Written by Dr Michael Dirkis, CTA, Professor of Taxation Law, The University of Sydney Law School
The High Court’s recent decision in Addy v Commissioner of Taxation  HCA 34 (Addy), reported in TaxVine (No. 42 on 5 November 2021 and No. 43 on 12 November 2021), has led to much media coverage and speculation about hundreds of thousands of backpackers seeking tax refunds. Those reports have highlighted the on-going challenges for tax practitioners.
As noted in TaxVine:
… this decision does not automatically mean that all backpackers in Australia are treated as Australian residents for tax purposes.
In this case, the High Court focused purely upon whether the so called ‘backpackers’ tax’ (Part III of Schedule 7 to the Income Tax Rates Act 1986 (Cth)), contravened Article 25(1) of the Tax Convention between Australia and the United Kingdom, by imposing a more burdensome taxation requirement on a national of the United Kingdom than that imposed on an Australian national in the same circumstances.
In this test case, the Commissioner and taxpayer conceded that she was a resident, although the taxpayer sought to muddy the waters by seeking leave to add an additional ground of appeal, being, that she was a resident of Australia for the entirety of the 2016–17 income year under the ‘more than 183-day test’ (183-day test). The High Court did not grant special leave for this issue to be argued.
In this blog, I will first address the actual scope of the High Court’s decision and its likely impact upon tax practitioners. I will then explore whether the new framework to modernise Australia’s individual tax residency rules — based on recommendations made by the Board of Taxation in its December 2019 report to the Government, Reforming individual tax residency rules — a model for modernisation, and slated to start from 1 July 2022 — will improve or worsen the situation for working holiday visa holders.
Finally, I will put forward an argument that, rather than changing our individual tax residency rules, the Government should consider a more fundamental tax policy change that would simplify the law for all temporary visa holders. This group consists of students, holiday makers, graduates, skilled workers, secondary visa holders and many New Zealand-born workers. According to the ABC fact checkers, this group was estimated pre-COVID (circa July 2018) as constituting 8.5% of the Australian work force. Such a change would lower tax compliance costs for employers, the ATO, and the individuals concerned and re-establish Australia as a preferred destination for working holiday makers, who are so vital for Australia’s primary producers, the construction, manufacturing and hospitality industries, and the health care sector.
To be affected by the Addy decision, your client needs to be:
Of these criteria, the determination of residency remains the most difficult thing to determine. The following explores the legal hurdles faced by practitioners in determining residency.
Since August 1990, the Commissioner’s approach in respect of temporary visa holders who are overseas visitors on holidays, or working in Australia for more than 183 days, has been to treat them as foreign residents ‘as they would usually have a usual place of abode elsewhere and would not have an intention of taking up residence in Australia’ (former Tax Ruling IT 2607). This approach, which has continued in Taxation Ruling TR 98/17, differs to the approach applied to other temporary visa holders, in particular, foreign students.
The approach was found to be flawed by the AAT in Groves and Commissioner of Taxation  AATA 609 and Guissouma and Commissioner of Taxation  AATA 875. In those cases, a British citizen and a French Citizen on working holiday visas, staying for less than 12 months in primarily one location in Australia, were found to be residents for tax purposes under both the resides and 183-day tests.
Not to be daunted by these decisions, the Commissioner sought to retest this view in 2015 by litigating three cases where the taxpayers, all of whom were itinerate backpackers, spent from 6 months to 11 months in Australia. As their mobility within Australia meant they had not stayed long enough at any single place in Australia to say they resided (lived) in Australia, the Commissioner based the challenges purely based upon the 183-day test. The AAT in Clemens and Commissioner of Taxation  AATA 124, Jaczenko and Commissioner of Taxation  AATA 125 and Koustrup and Commissioner of Taxation  AATA 126 determined that the taxpayers were found to be non-residents under the 183-day test as they had a usual place of abode outside Australia.
This approach was continued in 2020 in respect of seven taxpayers holding subclasses 417 visas. Six taxpayers — one each in Schiele and Commissioner of Taxation  AATA 286, and MacKinnon and Commissioner of Taxation  AATA 1647 and four in Dapper Coelho and Commissioner of Taxation  AATA 2474) — were found by the AAT to not reside in Australia and all were found to have usual places of abode elsewhere. However, in Gurney and Commissioner of Taxation  AATA 3813, the taxpayer was found to be a resident despite arriving on a 417 visa. He had demonstrated his intention to settle in Australia by initially applying for a skilled migration visa, the community links he established while in Australia, was in a relationship with someone who was with him in Australia, and the fact that he had abandoned the UK.
