Tax Treaties And Taxation Of Services: A Discussion

Impact of the decision for temporary working holiday-makers

Discuss about the Tax Treaties and Taxation of Services.

The present case involves the situation of foreign resident backpackers who visited Australian region and stayed in the country for more than 183 days during the taxation year June 30 2013. As per the facts of the present case, taxpayer has been a German resident who visited Australia based on the “working holiday visa” on October 3 2012. It has been stated that the applicant described his status as a “temporary entrant visitor” while filling up the relevant passenger card, while his anticipated stay in the country would be for five months. Accordingly, the taxpayer stayed in different hostels for first 45 days near the location of Queensland whereas he stayed in a rented apartment along with friend for next 92 days in the location of Sydney. During this period of stay, the taxpayer worked as a casual worker in a factory for a factory named, Warringah Plastics Pty Ltd. Further, the taxpayer again stayed in different hostels during the period between February 19 2013 and April 5 2013 whereas he left Australia for around 8 days in order to travel Fiji.

Accordingly, the related issue in the present case involved is whether the individual taxpayer is considered to be Australian resident for the taxation year ended on June 30, 2013 as per the regulations of Income Tax Assessment Act 1936. Since the residential status is defined under section 6(1), it is essential for the backpacker to satisfy the requirements of Australian residential status as per ITAA 1936 (Australasian Legal Information Institute (AustLII)., 2017).

In view of the fats and issues of the selected case situation, the deputy president of “Small Taxation Claims Tribunal” had taken decisionon March 6, 2015 in Sydney location based on the requirements of section 6(1). Further, the decision had been taken on the basis of usual place of abode of the individual taxpayer as well as his actual stay in Australia during the taxation year 2013.The tribunal court held that the taxpayer has his usual place of abode in Germany during all the relevant taxation years (Australasian Legal Information Institute (AustLII)., 2017). Additionally, the taxpayer visited Australia on temporary basis for travelling different location while worked in the factory for temporary period during the taxation year.

As the taxpayer had permanent establishment in Germany, hence the basic residential criteria will not be considered. Further, as the individual visited Australia based on the “working holiday visa”, he will be considered as backpacker and taxation regulation on backpacker tax system will be applicable. According to the taxation regulation of Income Tax Assessment Act 1936 section 6(1), income of foreign resident is assessable only if such income has been derived only in the Australian country during his stay for the year ended June 30 2013 (Kirsch, 2016). Similarly, court held that the taxpayer would be entitled to claim deduction for assessing his taxable income only if the amounts have been expended to generate such income and the assessable income would be taxed at the rate of 32.5%.

Identification of precedent cases and legislative requirements

Considering the regulations of section 6(1) under ITAA 1936, an individual is considered as an Australian resident if the taxpayer has permanent establishment in the country or if a foreign individual stays for more than 183 days. However, 183 days clause is subject to regulation for individuals visit Australia as a working holiday- maker. It states that if an individual travels Australia for the purpose of holiday, travels different locations and works for a temporary period, then the individual would be a foreign resident even if the stay were more than 183 days during the income year (Australasian Legal Information Institute (AustLII)., 2017). As per the regulation of ITAA 36, the income of foreign resident was taxable at lower rates along with the incomes generated in the country during the stay. It has been noticed by the Federal Government of Australia that such taxation rate from foreign residents would generate lower revenue to the country’s economy that affected the financial growth of Australia. However, the lower rate of taxation would provide taxation benefits to the foreign resident that resulted in growth of employmentas well as growth in business production (Morse, 2013).

On the contrary, Federal Government of Australia proposed the legislation on income tax regulation for the foreign residents since it was noted that the taxability as per ITAA 36 would generate lower revenue for the country. Therefore, Australian Taxation Office contended reformed the taxability regulations for foreign residents increasing the tax rate to 32.5% based on the arrival of foreigners on “working holiday visas”. The Federal Government of Australia contended that the higher rate of tax would enable to generate higher revenues and accordingly, the financial economy of Australia would increase (Brocke & Müller, 2013). Besides, recent proposal on legislation changes to the tax rate of 15% from the taxation year 2017 might help the country in generating high revenue from application fees. Moreover, increase in tax rate for foreign residents would result in lowering the employment growth because the foreign residents would not opt to visit Australia. In addition, it was observed that arrival and necessary application forvisiting the country would require the individuals in paying application fees, which is a source of revenue. On the contrary, if the tax rate becomes high, arrival of foreign residents might decline that would result in low generation of revenue from application fees (Sharkey, 2015).

