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Australian Backpacker Tax 'To Raise More Than Expected'

by Mary Swire, Tax-News.com, Hong Kong

28 October 2016


The Australian Treasury has underestimated the revenue the Government will receive from the so-called "backpacker tax," according to Australian Chamber – Tourism.

Australian Chamber – Tourism is the tourism advocacy body of the Australian Chamber of Commerce and Industry. Its chairman, John Hart, appeared before the Senate inquiry into reform of the Working Holiday Maker rules.

He presented the Chamber's submission to the inquiry, which included research commissioned from Lateral Economics into the impact of removing the tax-free threshold from working holiday makers and subjecting their earnings to a 19 percent tax.

Hart said: "Treasury estimated that it would collect AUD120m (USD90.9m) in a full year from a 19-cent-in-the-dollar base tax rate, but Lateral Economics says that figure would be AUD232m."

In its submission, the Chamber said that removing the tax-free threshold for working holiday makers "will constrict labor supply for tourism businesses … [and] have a negative impact on the economy, particularly regional economies, as taxation is substituted for direct spending in local businesses." However, it added that, "as the Government has made revenue targets the clear bottom-line objective, Australian Chamber – Tourism supports the 19 percent rate combined with measures to increase demand."

The Chamber recommended that the proposal be passed by parliament, subject to the Government undertaking a review of whether revenue from the measure is meeting or exceeding targets, the impact on labor supply, and the demand for working holiday maker visas.

In September, the Cabinet agreed to set the tax rate applying to working holiday makers at 19 percent on earnings up to AUD37,000, with ordinary marginal tax rates applicable after that threshold. The new rate will apply from January 1, 2017.

The 2016 Budget, introduced in March, included a proposal to reform the tax residency rules to treat most working holiday makers temporarily in Australia as non-residents for tax purposes, meaning that they would no longer be able to access the tax-free threshold. According to Budget documents, the aim was to "ensure that these people are taxed at 32.5 percent from their first dollar of income up to AUD80,000"

The tax-free threshold for Australian residents is AUD18,200. Afterwards, the following rates apply: 19 percent to income between AUD18,201 and AUD37,000; 32.5 percent to income between AUD37,001 and AUD87,000; 37 percent to income between AUD87,001 and AUD180,000; and 45 percent to income over AUD180,001. The Government recently passed legislation to increase the threshold for the 37 percent rate from AUD80,000 to AUD87,000.

To offset the impact of reducing the backpacker tax to 19 percent, the Government will increase the tax on working holiday makers' superannuation payments when they leave Australia to 95 percent. In addition, the Passenger Movement Charge (PMC) for all passengers departing Australia will be increased by AUD5 to AUD60 from July 1, 2017.

The package is designed to raise at least the AUD220m a year that it was originally estimated the 32.5 percent backpacker tax would raise.

The Chamber said that the PMC hike should be rejected, on the basis that adequate revenue will be derived from the related income tax and superannuation changes. It said there has been no assessment of the impact of the higher PMC rate on the competitiveness of Australia's visitor economy, and that any future proposal to increase the rate should be made in consultation with the sector.

Hart commented: "Tourism is a rapidly growing contributor to Australia's balance of trade. Tourism-related exports consistently earn more than goods categories including rural goods and the coal trade. The PMC increase will make Australia less competitive as a destination for international tourism. Given the revenue is not needed to meet the Government's target it should be reconsidered."

TAGS: tax | business | air passenger duty (APD) | Australia | tax thresholds | travel and tourism | legislation | tax rates | tax reform | trade association | trade | individual income tax

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