In a judgment of 6 August 2020 the Australian Federal Court ruled in favour of the Commissioner of Taxation in a case involving the residency test for a UK citizen staying in Australia on a Working Holiday Visa (WHV).
The Court found that the UK citizen fulfilled the 183 day test, also known as the ordinary concepts test, for Australian residence under the provisions of the Income Tax Assessment Act, 1936.
The UK citizen had entered a cross appeal claiming entitlement to the Australian annual tax free threshold of AUD 18,200 which is available to Australian resident nationals, on the grounds that this would be permitted under the non-discrimination Article of the Australia-UK double tax treaty.
The Court however held that the UK citizen was not eligible to claim allowance based on the non-discrimination article of the tax treaty. Since 2017 the tax position of the backpacker is covered by Income Tax Rates Amendments (Working Holiday Maker Reform) Act, 2017. The UK citizen would be liable to tax at a rate of 15% applicable to Australian income of individuals in Australia on a working holiday.
The non-discrimination Article in the Australia-UK tax treaty which is based on the equivalent Article in the OECD Model forbids discrimination on the grounds of nationality and precludes a contracting state from subjecting nationals of the other contracting state to a greater tax liability than that of its own nationals in the same circumstances.
The Commissioner of Taxation had noted that the Commentary on Art. 24 (non-discrimination) of the OECD Model states that in applying the non-discrimination Article the underlying question is whether two persons who are residents of the same State are being treated differently solely by reason of having a different nationality.
The Court noted that the Article is therefore restricted in scope to disparity in tax treatment based solely on nationality and does not prohibit differential tax treatment based on residence or other criteria not connected to nationality. In those cases the circumstances of taxpayers are not the same and the less favourable tax treatment is based upon factors other than nationality.
The Court concluded that the tax-free threshold available to Australian residents is not available to a foreign national backpacking in Australia. An Australian national was not in a comparable situation to a UK citizen backpacking in Australia under a WHV.