Therefore, it can said that the court’s decision to contend the non- residential status of the taxpayer individual would result in generating higher revenue with respect to higher tax rate 32.5% for the taxation year 2013. However, the increased taxation rate might affect the individual’s subsequent arrival resulting in lowering the revenue from application fees. But if the tax rate of 15% is applicable then the government might generate high revenue from application fees as more foreign residents would like to visit the country rising the employment rate (Arendse, Stark & Renaud, 2015). Hence, the decision of court would support the proposed changes need based on technical aspect but not on the practical aspect.

Issue raised in the present case is similar to the decided case of Jenkins v FC of T 82 ATC 4098with respect to place of abode in which the court held that the taxpayer’s permanent place was outside Australia. The case involved the taxpayer’s permanent resident out of Australia as the individual transferred to New Hebrides for 3 years while he returned to Australia only for 18 months (Australasian Legal Information Institute (AustLII)., 2017). Hence, as per section 6(1) the taxpayer did not fulfill the Australian residential test. Further, case of Applegate v FC of T 79 ATC 4307 presents similar judgment,in which court held that the taxpayer’s permanent place of residence was not in Australia. Court held that the individual was not present in Australia for an indefinite period therefore, requirements of section 6(1) on residential test had not been satisfied and as a result, the taxpayer was held non- resident Australian. Additionally, with reference to the case of John v FC of T 166 CLR 417 it was contended that the casual work in Australia does not amount to Australian resident for the tax purpose even if the individual stays for more than 183 days during the taxation year (Australasian Legal Information Institute (AustLII)., 2017).

According to the section 6(1) under ITAA 36/97, federal government states that the foreign individual’s income is assessable if the income has been generated in Australia during the taxation year. For this purpose, the taxpayer is entitled to claim deduction on the expenses incurred to derive such assessable income (Lee, 2014). Further, section 6(1) provides that is the individual visits Australia for travelling and for temporary work, the individual will be considered as non- resident Australia even if the stay exceeds 183 days, which otherwise consider an individual as an Australian resident for taxation purpose.

The chosen cases in the study were based on the analysis of residential status of individuals who visits Australia based on the purpose of holiday and temporary work. As per the legislation established by federal government of Australia, the taxpayers arrives Australia for holidays are referred as backpackers. It states that the foreign residents travels in Australia for temporary period, travel different locations for holidaying as well as undertake casual work then such individual would be considered as non- resident in Australia (Pillai, 2013). These individuals travel Australia for a temporary period on the basis of working holiday visa and derive income form temporary employment or casual work. Hence, the federal government contended and established regulation stating that such individuals would be considered as backpackers and their income would be taxed as per the rules of backpacker tax.

In the first selected case, the court contended that the individual was non- resident Australian for the purpose of tax since the taxpayer travelled Australia for work on temporary basis. Therefore, the individual would be referred asbackpacker on the basis of working holiday visa which enables different taxation rate from that of tax rate applicable for Australian residents. Initially, the backpacker tax rate was proposed to be as high as 32.5% in order to generate maximum tax revenue. However, the proposed tax rate was imposed by the Australian Taxation Office to derive higher revenue as well as to equalize the employment rate within the country for among residents and non- residents (Forsyth et al., 2014). Besides, such higher tax rate did not reflect positive outcomes in the country therefore the government proposed to reform the backpacker tax legislation with a tax rate of 15%. It was observed that the primary source of income for the Australian Taxation Office was income tax from the resident individuals and for non- residents, maximum revenue collection was from the application fees. Hence, to maintain the ratio of visitors in the country, the government proposed to decline the tax rate to 15% (Australasian Legal Information Institute (AustLII)., 2017).

