The High Court recently allowed the taxpayer’s appeal in the case of Addy v FCT [2021] HCA 34 that concerned the so-called ‘backpacker tax’.
Background
The ‘backpacker tax’ is the colloquial name for the change to tax rates introduced in 2016 that required Australian resident holders of working holiday visas to pay 15% tax on their first $37,000 of income in Australia. Australian nationals who were tax residents had a tax-free threshold on income up to $18,200.
We previously discussed the Full Federal Court decision in Addy v FCT [2020] FCAFC 135 here. Ms Addy, a British citizen, came to Australia in August 2015 on a working 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 Full Federal Court held that Ms Addy, a UK working holiday visa holder, was an Australian tax resident and was subject to the backpacker tax and not entitled to benefit from the tax-free threshold. It said that the imposition of tax at a higher rate on holders of specific visas was not discriminatory on the sole basis of their nationality and did not trigger the non-discrimination clause in article 25 of the Australia and United Kingdom Double Tax Agreement (UK DTA).
Ms Addy was granted special leave to appeal to the High Court.
The High Court decision
At issue before the High Court was whether the backpacker tax imposed a more burdensome taxation requirement on Ms Addy by reason of her nationality in contravention of Article 25 of the UK DTA. Article 25 provides that a UK national should not be subjected to a greater tax burden than that imposed on an Australian national ‘in the same circumstances, in particular with respect of residence.’
The High Court unanimously allowed Ms Addy’s appeal and found that an Australian national deriving taxable income in the same circumstances as the taxpayer would have been entitled to a tax-free threshold and taxation at a lower rate. The High Court rejected the Commissioner’s argument and found that more burdensome taxation had been imposed on Ms Addy due to her nationality. The court held that the ‘backpacker tax’ contravened Article 25 of the UK DTA as the tax discriminated against Ms Addy based on her nationality.
In finding for Ms Addy it was “mandatory” that the High Court looked “to the context, object and purpose of treaty provisions as well as the text ... consistent with the general principle that international instruments should be interpreted in a more liberal manner than would be adopted if the court was required to construe exclusively domestic legislation”.
Left for another day was the question of whether the OECD Commentary on Model Convention provisions published after the date of a treaty incorporated into domestic law is relevant to the task of construing the treaty for domestic law purposes. However, the High Court did note that the published OECD commentaries after the UK DTA were consistent with the Court’s construction in Addy.
What does the High Court decision mean?
Importantly, and contrary to some media reporting, the High Court did not find the ‘backpacker tax’ itself to be discriminatory. The ‘backpacker tax’ was only discriminatory under the non-discrimination Article 25 in the UK DTA. This means that barring legislative change the ‘backpacker tax’ will remain for Australian resident working holiday makers who are nationals of a country with which Australia does not have a tax treaty with the same, or similar, non-discrimination clause to Article 25 of the UK DTA.
Australian resident working holiday makers who are UK nationals or from a country with which Australia has a tax treaty with a similar non-discrimination clause to Article 25 may be able to benefit from the High Court decision.
On this point, the ATO has indicated that it is currently considering the implications of this decision. Working holiday makers potentially affected by the decision, particularly those from a treaty country other than the UK, should check the ATO website for updated guidance before lodging or amending a return or lodging an objection.
To discuss or 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
Lawyer
T +61 9611 0131
E lliang@sladen.com.au
