Following to the Court’s decision on Addy v Commissioner of Taxation on the backpacker tax case, the Australian Taxation Office (ATO) issued a Decision Impact Statement on 17 December 2021.
In the statement, the ATO has outlined the background of Addy's case, the issues decided by the Court and the ATO’s view on the decision.
Subsequently, the ATO has published the implication of the decision for working holiday makers (WHM) and guided how to lodge a tax return or amend the tax return on their website.
Background of Addy’s case
- Addy is a British citizen who was living at her family home in the UK before she came to Australia. She left a substantial amount of her personal belongings at her parent’s home with the intention to come back to the UK upon her return from Australia.
- Addy was granted a Subclass 417 (working holiday) visa for one year and entered Australia on 20 August 2015.
- By September 2015, she lived in Sydney under an informal share housing arrangement with several people.
- From 2 January 2016 to 8 March 2016, she travelled to several countries in Southeast Asia.
- She returned to Australia around April 2016 and worked on a horse farm in Western Australia for three months before returning to Sydney in July 2016, where she worked casually as a waitress in two different hotels.
- In July 2016, she was granted a further working holiday visa for another year. The taxpayer stayed in Australia until 1 May 2017 before returning to the UK permanently.
- Addy had lodged her 2016–2017 income tax return with taxable income of $26,576, derived from her working holiday employment. Her income was taxed at the WHM tax rate of 15% in accordance with the prescribed tax rate for WHM set under Part III of Schedule 7 to the Income Tax Rates Act 1986 (ITRA 1986)
- Addy disagreed with the treatment and continued to challenge the Commissioner’s assessment until she was finally allowed to appeal to Federal Court.
Issues decided by the Court
There are two main issues decided by the Court on Addy’s case, which are her Australian residency status and whether Non-Discrimination Article (NDA) has been contravened. The issues decided by the Court are predominantly unfavourable towards the Commissioner.
Residency
The Full Federal Court ruled that the taxpayer was a resident under the 183-day test but found that the taxpayer was not a resident under the ordinary resides test as her stay had a ‘fluid nature’ which is closer to being on an extended holiday. The court further commented that this was consistent with Addy’s declaration when obtaining the visa and there was nothing suggested that her intention had changed.
The Full Federal Court also concluded further that Addy’s residency ceased once she departed Australia in May 2017. As a result, she was only entitled to a part of the tax-free threshold under the ITRA 1986.
Application of Non-Discrimination Article (NDA)
The High Court ruled that NDA has been contravened and the effect of the NDA being contravened for this taxpayer was that the taxpayer should pay tax at the rates applying to resident nationals as set out in Part I of Schedule 7 to the ITRA 1986.
The implication of this case toward backpacker taxation going forward
The ATO has identified this case will have implications for the WHM who satisfied all the following criteria:
- holder of a visa subclass 417 Working Holiday or 462 Work and Holiday;
- an Australian resident for tax purposes; and
- from one of the following non-discrimination article (NDA) countries:
- Chile
- Finland
- Germany (from 1 July 2017 onwards)
- Israel (from 1 July 2020 onwards)
- Japan
- Norway
- Turkey
- The United Kingdom.
If the WHM satisfies the above criteria, the WHM will have the option of whether to lodge an income tax return on the same basis as an Australian resident return.
There are other implications required to be considered by the WHM if he/she chose to be assessed on the same basis as a resident Australian national's tax return, such as:
- He/she will be taxed following the tax rates for Australian residents for tax purposes and may be eligible for the tax offsets (i.e. low-income tax offset and the low and middle-income tax offset)
- His/ her worldwide income will be taxable in Australia just like an Australian tax resident (the relevant double taxation agreement may need to be reviewed to determine whether the foreign income could be excluded from being assessed in Australia).
- He/ she may have to pay the Medicare levy.
If the WHM is from an NDA country that is not an Australian resident, or a WHM from a non-NDA country, then the WHM will be taxed at the usual WHM rate.
Summary
Addy’s case will not be applicable for most WHMs as most of them are either non-residents or from NDA countries. However, if the WHM is from an NDA country and treated as an Australian resident, the taxpayer will have the option to be taxed the same as an Australian national under the NDA.
In order to be taxed at the Australian resident rate in the current or future period, the WHM will have to lodge a tax return to the ATO.
The ATO allows the amendment of the prior year’s tax returns for the affected WHM. Given the complicated nature of the amendment, it is recommended for the WHM to seek professional assistance from the tax professional for the lodgement/amendment of the tax return.