The High Court has held, on Wed 3.11.2021] that applying the so-called “backpacker tax” to wages earned by a UK national who was a tax resident of Australia contravened a non-discrimination clause in the Australia-UK DTA, thereby allowing the taxpayer’s appeal (see related TT article).
Ms Addy was a UK national who arrived in Australia in August 2015 on a 12-month working holiday visa. She obtained another 12-month visa and eventually left Australia in May 2017. During the 2017 income year, Ms Addy derived taxable income of $26,576 working in casual employment as a food and beverage waiter in Sydney.
The Full Federal Court held that Ms Addy was a tax resident of Australia under the 183-day test. The Court also held (by majority) that earnings derived by Ms Addy from 1 January 2017 should be taxed at the special rates applicable to working holiday makers (the “backpacker tax”). Ms Addy had argued that they should be taxed at the lower standard resident rates because of a non-discrimination clause (Art 25(1)) in the Australia-UK Double Tax Agreement (DTA). Article 25(1) relevantly provides that nationals of the UK shall not be subjected in Australia to “other or more burdensome” taxation than is imposed on Australian nationals “in the same circumstances, in particular with respect to residence”.
The only issue for the High Court was the application of Art 25(1). It has now unanimously held that taxing the wages derived by Ms Addy from 1 January 2017 at the higher “backpacker tax” rate contravened Art 25(1).
The High Court said that the “same circumstances” that must be considered under Art 25(1) cannot include being or not being the holder of a working holiday visa, because that status depends on nationality, the very attribute protected by Art 25(1). However, the more onerous “backpacker tax” was imposed on Ms Addy because of her nationality – an Australian national in the same circumstances, ie deriving taxable income from the same source during the same period rate, would have been taxed at the lower rate. Accordingly, Art 25(1) was contravened.
(Addy v FCT  HCA 34, High Court, Kiefel CJ, Gageler, Gordon, Edelman and Gleeson JJ, 3 November 2021.)
The ATO has released a media release stating, The Australian Taxation Office (ATO) notes the decision of the High Court in the matter of Addy v Commissioner of Taxation and is currently considering this decision and will provide further guidance as soon as possible.
Going forward, the ATO says:
- This decision is only relevant where the working holiday maker is both an Australian resident for tax purposes and from Chile, Finland, Japan, Norway, Turkey, the United Kingdom, Germany or Israel (which is to say, they are the only countries with a ‘non-discrimination’ clause.
- Working holiday makers who may potentially be affected by this decision are encouraged to check the ATO website for updated guidance prior to lodging or amending a return or lodging an objection.
- Employers should continue to follow rates in the published withholding tables for working holiday makers until we update the ATO website with further guidance.
- A working holiday maker’s residency status for tax purposes is determined by the taxpayer’s individual circumstances. Most working holiday makers will be non-residents consistent with their purpose of being in Australia to have a holiday and working to support that holiday.