Backpacker tax reform – The sting in the tail!

Government reduces proposed backpacker tax rate for first $37,000 of taxable income from 32.5% to 19% but stealthily jacks up departing Australia superannuation payments tax to as much as 95%.

As heralded in a press release on 27 September 2016, various bills that propose to change the way and rate at which backpackers are taxed were introduced in the House of Representatives on 12 October 2016. These bills were passed on 17 October 2016 and are now before the Senate. On the surface, these bills represent a backflip by the coalition government on their 2015-16 budget announcement that proposed a 32.5% tax rate on earnings up to $37,000, replacing it with a lower 19% tax rate to placate the industries that employ these workers. What many people don’t realise is the government’s cash grab on departing Australia superannuation payments tax that will now be up to (and often will be) 95% of the backpacker’s superannuation balance. Assuming backpackers are employees for superannuation guarantee purposes, and they earn more than $450 per month, this will effectively see tax at a minimum of approximately 25.7% on the total salary package somewhat reversing the benefit of the lower marginal income tax rate.
These proposed measures create a new class of taxpayer – a working holiday maker (“WHM”) (similar to a temporary resident) – defined as someone holding a Subclass 417 (Working Holiday) visa, a Subclass 462 (Work and Holiday) visa or certain related bridging visas.

All holders of these visa categories will be taxed under these rules – removing the difficult test of determining whether someone is an Australian tax resident. More cynical observers would suggest that part of the reason for doing this is to prevent backpackers assuming they are Australian tax residents for the duration of their stay and thereby benefiting from the $18,200 tax free threshold that applies to Australian residents.
Associated measures that are included in this raft of reforms include:

  • Providing a further incentive for WHMs to come to Australia by reducing the visa application charge for Subclass 417 (Working Holiday) visas and Subclass 462 (Work and Holiday) visas from $440 to $390;
  • Requiring employers to register with the ATO when they engage a WHM if they want to withhold at the appropriate lower withholding rates that apply to WHMs. If they don’t register, the normal, higher withholding rate that applies to ordinary non-residents are likely to apply and there is also the possibility of penalties. Accordingly, there is a strong incentive for employers to register so they can pass on more pay to the WHMs they employ;
  • Increasing the departing Australia superannuation payments tax to as much as an astonishing 95% for WHMs. Different tax rates apply to the various parts of the superannuation benefit with the tax free component remaining tax free. However, of the taxable component, a 95% tax rate will apply to the element taxed in the fund (currently this is 38%). This will comprise almost all of the benefit paid to backpackers when they leave the country given that superannuation guarantee payments will be the major, and probably only superannuation contributions made on their behalf whilst they are in Australia. This effectively means that WHMs that are employees for superannuation guarantee purposes will see just about all their super end up in government coffers once they leave Australia. Although the definition of employee for superannuation guarantee purposes is broader than the common law definition, employers will logically try to get around this as a means of attracting backpackers;
  • Increasing the passenger movement charge by $5 from $55 to $60 that applies to all passengers when leaving Australia. Although this sounds small, according to the modelling, this is the biggest offset to the cost of reducing the income tax rates.

The lower income tax rate is proposed to apply from 1 January 2017, however, the changes to visa application charges, passenger movement charges and the departing Australia superannuation payments tax generally apply from 1 July 2017.

This article provides a general summary of the subject covered as at the date it is published. It cannot be relied upon in relation to any specific instance. Webb Martin Consulting Pty Ltd and any person connected with its production disclaim any liability in connection with any use. It is not intended to be, nor should it be relied upon as, a substitute for professional advice.

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