Addy – Federal Court of Australia, Full Court finds that the imposition of flat tax on UK working-holiday visa holders did not contravene the Treaty non-discrimination Article

The taxpayer, who was a British citizen aged 23, came to Australia on a “working visa” for a 20-month stint, during which period she was found by the Court to be a deemed Australian resident (based on her satisfying a 183-day presence test). A citizen and resident of Australia would have largely escaped income taxation on her modest income working on a horse farm and as a waiter due to the right to deduct a “tax-free threshold.” However, the “backpacker tax” provisions of Pt. III of Sched. 7 of the Australian Rates Act provided that a “working holiday worker” (defined to include the holder of a working visa), was subject to 15% tax on her income.

The taxpayer, by virtue of her citizenship, was a UK rather than Australian national under the definition in the Australia-U.K. Treaty. That Treaty's non-discrimination clause (At. 25) - also found in many of the Canadian treaties - read:

Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.

In finding that this 15% tax did not contravene Art. 25, the majority of the Full Court found that “Art 25 is offended where the discrimination against the foreign national occurs solely by reason of having a different nationality,” whereas here, “it was not the taxpayer’s nationality that caused her to be taxed in accordance with Pt. III of Sch. 7 of the Rates Act, but rather her derivation of working holiday taxable income” (i.e,, as a British national, she could have applied for another type of visa, and not earned this income). Steward J further noted:

[T]he O.E.C.D. Commentary … warns against “unduly” extending the reach of Art. 24 of the Model Tax Convention (here Art. 25 of the Treaty) to “cover so-called “indirect” discrimination.”

Neal Armstrong. Summary of Commissioner of Taxation v Addy [2020] FCAFC 135 under Treaties – Income Tax Conventions – Art. 25.