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The Australian Tax Office guidance for employers employing Working Holiday Makers

The Australian Taxation Office issued a practice note to employers: Do you employ working holiday makers? on 21 December 2021 which sets out its current guidance for employers who are registered with the Australian Taxation Office as employers of Working Holiday Makers (WHM) and the WHM has a Tax File Number:

If you employ working holiday makers, regardless of the country they are from, you must continue to withhold 15% tax from their pay – unless you receive a pay as you go variation notice from the ATO.

This follows the recent decision by the High Court in the matter of Addy v Commissioner of Taxation. The decision means an eligible working holiday maker may be tax assessed the same as an Australian resident, if they are both:

  • an Australian resident for tax purposes, and
  • from Chile, Finland, Germany (for 2018 and later income years), Israel (for 2021 and later income years), Japan, Norway, Turkey or United Kingdom.

If your employee is a working holiday maker from one of the above countries and an Australian resident for tax purposes, they can lodge a tax return at the end of the income year to receive a tax refund (where eligible).

Note the reference to Addy v Commissioner of Taxation and the comments that follow.

This is the background:

  • Since 1 January 2017, working holiday makers (on Subclass 417 and 462 visas) have been subject to tax on income at the flat rate of 15Ȼ in the dollar. They do not have the tax-free threshold of $18,200 that Australian nationals enjoy. Therefore, they pay more tax than an Australian national would pay.
  • Catherine Addy, a United Kingdom national, spent 2 years in Australia on a working holiday visa (Subclass 417). She challenged the tax, which is commonly known as the backpacker tax, as being unfair because it discriminated against her on the grounds of nationality under the UK-Australia Double-Tax Treaty.
  • The Australia-UK Double-Tax Treaty provides that a United Kingdom national if they are doing the same work, earning the same income, under the same ordinary taxation laws as an Australian national, and if they are a resident for tax purposes, then are entitled to be taxed on income at the same rate as an Australian national.
  • The High Court of Australia applied that provision to Catherine Addy, and so her income was not subject to the backpacker tax. The provision applied because she was resident in Australia for tax purposes.
  • As the practice note states, Addy’s Case is applicable to nationals from 8 tax treaty countries if they can prove Australian residency for tax purposes.
  • The key is therefore tax residency. This means that they must satisfy the Tax Commissioner either that their usual place of abode is not outside Australia or that they intend to take up residence in Australia, so as to take advantage of the lower rate of tax available to Australian nationals. The Commissioner will require an explanation and credible evidence.
  • If not, the tax treaties provide no special protection and these nationals will be taxed on income at the same rate as working holiday nationals of other countries: i.e. a flat 15₵ in the dollar.

For a complete analysis of the backpacker tax and Addy’s case click

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