Tax office in Australia seeks to clarify new tax arrangements for backpackers

by Ray Clancy on November 16, 2016

in Jobs in Australia

Working holiday makers in Australia will have their tax status assessed according to their individual circumstances but should only be taxed on what they earn in the country, the tax office has confirmed.

With the tax arrangement for working holiday makers due to change from January 2017, there is concern that the new system is putting young people off. Legislation is currently before Parliament which means they will no longer get the $18,200 tax free allowance and will pay 19% tax from their first day of working.

taxes-economyThe change also means that they pay the new 19 cents per dollar earned rate up to earnings of $37,000, when ordinary tax levels then come into play. The Government had wanted to tax backpackers at 32.5%, but a backlash resulted in it being reduced to 19% which is more in line with other countries such as New Zealand.

Tax Commissioner Chris Jordan said that the amount of tax that a working holiday maker may pay will depend on their residency status for tax purposes, and officials consider the individual circumstances that apply to each working holiday maker.

‘The reality is, what we see is that most working holiday makers are transient, they move around and do not establish residency in Australia during their stay. Therefore, as a non-resident for tax purposes, they will be taxed only on their Australian sourced income, such as money they earn working in Australia, and they will commence paying tax on the first dollar of income they earn,’ he explained.

He pointed out that any working holiday maker who is unsure can consult the tax office for advice and the office considers that those who are travelling and working in various locations around Australia will be non-residents for tax purposes.

‘We will help working holiday makers understand Australia’s self-assessment tax system, so that they correctly advise their employers of their residency status and have correct tax withheld. We will also work to ensure that working holiday makers correctly prepare their tax returns. This will include working with tax agents so that their advice is consistent with the ATO view and some checking of returns,’ added Jordan.

He also pointed out that residency status turns on the circumstances applying to each individual working holiday maker. For example, if working holiday makers do establish residency for tax purposes, they will be taxed on their worldwide income from all sources, including wages from working in Australia.

The Tax Office has published a case study to help backpackers understand their tax status. Lars lives in Munich and is granted a 12-month working holiday visa. He plans to return to Munich, and resume his career as a carpenter, after his 12-month working holiday in Australia.

However, the Australian Chamber of Commerce and Industry (ACCI) challenged the statement that most backpackers are taxed as non-residents. It said that 2013/20414 income tax statistics show that there were just 11,500 non-resident taxpayers aged between 18 and 30, amounting to 4.8% of the number of people who had working holiday maker visas in that year.

‘Unless the Tax Office has more recent figures showing a massive change, it is hard to see how it argues that most working holiday makers are non-residents,’ said James Pearson, chief executive officer of the ACCI.

He is concerned that ‘inconsistent data’ could be used to claim that backpackers will face a reduced, rather than increased, tax burden. ‘It is misleading to claim that the latest backpacker tax proposal amounts to a reduction in tax for most backpackers, given the evidence shows otherwise. The publicly available figures indicate that the vast majority of people on working holiday maker visas are treated as residents for tax purposes, and therefore get the tax free threshold,’ he added.

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