Success for taxpayer in Australia’s ‘backpacker tax’ case

On November 3 2021, the High Court of Australia decided in favour of the taxpayer holding that Article 25(1) of the double taxation agreement between Australia and the UK (UK DTA) would apply to the taxpayer such that Australia’s ‘backpacker tax’ would not be imposed on wages earned in Australia whilst on a working holiday visa. 

Background

The taxpayer, Ms Addy, was a UK national who travelled to Australia in 2015 and was granted a working holiday visa that allowed her to be employed and work to support her holiday in Australia. 

The ‘backpacker tax’ was introduced in December 2016 and applies a flat 15% tax to the first AU$37,000 of income to persons holding a working holiday visa. Australian nationals are not subject to the backpacker’s tax as Australian nationals are not required to obtain a working holiday visa to be employed.

The tax liability in dispute was inconsequential but the case was selected as a test case for its significance in interpretating tax treaties and more particularly the operation of Article 25(1) of the UK DTA otherwise known more generally as the non-discrimination article. 

Article 25(1) of the UK DTA provides that nationals of a contracting state (UK) shall not be subjected in the other contracting state (Australia) to other or more burdensome taxation to nationals of that other state (Australia) who are in the same circumstances.

The issue

Importantly, for the purposes of this case, the taxpayer was held to be an Australian tax resident as determined by the Full Federal Court. Thus the key issue before the High Court was whether Article 25(1) of the UK DTA applied to override Australia’s domestic law and the imposition of the ‘backpacker’s tax’ on Ms Addy. The question was whether the backpacker tax was a more burdensome taxation requirement on Ms Addy due to her nationality when compared to an Australian national in the same circumstances. 

Article 25(1) required the comparison of Ms Addy’s circumstances to a hypothetical comparator that was ‘in the same circumstances’. In this regard, the Commissioner of Taxation (Commissioner), relied upon the New Zealand case of United Dominions Trust ([1973] 2 NZLR 555) and argued that on the basis an Australian national cannot hold a working holiday visa, no comparison or hypothetical comparator could exist as required by Article 25(1) and therefore Article 25(1) could not apply to override Australia’s domestic laws. 

The High Court rejected this argument on the basis that the court in United Dominions Trust held that additional taxation arose based on residency, not nationality. Nationality, broadly, refers to a person’s place of citizenship, whereas residency is based on a person’s tax residency which is tested under the tax laws of each country. 

Thus, as was the circumstances in this case, a UK national could be a tax resident of Australia. Importantly, a differential basis of taxation, even if it was more burdensome, is specifically permitted in the UK DTA pursuant to Articles 25(1) and 25(5) and so the Commissioner’s reliance on United Dominions Trust was rejected. 

The High Court unanimously held that the backpacker tax was more burdensome because Ms Addy, who was a tax resident of Australia, did the same kind of work and earned the same amount of income from the same source; yet an Australian national was not subject to the backpacker’s tax and evidently paid less tax. On this basis, Article 25(1) applied to override Australia’s domestic law such that the backpacker’s tax would not be imposed on Ms Addy. 

In reaching this conclusion, the High Court provided useful principles in relation to treaty interpretation. The High Court relied and considered the 2003 version of the OECD commentary in construing the UK DTA because that was the relevant OECD commentary that existed at the time the UK DTA was entered into. This point is significant in relation to treaty interpretation. 

The High Court did expressly note that the OECD has published more recent commentaries on the OECD Model Convention but it did not entertain the prospect of considering that commentary and only noted that the recent commentary was not inconsistent with the conclusion reached in this case. It remains unclear whether more recent OECD commentary may be used to interpret tax treaties. 

Subsequent to the decision, the Australian Taxation Office (ATO) issued a statement providing that it considers this case to have a narrow application. 

Of relevance, this case only applies where a working holiday maker is both an Australian resident for tax purposes and also one who is a national of Chile, Finland, Japan, Norway, Turkey, the UK, Germany or Israel. Evidently, the double tax agreements with these countries contain similar non-discriminatory clauses whereas no equivalent clauses exists in other tax treaties to which Australia is party to.

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