In Addy v Commissioner of Taxation [2021] HCA 34, the High Court has unanimously allowed the taxpayer’s appeal. The High Court held that the tax rates applicable to working holiday makers (“backpacker tax”) did not apply to Ms Addy in the 2017 income year as it contravened Article 25(1) of the Convention between Australia and United Kingdom for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (the UK Convention).

The principal question before the High Court was whether, in contravention of Article 25(1) of the UK Convention, Part III of Schedule 7 to the Income Tax Rates Act 1986 (the Rates Act), i.e. the tax rates for working holiday makers, imposed a more burdensome taxation requirement on Ms Addy, a national of the United Kingdom, than that imposed on an Australian national in the same circumstances. Article 25(1) provides that foreign nationals shall not be subjected to more burdensome tax treatment compared to a hypothetical Australian national in the same circumstances.

The working holiday maker tax rates applied a flat rate of tax of 15 per cent to the first $37,000 of an individual's "working holiday taxable income”, a maximum tax liability of $5,550. Under Part I of Schedule 7 to the Rates Act, the tax burden for an Australian national deriving taxable income from the same source as an individual earning working holiday taxable income during the same period would be less; they were entitled to a tax free threshold for the first $18,200 and were then taxed at 19 per cent up to $37,000, a maximum tax liability of $3,572.

“The question is whether that more burdensome taxation was imposed on Ms Addy owing to her nationality. The short answer is "yes". When the position of Ms Addy is compared with that of an Australian national, as it must be, that is the only conclusion which may be drawn” 

Facts

Ms Addy was a national of the United Kingdom who entered Australia on her working holiday visa. Between August 2015 and May 2017, Ms Addy primarily lived and worked in Australia while holding a working holiday visa. 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

Full Federal Court decision

In Addy v. Commissioner of Taxation [2020] FCAFC 135, the majority of the Full Federal Court held that Ms Addy was required to pay tax at the minimum 15 per cent tax rate applying to working holiday taxable income and that the working holiday maker tax was not discriminatory under Article 25(1) of the UK Convention. The Court found that Ms Addy was subject to the working holiday maker tax rates because of the category of visa she chose to hold and not because she was a British national.

The Full Federal Court also found that the individual was an Australian tax resident under the 183-day rule even though the Commissioner had not turned his mind as to whether he was satisfied the individual had a permanent place of abode outside Australia.

High Court decision

Overturning the Full Federal Court’s decision, the High Court held that Article 25(1) of the UK Convention requires a comparison between a national of the United Kingdom and an Australian national who is, otherwise than with respect to nationality, “in the same circumstances, in particular with respect to residence”. The “same circumstances” that must be considered cannot include being or nor being the holder of a working holiday visa, because that status depends on nationality.

Ms Addy was an Australian resident for tax purposes and was taxed at rates for working holiday makers. An Australian national deriving taxable income from the same source during the same period would have been taxed at a lower rate under Part I of Schedule 7. The more burdensome taxation was imposed on Ms Addy owing to her nationality and, for that reason, contravened Article 25(1).

Impact of decision

This decision has the potential to impact the applicability of “backpacker tax” (these tax rates commenced on 1 January 2017) on UK backpackers and other nationals from countries, which have the same non-discrimination article in their double tax agreement with Australia. According to the ATO media release, the decision is only relevant where the working holiday maker is both an Australian resident for tax purposes and from Chile, Finland, Germany, Japan, Norway, Turkey the United Kingdom, Germany or Israel.

The ATO is currently considering this decision and will provide further guidance soon. Employers should continue to follow the rates in the published withholding tables for working holiday makers until the ATO updates the ATO website with further guidance. Working holiday makers who may be impacted by this decision should check the ATO website for updated guidance prior to lodging or amending a tax return or lodging an objection.

According to the Treasurer, Josh Frydenberg, once the ATO and Treasury have worked through the implications of the decision, the Government will have more to say. So watch this space.

January 2022 Update

The ATO has now updated its guidance for working holiday makers for the impact of the High Court’s decision. The Decision Impact Statement: Addy v Commissioner of Taxation has also been published which sets out the ATO’s view of the High Court’s decision.