Ripples from the backpacker case spread wide

The recent decision in Addy v Commissioner of Taxation [2019] FCA 1768 continues to stir up the tax practitioner community. It found that a taxpayer was not subject to the “backpackers tax” basically due to the operation of an article of non-discrimination (Art 25[1]) in the Australia-UK Double Taxation Agreement.

In the interim since the decision was handed down, the ATO has issued a statement setting out the Commissioner’s views — stating at the outset that the ATO is still considering this decision and has not yet decided whether an appeal is appropriate.

The ATO notes that the decision only applies to working holiday makers from seven countries — Britain, Chile, Finland, Germany, Japan, Norway and Turkey. By ATO estimates, around 36% of the total number of people issued with working holiday maker visas in 2018 were from those countries. It also points out that the decision further only affects those that are “residents of Australia for tax purposes”.

Were no appeal to be lodged by the ATO, it advises that any affected taxpayer who may be entitled to a refund can object to their assessments to have their tax residency considered. “However, this would be determined on a case-by-case basis with regard to their individual circumstances.”

Tax & Super Australia’s Tax Counsel John Jeffreys offers his take on the case in one of this week’s Quick Tax videos (see it here).

The Corporate Tax Association (CTA) offers an interesting viewpoint on one aspect of the non-discrimination article. “From a corporate perspective, it is worth noting in passing that Art 25[3] has similar wording to Art 25[1],” CTA says. “It states that ‘enterprises of a contracting state, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other contracting state, shall not be subjected in the first-mentioned state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned state in similar circumstances are or may be subjected’.

The CTA goes on to observe: “Could an argument be run that our thin capitalisation rules, for example, are in breach of Art 25[3] as they are more burdensome for non-resident controlled entities?”

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