In November last year, the High Court of Australia ruled that the so-called ‘backpacker tax’, introduced four years earlier, was discriminatory towards many who had visited and worked in the country and who had an established right to be treated in the same way as tax residents.
Pre-Covid, Australia annually welcomed hundreds of thousands of young people to its shores. Availing of its working holiday visas, they could take up employment as they travelled around the country for a period of up to three years. In doing so, they were also benefiting the country’s agricultural and hospitality sectors, which are highly dependent on seasonal labour, and contributed over AU$3bn annually to the national economy.
Introduced by the then treasurer and future prime minister of Australia, Scott Morrison, in 2017, the backpacker tax for the first time specifically targeted these workers, imposing a flat 15% tax on income up to AU$37,000 (after which standard taxation rates applied). Notably, Morrison’s government had originally intended this to be a 32.5% tax but agreed to the lower level after strong opposition from the farming and hospitality sectors.
Taxback.com argued that the backpacker tax was contrary to the double taxation treaty agreed between Australia and the UK
What the government had not reckoned on was the clout of backpackers themselves. When British national Catherine Addy found that the new measure was substantially reducing her take-home pay, she joined forces with the Irish-founded tax advisory group Taxback.com to take the Australian Taxation Office (ATO) to court.
While the case was based on unfair treatment, it wasn’t centred on discrimination legislation. Addy and Taxback.com instead argued that the backpacker tax was contrary to the double taxation treaty agreed between Australia and the UK. This guaranteed that citizens of the UK would not be taxed in a ‘more burdensome’ way than Australian nationals, in situations where both were equally regarded as tax residents of Australia.
The Federal Court in Brisbane found in Addy’s favour in a 2019 judgment, which was overturned on appeal. Subsequently, Addy received special leave to have the case heard in Australia’s High Court, leading to the November 2021 judgment.
'This ruling will clear the path for a change in legislation in Australia, which would benefit thousands of working holidaymakers'
In a unanimous decision, the High Court agreed that Addy’s ‘circumstances in the 2017 income year, including that of her residency in Australia for taxation purposes, were relevantly the same as an Australian national’ and concluded: ‘The question is whether that more burdensome taxation was imposed on Ms Addy owing to her nationality. The short answer is “yes”.’
As Australia holds double taxation treaties double taxation treaties similar to the UK's with seven other countries (Chile, Finland, Japan, Norway, Turkey, Germany and Israel), impacted visa holders from these states can, like UK nationals, now look forward to a refund.
According to the ATO, 820,000 working holiday visas have been issued since 2017 and, of these, 320,000 were to people from the countries covered by the tax treaties. What happens beyond this is an open question. The department says that the story ends there as the court decision is only relevant where a working holidaymaker is both an Australian resident for tax purposes and from one of the eight countries.
However, Joanna Murphy, CEO of Taxback.com, believes the decision sets a precedent, albeit one that the Australian Government and ATO may take time to act upon. ‘It is our expectation that this ruling will clear the path for a change in legislation in Australia, which would benefit the thousands of working holidaymakers who travel "down under" every year,’ she says.
If the backpacker tax is continued, the sums raised will certainly be reduced while its impact on Australia’s reputation and appeal may not be diminished. ‘Australia’s agricultural sector was badly affected after the tax was introduced as numbers of new arrivals were reduced,’ Murphy says. She believes that the country’s ‘overall reputation as a destination for backpackers was also negatively affected because of the tax’.
Team behind the challenge
Global tax refund specialist Taxback.com has been working with backpackers for more than 20 years and 'it was only natural that we would want to support their challenge against this unfair tax,' CEO Joanna Murphy says. 'When we first examined the backpacker tax, it quickly became clear that it was inherently flawed and discriminatory.’
The firm owes its origins to the summers that founder Terry Clune spent working in Germany while a student in Dublin in the early 1990s. Frustrated by the difficulty he and his friends faced in claiming the tax due to them, he set up the company in 1996 to help people cut through paperwork and secure tax rebates.
‘Australia’s agricultural sector was badly affected after the tax was introduced as numbers of new arrivals were reduced’
Australia’s plans to reopen to the world in 2022 will provide an opportunity to test this out. ABC News recently observed that the loss of backpackers contributed to ‘crippling labour shortages during the pandemic’ and said the country ‘will need to out-compete other destinations to bring working holidaymakers back, particularly those from Europe’.
The global campaign for tax justice may be focused on the billions traded by multinationals, but the backpacker tax shows that reputations can be tarnished for far smaller amounts. As the New Year begins, tax authorities around the world will be refreshing themselves on their obligations under double taxation treaties.