As we discussed in Coelho v FCT [2020] AATA 2474, different tax rates apply to residents and non-residents. Further, under Pt III of Sch 7 to the Income Tax Rates Act 1986, a working holiday maker pays tax at 15% on the first $37,000 of income in Australia. Commonly referred to as the ‘backpacker tax’.
In Addy v FCT [2020] FCAFC 135 (Addy), the Full Federal Court upheld (most aspects of) the Commissioner of Taxation’s appeal against the decision of Logan J in the Federal Court. The Court held (in effect) that the taxpayer, Catherine Addy, had to pay the ‘backpacker tax’ and could not benefit from the tax-free threshold (up to $18,200).
Ms Addy, a British citizen, came to Australia in August 2015 on a work visa and left Australia in May 2017. The ATO issued a notice of assessment that assessed Ms Addy as liable for the ‘backpacker tax’ on her income.
The legal issues in Addy were complex with six grounds of appeal by the Commissioner and two grounds of cross-appeal by Ms Addy. The judgment ran to 353 paragraphs with two of the grounds of appeal relating to whether the backpacker tax infringed Article 25 of the Australia and United Kingdom Double Tax Agreement (UK DTA). This Snippet will focus on the Article 25 issue. However, in summary on other grounds of appeal:
Davies J and Steward J, for the reasons of Derrington J, allowed the Commissioner’s appeal that Ms Addy was not an Australian tax resident under the ‘ordinary concepts’ test; and
Davies J, Steward J, and Derrington J each separately held that Ms Addy was an Australian tax resident under the ‘183 day’ test.
Article 25 of the UK DTA precludes discriminatory tax treatment of foreign nationals based upon nationality and relevantly provides:
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 …
Article 25 largely follows Article 24 of the OECD Model Tax Convention (OECD Model) that for purposes of taxation, discrimination on the grounds of nationality is forbidden and, subject to reciprocity, the nationals of a contracting state may not be less favourably treated in the other contracting state than nationals of the latter state in the same circumstances.
The Full Federal Court, by majority (Derrington J and Steward J), held that the ‘backpacker tax’ did not discriminate against Ms Addy based on her nationality.
Steward J agreed with the reasons of Derrington J that although the ‘backpacker tax’ imposed a greater tax burden on Ms Addy than is imposed upon Australian residents who have the benefit of the tax-free threshold, it did not trigger the operation of Article 25 of the UK DTA. The imposition of a tax at a higher rate on the holders of specific visas did not discriminate against the holder solely based on nationality and did not offend the UK DTA.
Davies J disagreed and held that the primary judge (Logan J) was correct to hold that the backpacker tax infringed Article 25.
It is unknown whether Ms Addy will seek special leave to appeal to the High Court. In the interim, the Court in Addy by majority held that the ‘backpacker tax’ does not infringe Article 25 of the UK DTA.
Does this mean that the ‘backpacker tax’ will not infringe the anti-discrimination Articles of all of Australia’s tax treaties? Possibly, as most Australian tax treaties follow the OECD Model. However, there is still a risk that the non-discrimination Articles in other treaties are different from in the UK DTA as:
the OECD Model has changed over time (the 2003 OECD Model was relevant in Addy);
not all of Australia’s tax treaties are based on an OECD Model; and
many tax treaties, while based on an OECD Model, include differences to that model.
Addy, while it traverses some questions – the ordinary concepts test – often considered in residency cases, also considers a multitude of other issues including treaty interpretation and the non-discrimination article in the UK DTA.
For more information please contact:
Neil Brydges
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E nbrydges@sladen.com.au
Lucy Liang
Graduate Lawyer
E lliang@sladen.com.au
