exist to prevent a person being taxed twice for the same income. For example, if a British national earns income and pays tax in Australia, they do not pay that tax a second time on the same income when they lodge their tax return in the UK.

Towards the end of the Agreement is Article 25 – the non-discrimination clause. The clause states that it is illegal to discriminate against a national of the other country by imposing more burdensome tax compared with a national performing the same work.

In Catherine Addy’s case, she was working beside Australians who enjoyed the tax free threshold on their income, and was therefore a victim of tax discrimination.

The Federal Court ruled that Article 25 invalidated the backpackers tax and ordered the Commissioner of Taxation to issue a refund. The Commissioner has appealed, and so the refund is on hold. In the meantime the Commissioner continues to collect the tax (of course).

For more information click on my case note British Working Holiday Maker wins tax refund fight

Author: Anthony Cordato, Travel and Tourism Lawyer, Sydney – E: Ph 02 8297 5600