High Court rules backpacker tax invalid

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A unanimous ruling by the Australian High Court has this week decided the ‘backpacker tax’, first introduced in 2017, cannot be levied on citizens from eight countries.

The High Court says the Backpacker Tax broke a non-discrimination clause which prohibits unequal tax treatment of citizens from signatory countries in comparison to Australian nationals

The High Court says the backpacker tax broke non-discrimination clauses built into existing tax treaties Australia had signed with several countries including the United Kingdom, United States, Germany, Finland, Chile, Japan, Norway, and Turkey.  

These international tax treaties override domestic tax laws.

The ruling follows a legal battle by British citizen Catherine Addy, who worked as a waitress while on a working holiday in Australia in 2017.

Addy argued that she was discriminated against in having to pay the backpacker tax while on her working holiday down under.

In its ruling, the High Court stated the following:

‘’The method of assessment in relation to the taxable income of Australian nationals and nationals of the United Kingdom in the same circumstances – was the same, but the tax rate was not.

"The tax rate was more onerous for Ms Addy, a national of the United Kingdom, than it was for an Australian national in the same circumstances – doing the same work, earning the same income, under the same ordinary taxation laws."

The non-discrimination clause broken by the backpacker tax prohibits unequal tax treatment of citizens from signatory countries in comparison to Australian nationals.

Australia’s Backpacker Tax levies 15 per cent on all earnings of foreign nationals whereas Australian citizens can earn up to $18,500 – the tax-free threshold – before being taxed. 

The tax was introduced via reforms to the Tax Rates Amendment Reform Act 2016 which was designed to impose higher rates of tax on foreigners who earned income in Australia on a 417 or 462 Working Holiday Visa.

Typically used by backpackers, there have been almost 820,000 417 or 462 Working Holiday Visas granted between June 2017 and June 2021. Of these, it is estimated more than 320,000 recipients hailed from countries affected by the backpacker tax ruling. 

It is assumed many other backpackers were waiting on the High Court’s ruling – something which Taxback.com chief executive Joanna Murphy says the decision will bring clarity for many foreign workers. 

"The Court has reaffirmed important protections for foreign citizens choosing to work while holidaying in Australia," Murphy says. 

"It was always clear to us when this tax was introduced in 2016, against the wishes of the agricultural sector, that it breached a number of international tax agreements. It also damaged Australia’s reputation as a working holiday destination." 

"Ending the Backpacker Tax also removes a key barrier to rural and regional industries securing the workers they so badly need as Australia emerges from the COVID-19 period," she says.

The Backpacker Tax raises an estimated $520 million in tax revenue for the Government however the High Court’s ruling puts at risk approximately half of that figure (around $250 million) which was to be paid by visitors from the eight countries subject to the ruling. 

It is estimated earnings from backpackers and foreigners using a working holiday visa has contributed $3.1 billion annually to the economy including $920 million (2017 figures) in regional towns. 

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