On 3 November 2021, the High Court of Australia handed down a landmark decision, ruling that the “backpacker tax” imposed on a UK national who was deemed to be an Australian tax resident was in breach of the non-discrimination clauses in the Australia-UK Double Tax Agreement.
The ‘backpacker tax’ was originally introduced as part of the 2016 Budget measures for migrant workers residing in Australia on 417 (Working Holiday) and 462 (Work and Holiday) Visa’s. It imposed a flat tax of 15% up to certain income thresholds’ regardless of the individual residency status and therefore removed working holiday makers access to the tax free threshold afforded to other Australian tax residents.
The High Court ruled that the higher “backpacker tax” was incorrectly imposed on the wages of the individual due to her status as a UK national, rather than her status as an Australian tax resident. The Court reasoned that this imposition was discriminatory, based on the notion that under similar circumstances, an Australian national would be taxed at a lower marginal tax rate.
Considerations
This decision highlights several key points to note for employers with Australian-based employees. Primarily, the importance of ensuring that employees and employers alike are fully aware of their Australian tax residency status (noting the new “bright line” residency tests introduced in the May 2021 Federal Budget, which are yet to be finalised – see Residency changes).
Onboarding and Payroll process:
Employers need to ensure that they are able to properly manage the onboarding process given the impact this may have on correctly calculating employees’ wages and corresponding reporting. It stresses the importance of checking Tax File Number Declarations are being correctly completed and rolled into the payroll systems which are already undergoing a major overhaul as a result of the introduction of STP 2.0.
Nationality:
This also highlights the importance of differentiating between an employee’s nationality as well as their actual tax residency. The ATO have made a point of highlighting that it will only impact individuals from countries with a non-discriminatory clauses in the corresponding Double Tax Agreement. This includes Chile, Finland, Japan, Norway, Turkey, the United Kingdom, Germany and Israel.
Superannuation:
The case does not address the higher Departing Australia Superannuation Payment (“DASP”) which is levied on working holiday visa’s which imposes an exit tax of 65% (versus 35%) over and above the 15% contributions tax.
The outcome of the case is a welcome win for the taxpayer and will have a broad reaching positive impact for a multitude of employers. The ATO has released a media statement detailing that it will be considering the impact of the High Court case and will release further guidance in due course, the expectation being that the ATO will need to abolish all or part of the additional discriminatory working holiday tax regime. This will be welcome news to businesses such as retail, tourism and hospitality relying on migrant worker resources as the borders finally begin to reopen.
