A change to the tax laws around backpackers, or Working Holiday Makers (WHM), doesn’t sound like something that would get the nation talking, but it was a hot topic in parliament this year. The major political parties have used the changes as leverage for their agendas, but what do the changes entail? And is it really such a big deal?
The reason for the changes is that many WHMs on short-term visas were declaring themselves as Australian residents for tax purposes, when they should actually be classified as non-residents. While this might not seem like a big deal, declaring themselves residents allowed them to obtain the benefits of the tax-free threshold and low marginal rates resulting in many of them not paying any tax at all.
Industries that rely on WHM’s for seasonal work, such a fruit picking, are concerned that the new tax laws will make working on their farms and orchards a far less appealing proposition. While those for the tax changes see it as a way to ensure WHM’s pay some tax while they work here.
Whether the changes are fair or not, and who the changes have benefited the most, is a topic in itself for debate. As tax agents, our role is to ensure our clients comply with legislation so that they do not fall foul of the ATO.
What Are the Changes?
As of the 1 of January 2017, any assessable income earned by a WHM from that date, and any applicable deductions, will be subject to a new set of rates and calculations, regardless of their residency status.
Who Classifies as a WHM?
Anyone holding the following visas is classified as a WHM:
- Subclass 417 (Working Holiday) visa
- Subclass 462 (Work and Holiday) visa
- A bridging visa allowing the individual to earn an income in Australia if:
- this visa was granted under the Migration Act 1958,
- with the eventual goal of obtaining a subclass 417 or 462 visa,
- the matter is still undecided and,
- the most recent visa granted, other than the bridging visa, was a subclass 417 or 462.
What Are the New Tax Rates?
The new tax rates are complex, but to boil it down to its most basic principal, the first dollar of income up to $37,000 will now be taxed at 15%. Every dollar earned after $37,000 will be subject to the same margin tax rates all Australian residents pay.
This income of a WHM is referred to as ‘working holiday taxable income’ and the rates of tax for the 2017 income year are:
|Taxable Income||Tax Payable|
|$0 – $37,000||15%|
|$37,001 – $87,000||32.5%|
|$87,001 – $180,000||37%|
The 47% tax rate for incomes over $180,000 include the 2% tax payable for the Temporary Budget Repair Levy (TBRL), and this rate will move back to 47% from 1 July 2017.
The rates will be paid on any income earned in Australia by a WHM after 1 January 2017. Any income earned before 1st January 2017 will be taxed at normal rates of tax and dependent on residency status of the individual.
If a WHM has both ‘working holiday taxable income’ and ‘non-working holiday taxable income’ in the income year, from 1 January 2017 the ‘working holiday taxable income’ is speculatively added to the ‘non-working holiday taxable income,’ and applicable marginal tax rates are applied.
Registered employers of WHM’s are required to withhold tax at the PAYG withholding rates dictated by the 1 January 2017 changes (15% up to $37,000 and normal marginal tax rates after that). Employers also need to be aware that they are required to withhold 47% of income for any employees that don’t provide a Tax File Number.
Employers must register as WHM employers if they intend hiring WHM employee’s. If they fail to register, they will be required to withhold at 32.5%, instead of 15%. Employers may also face penalties for failing to register. So, if you currently employ, or plan on hiring WHM’s, make sure you register, because a failure to do so is bad for business and bad for your employees.
Employers should also take up the responsibility of informing WHM’s about the need to apply for a TFN. Not many WHM’s will be versed in Australian tax law, so make sure they know their responsibilities.
Registering is incredibly easy, ATO has set up a registration tool that can be accessed here.
If you are a WHM (Backpacker) and you have any concerns or queries about the change and how they will affect you and how to prepare and lodged your 2017 tax return, get in touch with the friendly team at Online Tax Australia.