Girl waitressing
Tax & AccountingCompliance8/11/2021 12:00:00 AM

ATO ultimately loses backpacker tax test case

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The High Court has unanimously held that the “backpacker tax” contravened the non-discrimination clause in art 25 of the Australia/UK double tax agreement (DTA). In so finding, it allowed the taxpayer’s appeal against the Full Federal Court decision in FC of T v Addy 2020 ATC ¶20-756; [2020] FCAFC 135.


The “backpacker tax” refers to tax rates applicable to working holiday makers irrespective of tax residency status under pt III of sch 7 to the Income Tax Rates Act 1986. At the relevant time, it required holders of working holiday visas to pay 15% tax on their first $37,000 of income in Australia. Australian nationals who were tax residents had a tax-free threshold on income up to $18,200.

The taxpayer, Ms Addy, was a British citizen who travelled to Australia in 2015. In the 2017 income year, she worked as a waitress in Sydney under a working holiday visa until she returned to her family home in the UK on 1 May 2017. The Commissioner assessed the taxpayer on income earned from 1 January 2017 at the backpacker tax rates which applied from that date. The taxpayer appealed to the Federal Court upon the Commissioner disallowing her objection, arguing that the backpacker tax was contrary to the non-discrimination clause in art 25 of the DTA.

Relevantly, art 25(1) of the DTA provided that a UK national should not be subjected to a greater tax burden than that imposed on an Australian national “in the same circumstances, in particular with respect to residence”. While foreign tax residency was a permissible ground for differential tax treatment, art 25 sought to prohibit taxation discrimination on the grounds of nationality. To the extent of any inconsistency, art 25 largely prevailed over ITAA 1936, ITAA 1997 and any other legislation imposing taxation.

Earlier decisions

At first instance, Logan J found (2019 ATC ¶20-719; [2019] FCA 1768) that the backpacker tax discriminated against the taxpayer on the basis of her nationality in contravention of art 25. According to Logan J, distinguishing between individuals based on a type of visa that could only be held by non-citizens was a disguised form of discrimination based on nationality. From that decision, the Commissioner appealed to the Full Federal Court.

A majority of the Federal Court allowed the Commissioner’s appeal, finding that art 25 was not infringed as the holding of a particular type of visa was not necessarily bound to nationality. According to the majority, the holding of that visa was a matter of choice. Although the taxpayer was a British national, she did not hold the visa because she was a British national. The majority also said that holding a working holiday visa was a distinguishing tax-related characteristic that could not be excluded when attempting to make the required comparison under art 25(1).

In dissent, Davies J found that the backpacker tax infringed art 25(1) because the designation as a “working holiday maker” for tax purposes was based on the taxpayer’s foreign nationality and visa status. The requirement to hold the visa arose directly, and could not be separated, from the person’s nationality. The taxpayer was granted special leave to appeal to the High Court.

Issue before High Court

At issue before the High Court was whether the backpacker tax imposed a more burdensome taxation requirement on the taxpayer by reason of her nationality in contravention of art 25(1). It was not in dispute before the court that the taxpayer was an Australian tax resident during the 2017 income year and that the backpacker tax was more burdensome than that which applied to resident Australian nationals.

The Commissioner argued that the backpacker tax was imposed because of the taxpayer’s visa type and not her nationality. As an Australian national could not hold a working holiday visa, the Commissioner also contended that it was not possible for an Australian national to be “in the same circumstances” as the taxpayer. Accordingly, art 25(1) was not engaged.


The High Court unanimously allowed the taxpayer’s appeal. It rejected the Commissioner’s argument that a comparison was not possible in the present case due to the inability of an Australian national to hold a working holiday visa. Consistent with the text, context, object and purpose of art 25(1), the relevant comparator was the hypothetical taxpayer in the same circumstances apart from the criterion on which the claim of discriminatory taxation was based.

The court found that an Australian national deriving taxable income in the same circumstances as the taxpayer would have been entitled to a tax-free threshold and taxation at a lower rate. Accordingly, the backpacker tax imposed more burdensome taxation on the taxpayer owing to her nationality, in contravention of art 25(1).

ATO response

The ATO has indicated that it is currently considering the implications of this decision.

This decision is only relevant where a working holiday maker is both an Australian tax resident and from Chile, Finland, Japan, Norway, Turkey, the UK, Germany or Israel (ie the countries with which Australia has a similar DTA). The ATO anticipates most working holiday makers will be non-residents for tax purposes, as their primary reason for being in Australia is to have a holiday.

Employers should continue to refer to published withholding tables for working holiday makers until further guidance is published on the ATO website. Working holiday makers potentially affected by the decision should check the ATO website for updated guidance before lodging or amending a return or lodging an objection.

Sources: Addy v FC of T 2021 ATC ¶20-803; [2021] HCA 34, 3 November 2021; ATO, High Court decision in the matter of Addy v Commissioner of Taxation, [media release], 3 November 2021, accessed 4 November 2021.

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