8 November 2019

Talking Tax – Issue 177

Australia-UK Double Tax Agreement - Protection from ‘backpacker tax’?

In Addy v Commissioner of Taxation [2019] FCA 1768, the Federal Court held that the Australia-UK Double Tax Agreement (DTA) protected a British citizen who was an Australian tax resident at the time from the working holiday tax rate (ie the ‘backpacker tax’).

The ATO has stated that the decision will only apply to working holiday makers that are a resident of Australia for tax purposes, and who are from Chile, Finland, Germany, Japan, Norway, Turkey and the United Kingdom.

Practically, this case may have limited application to the majority of working holiday makers as they will not meet these conditions.

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Ms Addy is a British citizen who resided in Australia from 20 August 2015 to 1 May 2017, save for a 2-month period in early 2016 which she spent in Southeast Asia.  In the 2017 income year, Ms Addy worked as a waitress in Sydney.

The Court had to determine whether she was liable to pay backpacker tax of 15% on the first $37,000 of her assessable income. Alternatively, Ms Addy would be entitled to the tax free threshold (ie a nil rate of tax for assessable income up to $18,200).

Ms Addy contended that:

  • she was a tax resident for the entire 2017 income year, and therefore entitled to the tax-free threshold; and
  • Article 25 of the Australia-UK DTA prevented the Commissioner from imposing a greater rate of tax than applied to Australian citizens who were tax residents.

Was Ms Addy a tax resident?

The Federal Court concluded that Ms Addy had a part year Australian residency period which commenced on 1 July 2016, and ended on 30 April 2017, when she returned to the UK.

The following facts and circumstances were relevant in reaching this conclusion:

  • Ms Addy was present in Australia during the 2017 income year for more than 183 days;
  • she was a tax resident for the entire 2017 income year, and therefore entitled to the tax-free threshold
  • she sought an extension of her visa and went to the trouble of undertaking such rural work as she thought necessary to carry out her intention to live and work in Australia;
  • statements on her passenger cards indicated an intention to live in Australia;
  • by the 2017 income year, Australia and, in particular, the ‘Earlwood house’ in Sydney, had become Ms Addy’s usual place of abode; and
  • the ‘Earlwood house’ was Ms Addy’s home, and the settled centre of her life for work and social purposes. Importantly, Ms Addy’s family home in the UK had ceased to have any of these qualities.

However, the Federal Court found that as the holder of a ‘working holiday visa’, Ms Addy was prima facie not entitled to claim the benefit of the tax-free threshold. This was by operation of section 3A of the Income Tax Rates Act 1986 (Cth), and Part III of Schedule 7 to that Act.

Application of DTA

Article 25 of the Australia-UK DTA is title ‘Non-discrimination’, and provides that:

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.

The Federal Court found that Article 25 required a comparison between ‘Nationals of a Contracting State’ and ‘nationals of that other State in the same circumstances’.

Applying this comparison, the Federal Court found that for the 2017 income year, Ms Addy was liable to a different rate of income tax than an Australian resident who was a ‘national’ of Australia, solely because she was a ‘working holiday maker’ and therefore a non-national of Australia.

Accordingly, the Federal Court found that this was exactly the type of discrimination that was prohibited by Art 25(1) of the Australia-UK DTA, and that Ms Addy was entitled to the tax free threshold.

New 75% stamp duty rebate for apartment buyers

The McGowan Labor Government recently announced a new stamp duty rebate to help stimulate the property and construction sectors in Western Australia (WA).

From 23 October 2019, purchasers who sign pre-construction contracts to purchase a new residential unit or apartment in a multi-tiered development will be eligible for a 75% transfer duty rebate of up to $50,000.

The rebate is available for two years, with no cap placed on the purchase price.  Multiple rebates will also be available to the same purchaser for additional unit or apartment purchases within the same or different developments.

This is a significant bonus for first home buyers, as the rebate builds on the existing stamp duty concessions that are available.

Urgent attention may be required prior to 31 December 2019 if you have a discretionary trust

The NSW government has recently introduced the State Revenue Legislation Further Amendment Bill 2019 (Bill), which proposes to make amendments to the Duties Act 1997, the Land Tax Act 1956 and the Land Tax Management Act 1956.

Among other things, the Bill will provide for exemption from, and refunds of, surcharge purchaser duty and surcharge land tax where:

  • the terms of the trust expressly prevent a foreign person from being a beneficiary of the trust; and
  • those terms cannot be amended in a manner that would allow a foreign person to become a potential beneficiary.

Taxpayers are strongly encouraged to review their discretionary trust deeds and, if necessary, seek advice about varying the terms to comply with the requirements under the Bill before 31 December 2019.

The Bill includes transitional arrangements, which may result in an exemption or refund where the terms of a discretionary trust are amended before the end of 2019.

New Bills receive Royal Assent

The following Bills received Royal Assent on Monday 28 October.

Talking Tax Issue 175 outlines the proposed changes in detail.  The amendments came into effect on 29 October 2019.

Among other things, the small business CGT concession will no longer be available for assignments of other rights or interests that merely result in the transfer of rights to income or capital that a partner receives from the partnership without making the other entity a partner. This captures Everett Assignments where a member of a partnership assigns a portion of their right to the income of the partnership to another entity, generally for asset protection purposes.

See Talking Tax Issue 165 for more details on these changes.

CGT changes for foreign investors – ATO admin treatment

As discussed in Talking Tax Issue 176, the Government has proposed to deny the main residency Capital Gains Tax (CGT) exemption for foreign and temporary tax residents.  The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 was introduced to Parliament on 23 October 2019 to implement this proposal.

The ATO has now set out its administrative treatment for the proposed changes.

Until the proposed law is passed by Parliament, the ATO will accept tax returns as lodged.  Past year assessments will not be reviewed until the outcome of the proposed amendment is known.

When, and if, the new law comes into effect as introduced into Parliament, taxpayers will need to review their positions.

Taxpayers who did not return a capital gain on the assumption that the main residence exemption applied may need to seek amendments, and obtain records to support any costs associated with the property.

In this regard, the ATO has stated that:

  • no tax shortfall penalties will be applied and any interest accrued will be remitted to the base interest rate up to the date of enactment of the new law; and
  • any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend assessments within a reasonable timeframe after enactment.

This article was written with Anne Wong, Law Graduate. 

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