BULAW3731 Income Tax Law & Practice Online Tutoring
PART A
1. What issues are being considered in your chosen case, and what decision (conclusion) is reached?
The chosen case is Clemens and Commissioner of Taxation [2015] AATA 124 (6 March 2015) which is one of the three cases that were heard together by the Tribunal but judgments in each of the three cases were reserved and announced separately. The main issue in the instant case was to determine the residential status for tax purpose of a German individual who was present in Australia for more than 183 days (i.e. half of the year) during the tax year ended 30 June 2013. The person entered Australia on October 3, 2012 under “working holiday visa” (subclass 417) and stayed in Australia for various intermittent periods as follows:
| Arrival | Departure | no. of days | place of stay |
| 03-Oct-12 | 17-Nov-12 | 45 | fourteen different hostels |
| 18-Nov-12 | 18-Feb-13 | 92 | shared a bedroom apartment with a travel friend |
| 19-Feb-13 | 05-Apr-13 | 45 | twelve different hostels |
| 14-04-13 | 18-04-13 | 4 | hostels |
| 186 |
Being present in Australia for more than 183 days, the Maximillian Clemens (hereinafter “the Applicant”) apparently fulfilled the residency test based on no. of days of presence in Australia where under a continuous or intermittent presence of 183 days or more causes an individual to qualify as an Australian resident for tax purposes. This rule emanates from the definition of “resident” under section 6(1) of the Income Tax Assessment Act 1936 which provides as follows:
“A person, other than a company, who resides in Australia and includes a person:
…..
(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia; ….”
(emphasis added)
The Applicant lodged his income tax return through Backpackers Buddy Pty Ltd as a resident of Australia. On review of the assessment the Commissioner advised that the Applicant was not an Australian resident under the ITAA36, to which the attorneys of the Applicant objected and later the objection was rejected by the Commissioner and the matter resulted in an appeal before the Tribunal.
The above dispute resulted in a rather unusual situation where under the taxpayer intends to be resident of Australia and the Commissioner is insisting otherwise. Commonly a reverse situation is observed because a resident in Australia would otherwise also be liable to offer for tax income earned outside Australia, thereby enhancing his income tax liability to pay tax on income earned all over the world. However, the unusual positions adopted in this case are a result of the basic exemption or the substantial tax-free threshold where under an Australian resident is not required to pay income tax on the first bracket of income up to $18,200 of assessable income, whilst a non-resident would be paying 32.5% tax on the same income resulting in tax savings of $5,915 for the applicant. Moreover, the applicant did not have any foreign source income during the assessment year in question.
The Tribunal reached a conclusion that the Applicant was not a resident of Australia during the tax year ended June 30, 2013.
The conclusion was arrived at after answering the following questions which were the backdrop of the case:
| S.no | Query | Response |
| 1. | Can a person not have a usual place of abode anywhere at all? | Possible only when a person does not have any fixed place of residence anywhere. Such persons are referred to as “bird of passage”. |
| 2. | Can a person have more than one usual place of abode? | Relying on the decision in Commissioner of Taxation v Executors of the Estate of Subrahmanyam [2001], Tribunal concluded that this is not possible at once. However, two different usual places of abode may be there at two different times because of the changed circumstances. |
| 3. | What was the Applicant’s usual place of abode during tax year 2013? | During the whole year, the Applicant’s usual place of abode was his parent’s home in Germany. The basis for these is provided in the next part. |
| 4. | Reasons for enactment of qualification to the 183 days test | The explanatory note to the amendment specifically mentions that the reason for amendment was so that the temporary visitors or holiday workers (backpackers) would not qualify as resident under this test. |
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2. Would the decision in your chosen case support the need for a change to the residency rules for backpackers in Australia? Give reasons
The selected case would support the need for a change in residency rules for backpackers or temporary dwellers / visitors in Australia as form the facts of the case it so appears that it is usual practice among the taxpayers and the consultants to avoid tax based on the 183 days test of residency. The essence of the case is that physical presence is a good determinant for usual place of abode of a person, but it becomes less meaningful if the facts indicate that the person’s usual place of abode is elsewhere in the world. Then the physical presence should not matter.
In the instant case, the Tribunal has further confirmed the findings in earlier cases where the phrase “place of abode” had been explained i.e. Federal Commissioner of Taxation v Applegate (1979) wherein it has been described as:
“the physical surroundings in which a person lives”;
In the above case, a comparison has been drawn between “permanent place of abode” and “place of abode” by Fisher J; and in case of R v Braithwaite (1918) it has been explained that the phrase has been taken to mean same as “place of residence” of the taxpayer.
The Tribunal confirmed the findings and formed conclusion on the basis that the phrase “usual place of abode” as emphasized above refers to a place where a person “usually or customarily dwells” (paragraph 34). This is further explained through example that if a person who usually dwells in another Country travels to Australia for a working holiday whilst his permanent home is still in another country from where he travelled and he intends to go back to that country once the purpose of the travel is finished, his usual place of abode would be in that another Country by all means, and not in Australia. It would further aid in reforming the rules relating to temporary dwellers or backpackers in Australia based on their particular class of visa.
