The working holiday tax rate (commonly known as the “backpacker tax”) has generally applied from 1 January 2017 to individuals who have working holiday or work and holiday visas. In essence, the first $37,000 of “working holiday taxable income” is taxed at 15%, and then the balance is taxed at the standard rates applicable to residents.
Thus, working holiday makers are taxed at a higher rate on their first $37,000 than residents, because the holiday makers don’t get the benefit of the Australian tax-free threshold ($18,200 for 2019–2020).
A recent Federal Court case centred on a British citizen, who lived in Australia for almost two years. During most of that time she lived in the same share house accommodation in Sydney, and only left for short stints to travel to other areas. Essentially, the case came down to whether or not she was a resident of Australia and if so, whether the non-discrimination clause in the Australia–United Kingdom double taxation agreement prevented her from being taxed at the higher “backpacker” rate. The Federal Court found that she was an Australian resident for tax purposes, and she should not be taxed at the higher rate.
Some have seen this decision as a win for all working holiday makers, but it’s likely to have a fairly narrow application. Coupled with the ATO still considering an appeal, this area of law is far from settled.
Tip: If you’re unsure whether this decision affects you, we can help you work out whether you’re a tax resident and may be eligible to pay less tax on your working holiday income.