Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)Chapter 1 Income tax treatment of working holiday makers
Outline of chapter
1.1 The Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 applies a 15 per cent income tax rate to working holiday maker taxable income (that is assessable income derived from Australian sources by working holiday makers less relevant deductions) on amounts up to $37,000, with ordinary tax rates for taxable income exceeding this amount.
Context of amendments
1.2 Working holiday makers are an important source of Australia's international tourism and a key source of seasonal labour in regional areas, particularly in the agriculture, horticulture, tourism and hospitality sectors. The reforms recognise the important contribution of working holiday makers to the Australian economy. The reforms seek to increase Australia's attractiveness as a destination of choice for working holiday makers, whilst ensuring that they pay tax at a fair rate on their earnings in Australia.
Income tax rates applying to working holiday makers
1.3 Currently, working holiday makers who satisfy the tax residency criteria receive the benefit of the $18,200 tax-free threshold. In contrast, working holiday makers that are non-residents for tax purposes are taxed at 32.5 per cent from their first dollar of income. The non-resident income tax rates that currently apply to the taxable income of working holiday makers are:
Table 1.1 : non-resident income tax rates
| Taxable income | Tax rate |
| less than $87,000 | 32.5 per cent |
| exceeds $87,000 but does not exceed $180,000 | 37 per cent |
| exceeds $180,000* | 45 per cent |
* The above rates do not include the Temporary Budget Repair Levy - for 2016-17 this levy is payable at a rate of 2 per cent for taxable incomes over $180,000.
Summary of new law
Tax rate changes
1.4 The Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 provides for an income tax rate of 15 per cent for taxable income up to $37,000 of working holiday makers in a year of income. Income above this amount in a year of income is subject to ordinary marginal income tax rates.
Comparison of key features of new law and current law
| New law | Current law |
| Income tax rates applying to working holiday makers | |
| The rate of income tax applying to the taxable income of a working holiday maker will be:
The above rates do not include the Temporary Budget Repair Levy - for 2016-17 this levy is payable at a rate of 2 per cent for taxable incomes over $180,000. |
Working holiday makers self-assess their residency status for tax purposes. The taxable income of a working holiday maker is subject to resident or non-resident rates of income tax, depending on the facts and circumstances of the individual.
The non-resident rates for the 2016-17 year of income are as follows:
The above rates do not include the Temporary Budget Repair Levy - for 2016-17 this levy is payable at a rate of 2 per cent for taxable incomes over $180,000. |
Detailed explanation of new law
Lower working holiday maker income tax rate
1.5 The Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 amends the income tax rates that apply to working holiday maker taxable income. Working holiday maker taxable income is assessable income derived from sources in Australia by working holiday makers, less related deductions. [Item 2, subsection 3A(2) of the Income Tax Rates Act 1986]
1.6 A working holiday maker is an individual holding one of the following temporary visas:
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- subclass 417 (Working Holiday) visa; or
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- subclass 462 (Work and Holiday) visa.
[Items 1 and 2, subsection 3(1) and subsection 3A(1) of the Income Tax Rates Act 1986]
1.7 A working holiday maker may also be an individual who holds a bridging visa permitting the individual to work in Australia if:
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- the bridging visa was granted under the Migration Act 1958 in relation to an application for one of the visas referred to above;
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- the Immigration Minister's decision on that application is yet to be made; and
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- the most recent visa, other than a bridging visa, held by the individual was a Subclass 417 (Working Holiday) visa or Subclass 462 (Work and Holiday) visa.
[Items 1 and 2, subsection 3(1) and subsection 3A(1) of the Income Tax Rates Act 1986]
1.8 The amendments ensure working holiday maker taxable income is subject to income tax at the following rates:
Table 1.2 : Income tax rates applying to working holiday taxable income
| Taxable income | Tax rate |
| Less than $37,000 | 15 per cent |
| Exceeds $37,000 but less than $87,000 | 32.5 per cent |
| Exceeds $87,000 but does not exceed $180,000 | 37 per cent |
| Exceeds $180,000* | 45 per cent |
* The above rates do not include the Temporary Budget Repair Levy - for 2016-17 this levy is payable at a rate of 2 per cent for taxable incomes over $180,000.