The facts considered by the Tribunal in the instant case in determining the Applicant’s usual place of abode during tax year 2013 could be a foundational basis for the future cases determining a similar question and could also aid in making rules relating to backpackers taxation. These are briefly summarized below:
| S.no | Determining Factor | Application to the Applicant’ s case |
| 1. | Does taxpayer have any permanent home elsewhere? What is his place of abode immediately before and after stay in Australia? | Yes, he lives with his parents in a house in Germany. |
| 2. | In the power of attorney signed with the consultants, how the address of the Applicant is described as? | “Naherrechstrasse 6 Grosheilm, Germany 55459”; which shows that his usual place of abode was his parent’s house in Germany. |
| 3. | Does taxpayer have any usual place of abode in Australia? | No, as he stayed in hostels and shared apartments. |
| 4. | The taxpayer’s pattern of travel so suggests? Is s/he a “bird of passage”? | No, as he flees to and from Germany only. |
| 5. | Usual place of abode after quitting one residence to depend on quality of his new accommodation for it to become new usual place of abode | Not present as he kept moving and returned to Germany later. |
| 6. | What is the taxpayer’s permanent place of residence under various correspondences? | University correspondence dated 5 June 2013 referred to his address in Germany. |
The case study also provides guidance into changing the higher tax rate on first bracket of income of temporary residents or backpackers.
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3. How does the WHMR Act treat income earned by ‘backpackers’ in Australia?
The Income Tax Rates Amendment (Working Holiday Maker Reform) Act 2017 (hereinafter “the WHMR Act”) was brought by the Australian Parliament as a means to rationalize and enforce a more equitable rates for working holiday makers in Australia and to incentivize certain sectors of the economy. The WHMR Act specified different rules of taxation for an individual who enjoys the following categories of visa in Australia:
- a Subclass 417 (Working Holiday) visa; or
- a Subclass 462 (Work and Holiday) visa; or
- a bridging visa permitting the individual to work in Australia subject to certain conditions
During such time as the taxpayer holds these visas, his/her income is treated under the Australian legislation as a separate block of income on which different rates of taxation are applied. This is referred to as the “working holiday taxable income” under the WHMR Act as against the statutory ordinary taxable income of a resident individual.
The rates of tax applicable on the working holiday maker are progressive rates of tax given under Part III of the Act, also reproduced below for the ease of reference:
| Item | working holiday taxable income that: | Tax rate |
| 1 | does not exceed $37,000 | 15% |
| 2 | exceeds $37,000 but does not exceed $87,000 | 32.50% |
| 3 | exceeds $87,000 but does not exceed $180,000 | 37% |
| 4 | exceeds $180,000 | 45% |
4. Is this different to the way income earned by ‘backpackers’ was treated prior to the introduction of the WHMR Act? If so, how?
The income of backpackers or working holiday makers in Australia are now treated differently from the treated accorded in terms prior to the enactment of the WHMR Act of 2017. As stated earlier prior to amendments in tax laws brought by the WHMR Act, income of non-resident backpackers was subject to higher rates of tax on the initial brackets of income i.e., 32.5% as against the new lower rates of 15%. This was a result of the interpretation of the Administrative Appeals Tribunal (AAT) of the existing law in the cases discussed in the previous parts (Parliament of Australia, 2016). There are certain other changes brought by the WHMR Act to the tax regime of working holiday makers that are discussed below. These changes are brought under the Working holiday maker reform package of the Parliament introduced in the form of a Bill in 2016 (Federal Register of Legislation, 2016).
After the interpretation of AAT of the existing laws applicable on backpackers, the tax rates applicable on the short-term residents in Australia remained a controversial issue for more or less 18 months, before this bill was presented in the parliament. The higher rates applicable on backpackers resulted in several concerns such as:
- Higher rates on low brackets of income would substantially increase the incentives for tax evasion;
- The number of holiday makers in Australia could substantially diminish as soon as they perceive their holiday to be less productive in terms of economic value;
- This would directly result in shortage of workers in industries that most Australian natives find unattractive such as picking fruit, cleaning and casual hospitality;
- The working holiday makers provide cheap workforce to several local business which would then face vacancies that are hard to fill up;
- Tourists who spend time working would be more inclined to visit other countries in the region such as New Zealand, South Africa or Canada;
- The overall competitiveness of Australia in the broad tourism industry could substantially diminish when working holiday makers perceive it as less attractive in terms of potential earnings and cost of living;
- Agriculture industry would be one of the most affected as seasonal demand for labor is often greater than the local supply and many farms rely on working migrants to fill the demand supply gap (Hanson and Bell, 2007).
- Employment for the second-year visa requirement is also a primary motive for backpackers visiting Mildura and other surrounding areas, according to a case study presented by Jarvis and Peel (2013).
To address the above concerns and to bring about a reform in the current legislation, following further amendments were introduced in the tax laws through the WHMT Act:
- Reduce the WHM visa charge by $50 (Blackwell, 2016);
- A reduction in superannuation from 95% to 65% to further incentivize these workers who will now forfeit lower amount when leaving Australia (Belot and Keany, 2016)
- Enable maintenance of register of employers with WHM visa so as to apply withholding at the lower rate of 15% on their first income bracket;
- Preparation of statistics from the register of WHM for policy making purposes;
[citationic]
