The holiday is over, or Why working holidaymakers should expect a tax bill from the ATO

You are a young person, who loves to travel and wants to visit Australia. You get the Working Holiday (or Work and Holiday) visa, pack your backpack and fly to Down Under. You travel all around the country, work a little here and there, and hang out with your new friends. After 12 months or so, you lodge your Australian income tax return and get a lump sum – a refund – back, equal to the amount of tax withheld from your salary.

Sounds great, doesn’t it? Unfortunately, the old way no longer works. If you are on the Working Holiday visa (Subclass 417) or Work and Holiday visa (Subclass 462), you will most likely have to pay tax to the Australian Taxation Office for the 2017 tax year.

Non-residents

Different tax rates apply to residents and non-residents for tax purposes. These rates are summarised in the table below.

Income in 2017 tax year Resident for Tax Purposes Non-resident for Tax Purposes
$0 – $18,200 Nil (Tax free) 32.5%
$18,201 – $37,000 19% 32.5%
$37,001 – $87,000 32,5% 32.5%
$87,001 – $180,000 39% 39%
Over $180,000 45% 45%

It is clear from the table above that residents don’t pay income tax for the first $18,200 of income, while non-residents are taxed at 32.5% from the first dollar of income. Previously, working holidaymakers might be treated as residents, if they satisfied the 183 days rule, and hence could benefit from the tax-free threshold.

However, in December 2016, the Australian Taxation Office (ATO) announced that it had changed its approach to residency for working holidaymakers. Now the ATO operates on the presumption that working holidaymakers are non-residents and should be taxed at 32.5% from the first dollar for the period from 1 July to 31 December 2016.

Backpackers’ tax

In January 2017, the new rules – also known as backpackers’ tax – were introduced in Australia. From 1 January 2017, all working holidaymakers on visa types 417 and 462 are taxed at 15% on their income from the first dollar and up to $37,000. Income after $37,000 will be taxed at a rate of 32.5%, according to the non-resident rates.

Let me illustrate the changes by the following examples.

Example 1. Good old days

Paul was on a 417 Working Holiday visa and came to Australia from France in July 2015. He worked for 2 employers and earned $18,000 for the next 12 months, with $2,700 of tax withheld. Upon his departure from Australia in June 2016, he lodged his early tax return as a resident and got a refund of $2,700.

Example 2. How it looks in 2017

Laura is on a 417 Working Holiday visa and arrived in Australia from Italy in July 2016. On 15 July, she started working at an Italian restaurant in Sydney. She earned $10,000 for the period from 15 July to 31 December 2016, with $1,500 tax withheld. After taking a break and celebrating a New Year, Laura moved to Melbourne and started working at a pizzeria, where she got another $8,000, with $1,200 tax withheld.

Laura wants to lodge her 2017 tax return in early July before her visa expires and she needs to leave Australia. Her tax payable is calculated as follows:

Income to 31 Dec 2016 X 32.5% $10,000 X 32.5% = $3,250
Income from 1 Jan 2017 X 15% $8,000 X 15% = $1,200
Gross tax payable: $4,450
Less tax withheld ($2,700)
Net tax payable: $1,750

As you can see from the example above, instead of having a refund of $2,700, Laura will have to pay $1,750 to the ATO.

How come?

In the past, many working holidaymakers would have claimed residency and enjoyed the benefit of the tax-free threshold. Employers knew that and didn’t withhold much tax from working holidaymakers’ salary. Working holidaymakers generally didn’t earn more than $37,000 a year and paid little if any tax.

The ATO has always said that working holidaymakers should be treated as non-residents, but they had to prove their position for every single working holidaymaker. The situation changed dramatically after the ATO won the cases Re Koustrup, Re Jaczenko and Re Clemens, where 3 typical backpackers were found to be non-residents.

The ATO has advised that they will put tax refunds on hold for most working holidaymakers, who lodge their returns as the resident and will request additional information to prove tax residency status. If this information couldn’t be provided, the ATO would re-assess the tax return according to the non-resident rates. The ATO will also keep a record of tax agents, lodging resident returns for working holidaymakers, and will seek to suspend or cancel their registration.

Needless to say, the ATO receives data from the Department of Border Protection and can automatically flag working holidaymakers.

What about claiming your super?

As you may know, all Australian employers must pay superannuation contributions at a rate of 9.5% of salary to fund retirement, if you are paid more than $450 a month. When a working holidaymaker leaves Australia for good, he or she can claim superannuation money back. This is known as Departing Australia superannuation payment (DASP).

Previously, DASP tax rate for working holidaymakers was 35%, but from 1 July 2017 it is set at 65%. So, you shouldn’t expect to get big bucks from DASP.

Example 3

Laura’s employers contributed to her superannuation fund $1,710 during the year. These contributions were taxed at 15% in the superannuation fund, leaving $1,454 on Laura’s super account. If she decides to claim her DASP, she would get $1,454 – ($1,454 x 65%) = $509.

You can use my Working Holiday Maker Tax Calculator to estimate your tax payable or refundable.

In conclusion, my last piece of advice: Don’t spend all your money on a farewell party, you will need it to pay the Taxman. The holiday is over.