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Australia: Parliament Passes 15% “Backpacker Tax” Rate

(Dec. 7, 2016) On December 1, 2016, on the last parliamentary sitting day of the year, the Australian Parliament voted to pass a bill establishing a 15% income tax rate for temporary foreign workers known as “working holiday makers” (WHMs, or “backpackers”) commonly referred to as the “backpacker tax.” The tax rate to be applied to those who engage in short-term employment in Australia under certain visas has been a controversial issue for the past 18 months, with farmers concerned about the possible negative impact of a higher tax rate on the number of seasonal workers available for upcoming harvests. (See Farmers Tell Canberra Backpacker Tax Reality, FARM ONLINE (Nov. 21, 2016).)

Working Holiday Maker Program

People aged between 18 and 30 years from eligible partner countries may obtain a Working Holiday Visa (subclass 417) or a Work and Holiday Visa (subclass 462).  (What Is the Working Holiday Maker Program?, DEPARTMENT OF IMMIGRATION AND BORDER PROTECTION (DIBP); Working Holiday Visa (Subclass 417), DIBP; Work and Holiday Visa (Subclass 462), DIBP (all last visited Dec. 2, 2016).)

The visas allow holders to holiday (i.e. vacation) and work in Australia for up to a year. Holders are generally restricted from working for the same employer for more than six months. The main purpose of the visas is to encourage “cultural exchange and closer ties between Australia and eligible countries.” (Working Holiday Visa (Subclass 417), supra; Working Holiday Visa (Subclass 462), supra.) In addition, “[t]he programme helps Australian regional employers by encouraging working holiday visa holders to seek short-term and casual work in specified industries in regional Australia.” (Fact Sheet – Working Holiday Visa Programme, DIBP (last visited Dec. 2, 2016).) Those who perform “specified work in an eligible regional Australian area for a minimum of three months” may be eligible for a second visa under the program. (Id.) “Regional Australia” refers to towns, small cities, and areas outside of the major capital cities. (What is Regional Australia?, REGIONAL AUSTRALIA INSTITUTE (last visited Dec. 5, 2016).)

2015-2016 Budget Proposal and Subsequent Review

In the 2015-2016 Budget, released in May 2015, the government proposed “to change the tax status of temporary working holiday makers from that of resident, to that of non-resident, from 1 July 2016.” (Les Nielsen, Changed Rules for Working Holiday Makers, in Parliamentary Library, Budget Review 2015-16 (May 2015), Parliament of Australia website.) Under the resident tax approach, the earnings of foreign workers on the relevant visas would be exempt from income tax up to AU$18,200 (about US$13,460). Earnings between AU$18,201 and AU$37,000 (about US$27,370) would be taxed at a rate of 19%, with higher marginal rates applying to subsequent higher amounts. (Id.) Administrative Appeals Tribunal rulings in March 2015 indicated that some WHMs may not qualify as Australian residents and therefore backpackers could not automatically claim the tax-free threshold. (11 Mar 15 Backpacker Not Resident of Australia Under 183 Day Test – Re Koustrup, THE TAX INSTITUTE (Mar. 11, 2015).)

A non-resident tax approach would see WHMs being taxed at the rate of 32.5% for earnings up to AU$80,000. (Nielson, supra.)

Several concerns were raised following the release of the government’s proposal:

  • this new policy could substantially increase the incentives for tax evasion; and
  • the number of working holiday makers may diminish rapidly as soon as visa holders perceive there is less economic benefit to undertaking work that most Australians are reluctant to do, such as picking fruit, cleaning and casual hospitality

The new income tax policy could end up hurting Australian companies that will find it hard to fill job vacancies without a cheap and casual visiting workforce.

Meanwhile, the tourism industry is concerned because backpackers, who are more likely to go to regional areas and are relatively high-spending tourists, will be less likely to visit Australia and will go instead to New Zealand, Canada or South Africa. At the same time, the industry relies heavily on working holiday makers as a labour force. (Id.)

As a result of the surrounding controversy, the government announced a review of the tax arrangements for working holiday makers in March 2016. (Press Release, Barnaby Joyce, Anne RustonKeith Pitt, Review of Taxation Arrangements for Working Holiday Maker Visa Programme a Sensible Approach for Agriculture (Mar. 16, 2016), Minister for Agriculture and Water Resources website.) In May 2016, the government stated that the commencement date for the policy in the previous budget would be deferred to January 1, 2017. (Press Conference, Kelly O’Dwyer, Murrumbatemen, NSW: Working Holiday Visa Review (May 17, 2016).)

