Many could be forgiven for assuming that the backpacker tax was a done deal, as it has been about a year since the then newly proposed tax caused quite vocal reactions from various tourism groups and industry bodies that were anxious about the affect the tax would have on both employer operations or on their constituents’ working futures.
The tax was originally proposed to be levied at 32.5% on working holidaymakers (those on a 417, 462 or bridging visas), starting to bite from dollar-zero and to have taken effect from January 1, 2017. Concentrated argy-bargy in the lead up to that deadline saw a deal struck between political opponents to reduce the rate to 15%.
But legal proceedings have just been initiated in the Queensland Federal Court, on December 4, which challenges the validity of the government’s working holidaymaker tax changes, claiming that the backpacker tax breaches non-discrimination clauses built into tax treaties that Australia has signed with eight countries — the UK, the US, Germany, Finland, Chile, Japan, Norway and Turkey.
The court action, initiated by international tax accounting firm Taxback.com, claims that the provisions of these treaties prohibit unequal tax treatment of citizens from these countries, including working holidaymakers, compared with Australians. Taxback.com claims that international tax treaties signed by Australia override domestic tax laws.
Taxback.com’s commercial director Eileen Devereux says the action has been taken to protect foreign workers and Australia’s reputation as a working holiday destination. “Our starting point is that by discriminating against foreign workers the tax is fatally flawed,” she says. “The tax unfairly targets working holidaymakers. It runs in direct conflict with Australia’s obligations under multiple international tax agreements. In doing so, it also harms the reputation of Australia’s tourism sector.”
The backpacker tax was brought in through the Income Tax Rates Amendment (Working Holiday Maker) Reform Act 2016, and imposes a 15 cents in the dollar tax on every dollar from zero to $37,000 and resident marginal rates after that, on or after 1 July 2017. In other words, there is no tax-free threshold and no second tax bracket/band as is enjoyed by resident taxpayers.
Australia has tax treaties in place with its major trading partners, and almost all contain a non-discrimination clause that prohibits unequal tax treatment of the citizens of these countries.
For example, Article 25 of the tax treaty between Australia and the Britain, which follows the OECD convention (see page 21 of this OECD document), states: “Nationals of a contracting state shall not be subjected in the other contracting state 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 in the same circumstances, in particular with respect to residence, are or may be subjected.”
The legal action that has been filed in the Queensland Federal Court seeks “declaratory relief” from the backpacker tax for citizens of the eight affected countries – in effect, rendering them exempt from the tax. Taxback.com says that data suggests that about half of all visitors to Australia on working holiday visas come from Britain, Germany and the USA.
Australian employer groups had previously been advised by the ATO that they were required to issue two payment summaries (with different rates) for the 2016-17 income year — one for the period July 1 to December 31, 2016, and a second for the period January 1 to June 30, 2017. Should the legal action have contrary outcomes, further ATO guidance may be required, and multiple income tax adjustments may be required.
To partly recoup revenue that it was forecast to miss out on from decreasing the backpacker tax rate from 32.5% to 15% (a deal done to ensure passage of the legislation), the government increased the “passenger movement charge” by $5, to $60 per person. This has already been put into operation from 1 July 2017, but no thought seems to have been given yet on how this levy could be affected by the outcome of Taxback.com’s Federal Court action.
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Frank at Lismore Professional Services writes: Does this mean the whole non-resident tax system is flawed for working visitors from these countries or, if this challenge is successful, will working visitors from these countries have to pay tax at the higher non-resident rates? I wonder if the proponents have bothered to ask the backpackers if they will accept being worse off if the court challenge is successful.
Euan at EDF Chartered Accountants in St Kilda, Vic, writes: I for one welcome the Federal Court challenge, because as a Tax Practitioner I have been uncomfortable taxing temporary overseas visitors a punitive tax merely because they do not vote, tax because we can with impunity. These people work harder than the local workforce, are an essential industry, and it sends the wrong message to our visitors, yet rewards Aussies on unemployment benefits who refuse to work! Good on Qld!
Veronica at Success Tax Professionals in Alice Springs, NT, writes: Since the new working holidaymaker tax came in, we have done numerous returns. Once we lodge the returns there are many times that the ATO goes over the top of our lodgment and decides for themselves that the taxpayer is a foreign resident for tax purposes, even though they have not spoken to the client… So the working holidaymaker tax is not 15% at all, they are all taxed at foreign resident rates now of nearly a third of what they earn. I can see all these working holidaymakers going off elsewhere!