[Items 2 and 7, subsections 3A(2) and Part III of Schedule 7 to the Income Tax Rates Act 1986]
1.9 A working holiday maker's working holiday taxable income is reduced by related deductions before applying the income tax rate. [Item 2, subsection 3A(2) of the Income Tax Rates Act 1986]
Example 1.1 : Working holiday maker taxable income
Pierre is a non-resident for income tax purposes. He is a working holiday maker for the whole of the 2017-18 income year earning $75,000 for the income year.
Pierre pays tax at the rate of 15 per cent for the first $37,000 and 32.5 per cent for the remaining $38,000 comprising his working holiday taxable income which exceeds the first income tax bracket.
1.10 Working holiday makers may earn income other than employment income whilst in Australia. These other amounts that form part of their taxable income are taxed as working holiday maker taxable income.
1.11 A person may be a working holiday maker for part of an income year and, for the balance of that income year, hold a different visa that does not qualify them as a working holiday maker. In these circumstances, the working holiday maker rates of income tax apply only to income derived during the period of the year of income in which the person qualifies as a working holiday maker. For the balance of the year of income in which they are not a working holiday maker, the person must assess their residency status, determined on a whole of year basis (typically as a non-resident) and the relevant rates of tax will apply.
Example 1.2 : Working holiday maker taxable income and other income
Fabio is a non-resident for income tax purposes. Fabio earns $50,000 while a working holiday maker in Australia from 1 July 2017 to 31 March 2018 and has $1,000 of deductions that relate to this income. His working holiday taxable income is therefore $49,000. He also earns a $39,000 salary in Australia while holding a different class of visa from 1 April 2018 to 30 June 2018 which does not result in him being a working holiday maker for this period.
Fabio pays tax at the rate of 15 per cent on the working holiday taxable income from $0 to the tax threshold of $37,000 and 32.5 per cent for the remaining $12,000 of his total of $49,000 of working holiday taxable income.
For Fabio's taxable income of $39,000 that is not working holiday taxable income, he pays income tax at the 32.5 per cent non-resident rates for the first $38,000. The remaining $1,000 is taxed at 37 per cent, as his overall income for the year is higher than $87,000 so he moves into the next tax bracket.
1.12 The income tax rate schedules for resident and non-resident taxpayers are also amended to ensure that:
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- the working holiday maker income tax rates correctly apply to working holiday maker taxable income; and
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- working holiday maker taxable income is correctly taken into account if an individual is assessed by the Commissioner of Taxation where, in a year of income, they have both working holiday maker taxable income (with rates under Part III of Schedule 7 of the Income Tax Rates Act 1986 to apply) and other taxable income earned in a part of the income year in which they were not a working holiday maker (to which either Part I for residents or Part II for non-residents would apply).
[Items 3, 4, 5 and 6, clauses 1 and 4 of Part I and clauses 1 and 4 of Part II to Schedule 7 of the Income Tax Rates Act 1986]
Commencement, application and transitional provisions
Commencement
1.13 The provisions in the Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 commence on the date of Royal Assent. [Clause 2]
Application
1.14 The amendments apply in relation to assessable income derived by working holiday makers, less related income tax deductions, on or after 1 January 2017. [Item 8, Schedule 1]
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016
1.15 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
1.16 This Bill applies a 15 per cent income tax rate to assessable income derived by working holiday makers on amounts up to $37,000, with ordinary income tax rates applying for income exceeding this amount.
Human rights implications
1.17 This Bill does not engage any of the applicable rights or freedoms.
Conclusion
1.18 This Bill is compatible with human rights as it does not raise any human rights issues.