The review itself did not commence until August 2016, following the July 2016 general election. (Press Release, Barnaby Joyce, Working Holiday Visa Review Now Underway (Aug. 15, 2016).) A package of measures was subsequently announced at the end of September 2016, and the relevant bills were introduced in the Parliament in October 2016. (Press Release, Scott Morrison, Better Working Holiday Maker Tax Arrangements (Sept. 27, 2016); Scott Morrison, Working Holiday Maker Reform Package: Factsheet (Sept. 2016);

Original Bills Arising from Review

The review resulted in the introduction of four bills:

Elements of the government’s proposed packaged that were included in the bills were to:

  • apply a 19 per cent tax rate to the taxable income of WHMs on amounts up to $37,000, with ordinary tax rates and thresholds applying thereafter
  • increase tax on the Departing Australia Superannuation Payment to 95 per cent [from either 0%, 35%, or 45%, depending on the composition of the balance of the member’s superannuation (i.e., pension)]
  • increase the passenger movement charge by five dollars [from $55 to $60]
  • reduce the application charge for WHM visas by $50 [from $440 to $390]
  • create a register of employers of WHMs, which will be used to enable tax to be withheld at the lower 19 per cent rate
  • provide for the Commissioner of Taxation to prepare an annual report to the Treasurer, for presentation in Parliament, which includes statistics and information derived from the register, and
  • allow the Commissioner to disclose to the Fair Work Ombudsman (FWO) information that is relevant to ensuring an entity’s compliance with the appropriate employment arrangements. (Swoboda & Dossor, supra.)

Other elements that would require other implementation processes include:

  • funding for Tourism Australia to promote Australia as a potential destination for WHMs through a $10 million global youth targeted advertising campaign
  • change visa conditions so that an employer with premises in different regions is able to employ a WHM for 12 months, with the WHM working up to six months in each region
  • change visa conditions so that the eligibility age for a WHM visa is lifted from age 30 to age 35. (Id.)

Consideration of the Bills by the Parliament

The government hoped for swift passage of the relevant bills by the Parliament, with a failure to pass the bills meaning that the tax rate for WHMs would default to 32.5% on January 1, 2017.  However, the Labor Party argued that because the bills included measures not previously scrutinized, they should be referred to a Senate committee. (Anna Vidot, Backpacker Tax: Labor Blames ‘Government Incompetence’ for Delay, ABC News (Oct. 13, 2016).) The Senate Standing Committee on Economics subsequently completed its inquiry on November 11, 2016.  (Working Holiday Maker Reform Package, SENATE STANDING COMMITTEE ON ECONOMICS, PARLIAMENT OF AUSTRALIA (last visited Dec. 2, 2016).) In the meantime, the House of Representatives voted to pass the bills on October 17, 2016. (See, e.g., Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016, PARLIAMENT OF AUSTRALIA (last visited Dec. 2, 2016).)

During subsequent debate on the reforms in the Senate, the Senate agreed to an amended tax rate of 10.5%, which the House rejected. (Gareth Hutchens & Paul Karp, Backpacker Tax: Parliament Split as House Rejects Lambie’s 10.5% Plan, GUARDIAN (Nov. 24, 2016).) The government then reached a compromise deal with the One Nation Party for a tax rate of 15%, which was contained in a new bill that was passed by the House. (Katharine Murphy, Coalition Caves to One Nation Demand to Set Backpacker Tax at 15%,  GUARDIAN (Nov. 27, 2016); Income Tax Rates (Working Holiday Maker Reform) Bill 2016 No. 2 (Parliament of Australia website).) However, the bill was defeated by the Senate, which instead voted again for a 10.5% rate. (Anna Vidot & Lucy Barbour, Backpacker Tax: Senate Rejects Government’s 15pc Rate, Labor’s 10.5pc Amendment Passes, ABC NEWS (Nov. 29, 2016); Katharine Murphy, Senate Rejects Backpacker Tax Deal in Surprise Defeat for Turnbull Government, GUARDIAN (Nov. 29, 2016).)

This led the government to negotiate a new deal with the Green Party, involving a 15% tax rate for earnings up to AU$37,000 and a reduction in the percentage of superannuation from 95% to 65% that backpackers will forfeit when they leave Australia. (Henry Belot & Francis Keany, Backpacker Tax: Government Defends Doing Last-Minute Deal with Greens, ABC NEWS (Dec. 1, 2016); Eoin Blackwell, Backpacker Tax Passes with Greens Support, HUFFINGTON POST (Dec. 1, 2016).) In addition, the government agreed to AU$100 million in funding for Landcare, a non-profit organization concerned with sustainable land and environmental management, which has seen a significant cut in government funding in recent years. (Katharine Murphy, Greens Support 15% Backpacker Tax in Return for $100m for Landcare,  GUARDIAN (Dec. 1, 2016); About, LANDCARE AUSTRALIA (last visited Dec. 2, 2016).)

The bill was finally passed by both houses on December 1, 2016, with the new tax rate to take effect from January 1, 2017.