Court ruling finds Australia’s backpacker tax illegal (for some)

This post is from November 2019, when the case was still running. It is kept as the record of the Federal Court decision. The matter finished in the High Court in November 2021 – see "What happens now?" below – and the rates quoted here are from 2017. For the rates that apply today, see work and holiday tax.

Around 150,000 backpackers travel to Australia every year on working holiday visas, with many finding work in the farming and hospitality industries. And now, in what’s being hailed as a landmark ruling, many of them could be owed money by the Australian Government.

As reported by BBC News on 30 October in the article Australia’s ‘backpacker tax’ ruled illegal by court, the Federal Court found that Australia has been using a so-called ‘backpackers tax’ to illegally tax foreign workers from the United Kingdom, United States of America, Germany, Finland, Chile, Japan, Norway and Turkey. Double tax agreements that Australia has with these countries contain a clause that prevents taxing citizens of these countries differently to their own. This means that if a citizen of Australia receives a tax-free threshold, so should citizens of these countries.

What is the ‘Backpacker Tax’?

In 2017, the Australian Government imposed a controversial tax rate for those on a Subclass 417 (Working Holiday) visa, a Subclass 462 (Work and Holiday) visa and a bridging visa permitting an individual to work in Australia.

Up until 2016, working holiday-makers were eligible to earn up to $18,200 tax-free, similar to Australian citizens. From 1st January 2017, working holidaymakers have been taxed at 15 per cent on all earnings up to $37,000. Ordinary marginal tax rates apply after that amount and there is no longer the ability to claim the tax-free threshold under $18,200.

Federal Court findings

The 2016 tax amendments were challenged by an international tax company on behalf of a British tourist who worked in the hospitality industry in Australia between 2015 and 2017. The recent Federal Court hearing found that the ‘backpacker tax’ was in breach of the existing treaties Australia has with the eight countries affected. The tax levy breaches anti-discrimination clauses in these treaties which require Australia to tax nationals from those countries in the same way as local workers.

These findings could potentially impact upon half of those who worked on a working holiday visa in Australia between the 2017 and 2019 financial years – thought to be around 70,000 backpackers. It could also force the government to collectively repay tens of thousands of foreign nationals hundreds of millions of dollars.

What happens now?

The ATO did appeal, and won in the Full Federal Court – but the taxpayer then took it to the High Court, which decided Addy v Commissioner of Taxation on 3 November 2021, unanimously in her favour.

The result: a working holiday maker who is an Australian resident for tax purposes and a national of one of the eight non-discrimination-article countries cannot be taxed more heavily than an Australian doing the same work. Residency is the hinge – most working holiday makers are not Australian residents for tax purposes, and for them the working holiday maker rates always applied and still do.

If you are on a working holiday visa now, the rates that apply today are in work and holiday tax, and our tax for travellers service covers the rest of it.

If you think you were affected, the practical obstacle now is time rather than law: an individual generally has two years from their notice of assessment to amend a return, so the 2017 to 2019 years this case was about are long closed. Please follow our Facebook page to keep up to date or contact us with any questions.