Changed rules for working holiday makers

Budget Review 2015–16 Index

Les Nielson

In the 2015–16 Budget the Government proposes to change the tax status of temporary working holiday makers from that of resident, to that of non-resident, from 1 July 2016.[1]

Background

Australia’s working holiday program

Most individuals who will be affected by the proposed change will be participants in the ‘Working Holiday Maker Program’. This program allows young adults (aged 18 to 30) from eligible partner countries to work in Australia while having an extended holiday. Work in Australia must not be the main purpose of the visa holder’s visit.[2] This is a cultural exchange programme which enables young travellers to have an extended holiday and earn money through short-term employment.[3]

Qualifications for being classed as a working holiday resident tax payer

Currently, to work legally as a working holiday maker an individual has to obtain an Australian Tax File Number (TFN). These numbers are available to non-residents who have the required working visas. Examples of common valid working visa types are:

  • Working holiday makers (subclass 417)
  •   Entertainment (subclass 420)
  • Sport (subclass 421) and
  •   Work and holiday makers (subclass 462).[4]

At this stage it is not clear whether the proposed measure will extend to holders of all of these visa types.

Tax consequences of proposed change

The measure proposes a change in the personal income tax rates applying to non-residents. Following is a table showing the differences in personal income tax rates for residents and non-residents.

Table 1: Resident and non-resident tax rates 2014–15

Resident tax rates
Non-resident tax rates
Taxable income Tax on this income Taxable income Tax on this income
0 – $18,200 Nil 0 – $80,000 32.5c for each $1
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001 – $180,000 $17,547 plus 37c for each $1 over $80,000 $80,001 – $180,000 $26,000 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000 $180,001 and over $63,000 plus 45c for each $1 over $180,000

Source: ATO[5]

For example, a non-resident individual earning $40,000 in the current tax year would be liable for $4,547 in personal income tax, leaving an after-tax income of $35,453. Under the proposed arrangements, this individual would be liable for $13,000 in personal income tax, leaving an after tax income of $27,000.

Comparison with departing superannuation payments

The proposed change is not the only instance where working holiday makers are subject to a higher rate of tax than residents. When temporary residents depart Australia permanently, they may withdraw their accumulated superannuation balance. The tax rate is between 38 and 47 per cent. In similar circumstances, residents withdrawing their superannuation balance when they are below their preservation age (generally between 55 and 60) face a 20 per cent tax rate.[6]

Second round effects

A recent press article has highlighted some problems with the proposed changes:

  • this new policy could substantially increase the incentives for tax evasion and
  • the number of working holiday makers may diminish rapidly as soon as visa holders perceive there is less economic benefit to undertaking work that most Australians are reluctant to do, such as picking fruit, cleaning and casual hospitality.

The new income tax policy could end up hurting Australian companies that will find it hard to fill job vacancies without a cheap and casual visiting workforce.[7]

Meanwhile, the tourism industry is concerned because backpackers, who are more likely to go to regional areas and are relatively high-spending tourists, will be less likely to visit Australia and will go instead to New Zealand, Canada or South Africa.[8] At the same time, the industry relies heavily on working holiday makers as a labour force.[9]



[1].          Australian Government, Budget measures: budget paper: no. 2: 2015–16,  p. 26.

[2].          Department of Immigration and Border Protection (DIBP), What is the Working Holiday Maker program?, DIBP website, 13 August 2013.

[3].          Tourism Australia, Planning to stay and work while you’re visiting Australia?, Australian Tourism website, 2015.

[4].          Australian Taxation Office (ATO), Foreign passport holders, permanent migrants and temporary visitors – TFN application, ATO website, 8 April 2015.

[5].          Australian Taxation Office (ATO), Individual income tax rates, ATO website, 13 August 2014.

[6].          Australian Taxation Office (ATO), Table 10: Super lump sum tax table, ATO website, 30 April 2015.

[7].          P Carvalho, ‘Budget 2015: plucking the foreign flock may backfire, The Drum, 14 May 2015.

[8].          H Kempton, ‘Anger grows over backpacker tax’, Mercury, 15 May 2015.

[9].          L Allen, ‘Backpacker tax “ridiculous”’, The Australian, 14 May 2015.

 

All online articles accessed May 2015. 

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