On 30 October 2019, His Honour: Justice Logan, in the Federal Court, held that a UK backpacker did not have to pay the ‘backpackers tax’ on her Australian income – because the ‘anti-discrimination clause, in the relevant Double Tax Agreement, prevented it. See also related Tax Technical article.
See below for a summary of the case.
FJM 10.11.19
The Federal Court has held, in a test case, that the Australia-UK Double Tax Agreement (DTA) required a British working holiday maker, who was an Australian tax resident, to pay tax at the same rate as other Australian tax residents, and not at the special rate, applicable to working holiday makers (the so-called “backpacker tax”).
The taxpayer was a British citizen who arrived in Australia, on 20 August 2015, on a 12-month working holiday visa. She obtained a second 12-month visa, and eventually returned to the UK, on 1 May 2017.
For most of her time in Australia, the taxpayer lived with a friend in share house accommodation, in Earlwood in Sydney, having arranged it before leaving the UK. It was also her postal address here. In the first half of 2016, she toured S-E Asia, for 2 months, and also spent 2 months working on a horse farm in WA (so she could qualify for the second working holiday visa). She had 2 bank accounts and a pre-paid mobile phone account in Australia.
From 18 July 2016 to 30 April 2017 the taxpayer worked as a waitress in Sydney. Her wages were paid into one of the Australian bank accounts. The ATO assessed her in 2016-17 to pay tax, on the taxable income, derived from 1 January 2017, at the working holiday tax rate (15% on the first $37,000 of taxable income).
The Federal Court firstly held that the taxpayer was a resident of Australia (for tax purposes) within the ordinary meaning of that term as, in respect of the 2016-17 income year, she was settled in Sydney at the Earlwood house. It was, as a matter of habit and intent, her home base for employment, living and social purposes. There was nothing itinerant about her life. She was also held to be a resident, on the basis of the “183-day test”, as the Earlwood house had become her usual place of abode.
The Court also ruled, however, that her residency ceased when she left Australia on 1 May 2017 and therefore, by virtue of s 18 of the Rates Act, she had a part year residency period, which commenced, on 1 July 2016, and concluded on 30 April 2017.
The Court then found that, by virtue of Art 25 of the Australia-UK DTA ([2003] ATS 22), the taxpayer was entitled to be taxed at the same rates that apply to Australian citizens who are tax residents, including getting the benefit of the tax-free threshold.
Article 25 is a “non-discrimination clause” which relevantly provides that tax imposed by Australia, on nationals of the UK, should not be “more burdensome” than the tax imposed on Australian nationals “in the same circumstances”. Specifically, it provides, as follows.
ARTICLE 25
Non-discrimination
- 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.
As the working holiday tax rate could not apply to Australian nationals, the discrimination in the Rates Act between resident derived income from the same source in Australia was based on nationality which was not allowed. His Honour explained it, this way, in para 103.
103. The Rates Act expressly envisages that, in respect of persons who are resident in Australia, a different rate of tax will apply in respect of income derived in Australia from the same source, depending on whether the individual deriving that income is or is not a “working holiday maker” (as defined). On examination, the definition of “working holiday maker” in s 3A(1) of the Rates Act necessarily extends only to particular individuals who are not nationals of Australia. Likewise by reference to s 3A(2) of the Rates Act, it is only such persons who may derive “working holiday taxable income”. These are what Vogel terms the “actual circumstances which are decisive in connection with the taxation procedure”. In my view, this means that the discrimination between resident derived income from the same source in Australia is based on nationality. It is disguised by the reference to “working holiday maker” but the definition of that term makes it plain that what the disguise covers is nationality. A resident “national” of Australia undertaking the same work as did Ms Addy, in other words “in the same circumstances”, would not be taxed by reference to the rates specified in Pt III of Sch 7 to the Rates Act. Such a person would have the benefit of the tax free threshold.
Such a provision, in a DTA, overrides the domestic taxation law, because of the effect of the International Tax Agreements Act 1953. His Honour confirmed this in the final paragraph of his judgment.
116. For these reasons, Ms Addy’s tax ought not to have been assessed by reference to the rate of tax specified in Pt III of Sch 7 to the Rates Act. That is because the effect of Art 25(1) of the Double Taxation Agreement, as applied by the Agreements Act, was to prohibit her being taxed at that rate of tax.
(Addy v FCT [2019] FCA 1768, Federal Court, Logan J, 30 October 2019