Landmark ruling in ‘backpacker tax’ case

FCT v Addy [2020] FCAFC 135 is a case which has been on my radar for some time. Ms Addy, a British national travelling through Australia on a working holiday visa, claimed the tax she suffered whilst waitressing throughout her trip was discriminatory based on the UK-Australia Double Tax Treaty.

Australia has a 15% rate of tax which applies to non-residents from the point that they first start earning, whereas residents of Australia are granted a personal allowance on the first $18k [in the years in question] they earn in a given tax year. The lack of personal allowance has become widely known as a ‘backpacker tax’, due to the large number of working travellers Australia sees each year.

Ms Addy was however by Australia’s own residency tests an Australian tax resident, having met the 183 day test, having an Australian bank account (in which her wages were paid), and having a home address in Australia in the house she rented with her friend. It should have been an open and shut case that she should be afforded a personal allowance.

Ms Addy put forward that Article 25 of the UK-Australia double tax treaty contained a non-discrimination clause, and that, given she was a resident of Australia, she was being taxed discriminatorily based on her British nationality, when compared to an Australian national doing the same work.

The Australian Taxation Office (ATO) however argued that the status of her visa was the reason for the tax, she could have applied for a more permanent visa, and therefore her stay in Australia, whilst meeting the day count, was only temporary in nature. Personally, I was surprised that this argument was allowed on appeal, as this could have resulted in far ranging consequences for those individuals in Australia who are claiming they are not resident based on temporary purpose and yet subject to tax under Article 4 (Residence) of the relevant Australian double tax treaty.

The high court dismissed the ATO’s visa appeal on the basis that focusing on her type of visa was in itself discriminatory. Had she been an Australian national, a visa would not be required and therefore the state was “imposing a more burdensome taxation requirement on a national of the United Kingdom than that imposed on an Australian national in the same circumstances”.

The ATO has since stated that this ruling will only apply in limited circumstances, to backpackers since 2017 who met the definition of tax resident, but never the less this opens up a flood of potential claims from backpackers from countries with non-discrimination clauses in their double tax treaty (Chile, Finland, Japan, Norway, Turkey, the United Kingdom, Germany or Israel).

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