Around 150,000 backpackers travel to Australia every year on working holiday visas, with many finding work in the farming and hospitality industries. And now, in what’s being hailed as a landmark ruling, many of them could be owed money by the Australian Government.
As reported by BBC News on 30 October in the article Australia’s ‘backpacker tax’ ruled illegal by court, the Federal Court found that Australia has been using a so-called ‘backpackers tax’ to illegally tax foreign workers from the United Kingdom, United States of America, Germany, Finland, Chile, Japan, Norway and Turkey. Double tax agreements that Australia has with these countries contain a clause that prevents taxing citizens of these countries differently to their own. This means that if a citizen of Australia receives a tax-free threshold, so should citizens of these countries.
What is the ‘Backpacker Tax’?
In 2017, the Australian Government imposed a controversial tax rate for those on a Subclass 417 (Working Holiday) visa, a Subclass 462 (Work and Holiday) visa and a bridging visa permitting an individual to work in Australia.
Up until 2016, working holiday-makers were eligible to earn up to $18,200 tax-free, similar to Australian citizens. From 1st January 2017, working holidaymakers have been taxed at 15 per cent on all earnings up to $37,000. Ordinary marginal tax rates apply after that amount and there is no longer the ability to claim the tax-free threshold under $18,200.
Federal Court findings
The 2016 tax amendments were challenged by an international tax company on behalf of a British tourist who worked in the hospitality industry in Australia between 2015 and 2017. The recent Federal Court hearing found that the ‘backpacker tax’ was in breach of the existing treaties Australia has with the eight countries affected. The tax levy breaches anti-discrimination clauses in these treaties which require Australia to tax nationals from those countries in the same way as local workers.
These findings could potentially impact upon half of those who worked on a working holiday visa in Australia between the 2017 and 2019 financial years – thought to be around 70,000 backpackers. It could also force the government to collectively repay tens of thousands of foreign nationals hundreds of millions of dollars.
What happens now?
The ATO is currently considering whether to appeal against the ruling and how to approach this ruling.
Questions now arise if backpackers will be regarded as residents for tax purposes or not. Currently, only Australian residents are entitled to the tax-free threshold, while non-residents are taxed 32.5% from their first earned dollar up to a yearly income of around $90,000. Tax residency tests apply to both Australian citizens and foreign citizens in the same way, therefore the anti-discrimination clause may not apply.
At Business Tax & Money House, we are pending the ATO’s decision. Since the ruling doesn’t apply to all backpackers, the ATO will likely require some action from the individual person interested. We will keep everyone posted on the developments and required action if any. Please follow our Facebook page to keep up to date or contact us with any questions.