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Australia: Legal Action to Challenge the Validity of the Australian Federal Government’s Controversial Backpacker Tax

Legal Action to Challenge the Validity of the Australian Federal Government’s Controversial Backpacker Tax

The Federal Court of Australia has found that the Applicant, a British backpacker who had entered Australia pursuant to a working holiday visa, was a “resident” under the relevant tax legislation and thus subject to a tax-free threshold. The Applicant had appealed a decision by the Commissioner of Taxation, who had disallowed the Applicant’s objection to the Commissioner’s assessment in respect of her taxable income and tax payable thereon for the 2017 financial year (“Objection Decision”). The Court ruled that the appeal be allowed and that the Objection Decision be set aside.

In reaching this decision, the Court reasoned that the “working holiday taxable income” of a “working holiday maker” set out in the Income Tax Rates Act 1986 (Cth)  (“Backpacker Tax”) was discriminatory in contravention of the international double tax agreement between the UK and Australia because it attempted to tax foreign workers in the same circumstances as an Australian resident at a higher tax rate. Under the Backpacker Tax, the Applicant was obligated to pay 15% tax for all her income up to $37,000. In comparison, Australian residents are not required to pay tax on the first $18,200 of their income.

Pursuant to the international double tax agreement: “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.” The UK and Australia are “Contracting States” for the purposes of this agreement, which was given force and effect as part of Australia’s domestic law by the International Tax Agreements Act 1953 (Cth).

The Court stated the expression “in particular in respect to residence” from the international double tax agreement made clear that the residence of the taxpayer is one of the factors relevant in determining whether taxpayers are placed in similar circumstances. The Court considered that the Applicant was a “resident”, given she resided in a home in Sydney which was the “centre of her life for work and social purposes” throughout her residency in Australia.

The Court affirmed that, when reading the international double tax agreement in context, the purpose as a whole is the prevention of discrimination based solely on nationality. Accordingly, the Backpacker Tax was a “disguised form of discrimination based on nationality” prohibited by the international double tax agreement. The Court held that the Applicant’s appeal of the Commissioner of Taxation’s assessment of her taxable income and tax payable thereon must be allowed, and the mater remitted to the Commissioner for the making of a consequential amended assessment.

The Commissioner of Taxation has recently lodged an appeal, which will likely be heard in 2020.