What the cases reinforce is the AAT has followed the 2015 cases by generally setting a
higher-level abandonment threshold for a taxpayer to establish that they have abandoned their ‘usual place of abode’. This approach places a greater importance (weight) on the existence of parents or siblings in the former place of residence (place of abode) than what was imposed in the earlier cases of Groves and Guissouma. However, that criteria carries almost no weight in Gurney, due to the existence of the relationship in Australia which was given more weight.
The simple answer to this question is maybe.
First, provided the taxpayer spends 183 days or more in Australia in the current income year, they will be an Australian tax resident. Groves, Guissouma and Addy would be residents under this rule. Broadly, it requires persons to arrive in Australia prior to 1 January, which may be difficult for temporary visa holders such as foreign students who arrive at the start of an academic year.
However, if a person does not satisfy the proposed 183-day test in an income year, then the next step is dependent upon their residency status in the prior income year. If they were a resident in the prior income year, they will be required to determine under the proposed ‘ceasing residency’ rules if they are still a resident or have ceased to be a resident. If, however, they were not a resident in the prior income year, they will be required to determine under the proposed ‘commencing residency’ rules whether they have become a resident or remain a non-resident.
Essentially, if a person failed the 183-day test in the prior year, they will be a non-resident if they reside in Australia in the current income year for less than 45 days. However, if a person is present in Australia for 45 days or more in an income year (but less than 183 days), they will be a resident of Australia (a ‘commencing resident’) provided they satisfy two or more of four ‘connection to Australia’ factors. This checklist applies also in the context of the ceasing residency test. The four criteria persons must judge their personal circumstances against are:
(a) the right to reside permanently in Australia (including citizenship and permanent residency);
(b) Australian accommodation;
(c) Australian family; and
(d) Australian economic connections (not defined).
If they fail to satisfy two factors, then they will not be residents despite being in Australia for more than 45 days. Most working single holiday makers and many single temporary visa holders will only satisfy the accommodation tests and will be treated as non-residents in year one.
Thus, the rules appear to make it easier for single working holiday makers, from certain treaty partner countries, present in Australia for more than 183 days, to be residents of Australia and not subject to the backpacker tax. For practitioners and employers, the residency test is easier, but the application of the backpacker tax becomes more complex as its applicability will be determined on a case-by-case basis, dependent upon nationality. This outcome is not surprising given that all migration rules were off the table in the consultation on these tax residency rule changes.
The difficulties raised by Addy are the result of a poor policy response by the Government to the AAT decisions in Clemens, Jaczenko and Koustrup (described by our political leaders as a change in the ‘law’ by the AAT). The resultant fear campaign that all working holiday visa holders would flee Australia for New Zealand due to their loss of the tax-free threshold and a 32.5% tax liability on every dollar earned resulted, after a two-year debate, in the backpackers’ tax being politically compromised. The tax merely created more complexity and imposed additional compliance costs on the health, hospitality, construction, and primary production sectors, and the ATO.
If there had been no change to the law, life would have continued as always with resident backpackers correctly claiming the tax-free threshold and non-resident backpackers incorrectly doing the same. The non-residents would continue to declare they are residents of Australia on the PAYG declaration form. As they would have a tax file number — obtained using foreign identification or purchased at a hostel (as was a common, although improper, practice many years ago) — the prudent potential employer would have no grounds for enquiring further in multi-cultural Australia.
A cleaner and simpler approach would have been to adopt the New Zealand approach of treating all temporary visa holders the same as residents by extending the tax-free threshold to all. This would ensure that we could be competitive with New Zealand in attracting this necessary workforce for many of our industries and, given backpackers tend to spend all their income in Australia, a boost to our post-COVID recovery. To continue with this discriminatory approach in respect of backpackers just creates unnecessary complexity in an already over-complicated system.
Further guidance and information is available from the ATO website.
If you have any specific concerns that have not been outlined above, please email firstname.lastname@example.org
DISCLAIMER: The material and opinions in this article should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.
© 1996-2021 The Tax Institute (ABN 45 008 392 372 (PRV14016)). All rights reserved. The Tax Institute is a Recognised Tax Agent Association (RTAA) under the Tax Agent Services Regulations 2009.