Moreover, regulation on residential test was based on the permanent establishment, place of abode and purpose of visit for specific period for the individuals. Accordingly, it was noted that many individuals visit Australia for more than 183 days for holidaying and casual work while the tax rate for assessable income similar to the individual tax rate would discourage the local residents. Therefore, Federal Government proposed a different legislation for backpackers stating different and higher tax rates. The establishment of new policy would assume to increase the tax evasion incentives while the increase in tax rates would affect the casual employment of Australian Companies. Another problem due to new policy was decline in the value of country’s revenue with the increase of tax rate that would result in less number of visitors in Australia for works like fruit picking, cleaning and hospitality (Morris & Wilson, 2014).

The Federal Government of Australia amended the Income Tax Rate Bill with respect to the Working Holiday Makers during the year 2016. The Australian Taxation Office has amended the Working Holiday Maker Reform Bill 2016 by considering several factors to provide benefit for the Australian economy as well as to the taxpayers in terms of good taxation system. During the imposition of the tax rate at 32.5% the federal government contended that the economy of Australia was not strong while the amount of collected revenue was lower compared to the financial economy of other countries especially US (Zaei & Zaei, 2013). Accordingly, federal government imposed special tax rate and tax regulations for working holidaymakers in order to raise higher revenue and to establish the equivalent tax reforms for resident and non- resident individual of Australia.

Further, higher tax rate 32.5% resulted in declining the foreign visitors that eventually affected the country’s revenue and economy because revenue collection from application fee also declined. Therefore, during the year 2016, Federal Government reformed the bill and established 15% of tax on the assessable income $37,000 for working holiday- makers. The Australian government contended that the lower tax rate of 15% would increase the foreign visitors that will increase the application fee resulting in generating higher revenue (Ho, Lin & Huang, 2014). Further, amended tax rate to 15% would establish better opportunity for tourism industry as well as for organizations that requires casual workers with respect to fruit picking and casual hospitality.

If the Bill is enacted for working holiday- maker as per the current amendment i.e. 15% tax then first assessable income amounted to $37,000 would be taxed at 15% while balance amount would be taxed at normal tax rate. The amended Bill on the taxation system for working holiday- makers requires the respective employer to pay super provided the foreign resident individual satisfies the eligibility criteria (Yoon, 2015). For this purpose the foreign individual is required to comply the requirements of working- holiday visa under subclass 417 (Working Holiday) or 462 (Work and Holiday). Further, the applicants are required to apply for tax file number (TFN) after having the work visa that enables the non- resident individuals to consider the regulation under backpacker tax.

On the contrary, if the previous backpacker tax regulation is enacted then the foreign individual would be taxed at the rate 32.5% then threshold limit would be first assessable income amounted to $80,000. Such high rate of tax would result in collecting higher revenue but the same might decline foreign visitors and accordingly revenue from the source of application fee (Robertson, 2014).

For instance, the assessable income of a foreign resident amounted to $45,000 during the current taxation year that was earned during the stay in Australia against the casual work for temporary period. Therefore, if the previous legislations of backpacker tax were followed i.e. tax rate of 32.5% then the tax liability of the individual would be determined as 32.5% on $45,000 amounted to $14,625. On the other hand, if the recent proposed regulation of the Bill is followed i.e. 15% then the taxable amount would be 15% on first $37,000 amounted to $5,550 plus 32.5% on the balance amount $2,600 hence, total taxable amounted to $8,150 ($5,550 + $2,600). Besides, if the previous regulation on personal income tax is followed before the amendment the applicable tax rate would be nil for first $18,200 plus $3,572 for the next slab and $2,600 for the last slab that is 32.5% on the balance amount $8,000. Therefore, total amount of tax liability under personal income tax would be ($3,572 + $2,600) amounted to $6,172.

Considering the three forms of taxation system for the non- resident Australian individual, it can be said that the minimum taxable amount has been derived from the previous tax regulation while the highest was from tax rate 32.5%. Moreover, taxable amount from the proposed bill i.e. tax rate 15% amounted to $8,150 can be said to be appropriate as the tax rate is lower and at the same time, amount of tax revenue is higher than that of previous regulation.

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