30 Oct 2019

Australia backpacker tax ruled invalid by Federal Court

8:13 pm on 30 October 2019

An estimated 75,000 backpackers could receive hundreds of millions of dollars from the tax office after the Australian Federal Court ruled the government's so-called backpacker tax invalid.

A woman with a backpacker wheels a suitcase at an airport

Photo: 123RF

The ruling said the tax was a "form of discrimination based on nationality" and in contravention of several treaties Australia has signed with other countries.

The landmark court decision found the Federal Government's controversial 'backpacker tax' cannot lawfully be applied to citizens from eight foreign countries.

Those are the United Kingdom, the United States, Germany, Finland, Chile, Japan, Norway, and Turkey.

The tax on working holiday-makers was introduced in 2017 and meant any foreigner on 417 or 462 visas who earned under $A18,200 ($NZ19,680) would need to pay 15 percent tax, unlike Australians who were not taxed on similar earnings.

Each year about 150,000 foreigners come to Australia on working holiday visas, meaning the case could potentially impact upon half of those who worked here between the 2017 and 2019 financial years.

'Slippery slope'

Catherine Addy, who the test case was mounted on behalf of, told the ABC in an emailed statement through her lawyer that she was pleased with the outcome, which had now been ruled had discriminated against working holidaymakers.

Ms Addy came to Australia on a working holiday visa in 2015, undertaking various roles in the hospitality industry before returning to the UK in 2017.

The ATO hit her with a tax bill for her work in Australia, which she disputed as part of the case.

She welcomed the Federal Court upholding her appeal.

"I think it is wrong that foreigners should be taxed more harshly than Australians when they are doing the same work," Ms Addy said.

"In my opinion it is a slippery slope. It just makes sense, no matter where you come from, that if you are doing the same work then you have to be paid the same money."

Long-running drama

The divisive proposal to institute the tax was floated in the 2015 Budget and the level of taxation changed several times, leading to widespread confusion among working holiday-makers.

It also angered the farm sector, with many farmers reliant on seasonal labour blaming the tax for a slump in workers at harvest times.

In early 2017, international tax advisory firm Taxback.com launched legal action seeking to have the tax overturned.

And on Wednesday in Brisbane's Federal Court, Justice Logan agreed it was invalid.

"That is a disguised form of discrimination based on nationality," he said.

"That is exactly the type of discrimination which is prohibited by Art 25(1) of the Double Taxation Agreement and, per force of s4 of the Agreements Act, prohibited by that Act.

"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 or not they hold, or are entitled to, a passport issued by the State."

In a statement, Taxback.com chief executive Joanna Murphy welcomed the decision.

"In our view it was very clear, when the tax was introduced in 2016, that it discriminated against foreign workers and breached several international tax agreements," she said.

"It also damaged Australia's reputation as a working holiday destination."

Visitors from the eight countries account for about 50 percent of all visitors who come to Australia on 417 or 462 working holiday visas, according to Taxback.com.

'Ill conceived mess': Labor

Shadow agriculture spokesman Joel Fitzgibbon said the tax "was always ill-conceived".

"The backpacker tax only passed the Parliament because of the support of the National Party and a dirty deal with the Greens," Mr Fitzgibbon told the ABC.

"There have been many losers - including producers and growers."

The government sided with the Greens, which demanded they scrap a proposal to also tax 95 percent of backpackers' superannuation.

The National Farmers' Federation was accused by Tasmanian senator Jacquie Lambie, who strongly opposed the tax, of being a "lap dog" of the National Party and the then-agriculture minister Barnaby Joyce.

Budget had forecast $540 million in tax's revenue

Up until 2016, working holiday-makers were eligible to earn up to $18,200 tax-free.

In a 2016 budget measure, the then-government announced it would tax working holiday makers at 32.5 percent, estimating the measure would raise about $540 million over four years.

But the tax was scaled back following Liberal and National backbenchers pushing for changes based on concerns the measure could hurt domestic agriculture and tourism.

The tax on working holiday-maker earnings was subsequently dropped to 19 percent, and finally 15 percent.

Justice John Logan accepted the argument that double taxation clauses prohibit unequal tax treatment of citizens from the eight countries, including working holiday-makers, compared with Australian nationals.

Taxback.com founder and chair Terry Clune said the group would now work with the Federal Government to restore the previous "fairer and non-discriminatory" taxation arrangements that apply to holiday workers.

In 2017, backpackers spent $920 million in regional towns alone, Mr Clune said, and the overall contribution of the sector to the Australian economy was estimated at $3.5 billion annually.

Ms Murphy said Australia had seen a decline in backpacker numbers in recent years, causing some regional farms and businesses difficulties in sourcing seasonal staff.

ATO to consider decision

A spokesperson for The Australian Tax Office said it would consider the decision and whether an appeal was appropriate.

"It is important to note that this decision does not affect the Working Holiday Makers [WHM] tax rate applying to WHMs who are non-residents," they said.

"We consider most working holiday-makers are not residents for tax purposes and this decision has no impact for these working holiday-makers.

"This decision only affects the tax rates applying to a minority of WHMs who are also residents, and only those from countries affected by a similar clause in the double tax agreement with their home country.

"If the decision is not appealed, these taxpayers will be treated the same as other Australian tax residents, that is, entitled to the benefit of the tax-free threshold of $18,200, after which marginal rates of tax apply, starting at 19 cents in the dollar.

"Residency status depends upon on the circumstances applying to each individual working holiday-maker."

Assistant Treasurer Michael Sukkar said it would be a matter for the Commissioner of Taxation to determine whether he would appeal the decision.

"The Government will await the finalisation of any legal process before considering if any policy response is needed," he said.