Backpacker Tax - What you need to know

09 December 2016

Stephanie Sims |

During the 2016 Federal election, the Government promised to review the tax changes for individuals visiting Australia on working holidays that were announced in the 2015/16 Federal Budget.

In 2015/16 budget it was proposed to tax all working holiday makers at the non-resident tax rates regardless of their actual tax residence status.  This meant all backpackers would be taxed at least 32.5 cents for every dollar earned.  This was met with fierce criticism from the agricultural industry, with fears backpackers would travel to other countries to work.   Backpackers make up nearly one quarter of the farming workforce, especially during peak times such as harvests. It seemed to be the consensus in Australia that 32.5% tax rate was unfair, as the little money the backpackers made would be used to support themselves on their holiday and be injected back into the Australian economy anyway.

As a result the tax has been revised multiple times, with Parliament finally coming to a decision earlier this month. The treasurer has announced the following changes to the backpacker tax to take effect on 1 January 2017. The tax rate of 15 cents in the dollar will be applied from earnings up to $37,000, with marginal tax rates applying on any income beyond that limit. The Government has also reduced the cost of working holiday visas by $50, to $390. These changes, as well as a $10 million global advertising campaign, are aimed at attracting more seasonal workers to Australia to boost both the agricultural and tourism industries.  

Although the more generous income tax rate of 15% has been decided, it should be noted that the Departing Australia Superannuation Payment (‘DASP’) withholding tax rate has been significantly increased for backpackers. Temporary residents who have earned superannuation whilst working in Australia are eligible to claim their super upon their permanent departure, known as the DASP. The DASP does not contribute to a person’s taxable income, but rather tax is withheld by the superannuation fund and sent to the Australian Tax Office (‘ATO’), typically at 38%. Along with the backpacker changes announced above, the withholding tax rate for the DASP for working holiday makers has been set at 65%, meaning backpackers are only entitled to a small percentage of the superannuation they earn whilst working in Australia. The government’s rationale behind the withholding tax hike is to partially offset the cost of the reduction from 32.5% to 15%, as well as acting as an incentive to keep the superannuation money in Australian superfunds and the economy. Considering the number of working holiday visas has been steadily decreasing since 2012, it is not clear if the government has done enough to encourage the trend to change. Keep in mind employers are still obligated to contribute the minimum superannuation guarantee of 9.5% for backpackers. Perhaps the Government should consider passing some of the benefit onto the Australian agricultural employers, and allow backpacker’s super to be contributed at a lower rate, saving our farmers money.

The final change announced was the increase in Passenger Movement Charge (the 1995 replacement of the Departure Tax), imposed on a person departing Australia regardless of their intent to return, of $55 to $60. The charge is automatically remitted to the Australian Government by the airline carriers upon purchase of a plane ticket and no action is required by the purchaser. The change will take effect on 1 July 2017.

What employers need to do?

Employers looking to hire working holiday makers, with either subclass 417 (Working Holiday) visa or subclass 462 (Work and Holiday) visa, will need to register with the ATO or else they will be required to withhold tax at 32.5%, as opposed to the desirable 15%. Employers of backpackers who fail to register may be penalised by the ATO. Backpackers will be able to access the list and see the registered employers on the ‘ABN Lookup’ website.

If backpackers have a higher rate of tax withheld throughout the year, the correction can be made upon lodgement of their Australian income tax return and they will be credited with the difference in tax.

The legislation was passed on 1 December 2016 and awaits Royal Assent.