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The revised backpacker tax – what employers and seasonal workers need to know

21 November 2016

Stephanie Sims |

During the 2016 Federal election, the Government promised to review the tax rate for individuals on working holidays in Australia, referred to as “Working Holiday Makers” (WHM). The original plan to tax backpackers at 32.5 cents in the dollar endured fierce criticism from the agricultural industry, with fears that such a plan would drive backpackers to other countries to visit and work.

With backpackers making up nearly one-quarter of farm labour, especially during peak times such as harvests, any reduction in traveller numbers would place a significant strain on the available workforce. The prevailing consensus in Australia is that the originally proposed 32.5% tax rate would be unfair, as the little money the backpackers made would be injected back into the Australian economy as the travellers used the funds to support themselves on their holiday.

As a result, the government revisited the backpacker tax again, with the treasurer announcing the following changes to take effect 1 January 2017:

  • A tax rate of 19 cents in the dollar applied from earnings up to $37,000, with marginal tax rates applying to any income beyond that limit; and
  • A reduction in 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.  

The tax rate to apply to WHM has not be determined. Notwithstanding the rate reduction to 19%, the Labor party is advocating for a reduction of the rate to 10.5% to bring it into line with the New Zealand, an idea supported by some Senate independents. The Government has indicated it does not favour such a reduction. With Parliament not currently sitting, it is difficult to gauge what the final rate will be, or whether the bills purporting to implement the WHM bills will be passed at all.

Residency Status

Currently, “backpackers” or itinerant travellers can be resident or non-resident taxpayers depending on their circumstances. As a resident, they can take advantage of the generous tax-free threshold of $18,200, as well as the more generous resident tax rates thereafter.

The original intention announced in the 2015/16 Budget was to treat all WHMs as non-residents for tax purposes and taxed at 32.5% on all income up to $37,000. Under the new WHM regime, the Government envisages a flat tax rate of 19% on WHM earnings up to $37,000, with ordinary marginal rates applying after that. 

Superannuation

While the more generous income tax rate of 19% has already been decided, one should note that the Departing Australia Superannuation Payment (‘DASP’) withholding tax rate has significantly increased for backpackers.

Temporary residents who have earned superannuation while 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 Australian Tax Office (‘ATO’), typically at 38%.

Along with the backpacker taxation changes announced above, the withholding tax rate for the DASP for working holiday makers has been set at 95%, meaning backpackers are only entitled to 5% of the superannuation they earn while 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 19%, as well as acting as an incentive to keep the superannuation money in Australian super funds 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. Bearing in mind that employers are still obligated to contribute the minimum superannuation guarantee of 9.5% for backpackers. Many suggest that perhaps the Government should consider passing some of the benefits onto the Australian agricultural employers, and allow backpacker’s super to be contributed at a lower rate, thus 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, from $55 to $60. The charge is automatically remitted to the Australian Government by the airline carriers upon purchase of a plane ticket, with no action 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 will need to register with the ATO or else they will be required to withhold tax at 32.5%, as opposed to the new rate of 19%. It is worth noting that the ATO may penalise organisations who fail to register backpackers that are under their employment. 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, this can be corrected. However, this will not be adjusted for until their Australian income tax return has been lodged, with the overpayment to be credited to them at a later date.

The legislation enacting these changes is yet to be drafted, so be sure to follow BDO Australia to keep on top of any changes to the backpacker tax before the effective date of 1 January 2017.

What happens if the Bills do Not Pass?

Currently, the status of the package of bills to implement the WHM taxation regime is uncertain. With Parliament not currently sitting, and the discord between the Government and the opposition in relation to the tax rates, it is conceivable the bills may not pass at all.

The Commissioner has stated that if this were to occur, the ATO would apply the current law. Even though it means that backpackers are likely to self-assess their residency, the ATO considers that most working holiday makers are transient and do not establish residency during their stay.