In a decision that could impact future working holiday-makers and may lead to large refunds from the “backpacker tax”, the High Court of Australia has awarded British national Catherine Addy an appeal from a Federal Court decision that favoured the Australian Taxation Office’s (ATO) “burdensome” tax assessment of her income.

The test case was led by the legal team behind Ms Addy, who arrived in Australia on a working holiday visa in August 2015 and lived and worked as a waitress in Sydney until May 2017. In January 2017, a new tax rate applicable to persons holding a working holiday visa was enacted and inserted into the Income Tax Rates Act 1986.

This new section applied a flat rate to tax 15 per cent of the first $37,000 of an individual’s “working holiday taxable income” and a maximum tax liability of $5,500.

During the income year that this came into effect, Ms Addy derived a taxable income of $26,567 from her work in casual employment as a food and beverage waitress.

A UK convention, of which Australia had agreed to in 2003, provided that nationals of the UK should not be subjected in Australia to “other or more burdensome taxation” than may be imposed on Australian nationals in the same circumstances, in particular with respect to their residency in the other’s country.

In a unanimous decision, Chief Justice Susan Kiefel and Justices Stephen Gageler, Michelle Gordon, James Edelman and Jacqueline Gleeson found that based on this
convention between UK and Australia – and the latter’s supposed contravention of it – Ms Addy was discriminated against on the basis of her nationality.

“The question is whether that more burdensome taxation was imposed on Ms Addy owing to her nationality. The short answer is ‘yes’,” the High Court found.

“The tax rate was more onerous for Ms Addy, a national of the United Kingdom, than it was for an Australian national in the same circumstances – doing the same work, earning the same income, under the same ordinary taxation laws.”

The High Court ultimately found that Ms Addy’s circumstances in the 2017 income year, including that of her residency in Australia for taxation purposes, were relevantly the same as an Australian national. In other words, she did the same work and earned the same amount from the same source, but needed to pay more tax.

The case began in December 2017 when Ms Addy was issued with an amended notice for the 2017 income year. Ms Addy objected to that assessment on the grounds that her assessable income contravened the UK’s convention.

The Commissioner of Taxation disallowed this objection and found that Ms Addy was an “Australian resident for taxation purposes during the 2017 [income] year” and a “working holiday maker” earning “working holiday taxable income” within the meaning of the Rates Act and was “therefore subject to the tax rates”.

Ms Addy commenced proceedings in the Federal Court, which allowed the appeal and ordered that the matter be remitted to the commissioner for the making of a consequential amended assessment. However, a further appeal by the commissioner to the full bench of the Federal Court reversed this first decision.

Responding to the High Court’s decision to reverse the full bench’s finding in favour of the commissioner, the ATO said it is currently considering the decision and would soon be providing further guidance as soon as possible, particularly for working holiday-makers who may be potentially affected by this decision.

These workers are encouraged to check the ATO website for updated guidance “prior to lodging or amending a return or lodging an objection”. Employers should still continue to follow rates in the published withholding tables for working holiday-makers until the ATO website has been updated with further guidance.

“The decision is only relevant where the working holiday maker is both an Australian resident for tax purposes and from Chile, Finland, Japan, Norway, Turkey, the United Kingdom, Germany or Israel,” the ATO said in a statement shortly after judgement.

“A working holiday maker’s residency status for tax purposes is determined by the taxpayer’s individual circumstances. Most working holiday makers will be non- residents consistent with their purpose of being in Australia to have a holiday and working to support that holiday.”