What you need to know about the Backpackers Tax

Summary

On 2 December 2016 the Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 was passed by the Australian Parliament. Under the new law, working holiday makers will be taxed at 15% from the first dollar they earn up to $37,000 per annum. Earnings above this will be taxed at the ordinary tax rates.

What you need to know

This reform is designed to recognise working holiday makers as a key source of tourism and labour in Australia, particularly to regional areas. It also aims to promote Australia as an attractive holiday and work destination of choice.

To be eligible, individuals must hold one of the following:

  • Subclass 417 visa; or
  • Subclass 462 visa; or
  • A bridging visa allowing them to work in Australia

Any employer of working holiday makers will need to ensure 15% of every dollar paid to individuals who meet the above criteria must be withheld from income derived on or after 1 January 2017.

If you are an employer, you must now undertake a once-off registration with the ATO or withhold at 32.5% and face possible penalties.

For example, a working holiday maker who earns $50,000 taxable income during the income year will pay tax at 15% on the first $37,000 of their earnings. The remaining amount will be taxed at ordinary rates. In this case the remaining $13,000 will be taxed at 32.5%.

What Has Changed?

Old New Unchanged
  • Working holiday makers would self-assess their residency status and based on this conclusion the individual would be subject to resident or non-resident tax rates.
  • Working holiday makers were eligible (having satisfied the residency criteria) to claim the tax-free threshold of $18,200. Those who were non-residents were taxed at 32.5% from the first dollar that they earnt.
  • The tax-free threshold has been removed regardless of residency status.
  • Working holiday makers will be taxed from the first dollar they earn up to $37,000 at 15%. Anything above will be subject to the ordinary tax rates.
  • Both new and old rates do not include the Temporary Budget Repair Levy for 2016-17 applying to taxable incomes over $180,000.

Employers

To employ working holiday makers holding the appropriate visa, employers should register with the Australian Taxation Office by 31 January 2017 or prior to the first payment being made to the holiday maker.

There is a working holiday maker registration tool to assist with registrations. Employers should check the relevant visa status which can be verified by accessing the Visa Entitlement Verification online. Holiday makers will not be entitled to any tax free threshold if utilising the 15% rate and must have a valid income tax file number to avoid being taxed at the highest marginal rate.

For more information on these changes, please contact Malcolm Wight, Tax Director at William Buck Chartered Accountants and Advisors on (08) 8409 4333 or malcolm.wight@williambuck.com.