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Appellant Opposes New Tax Rate Imposed on Working Holiday Visa Holders

Addy v Commissioner of Taxation [2021] HCA 34 (3 November 2021)

The appellant applied for and was granted a Working Holiday (Temporary) (Class TZ) (Subclass 417) visa.  When a new tax rate applicable to persons holding working holiday visas was enacted, the tax rate imposed on working holiday visa holders became more burdensome. The appellant objected the Commissioner's amended notice of assessment for the 2017 income year.  The parties dispute whether or not the new tax rate was in contravention of Art 25(1) of the United Kingdom convention. 

Facts:

The appellant, Ms Catherine Addy, is a national of the United Kingdom.  On 3 July 2015, she applied for and was granted a Working Holiday (Temporary) (Class TZ) (Subclass 417) visa under the Migration Act 1958 (Cth).  Ms Addy travelled to Australia on her British passport and, on 20 August 2015, entered Australia on her working holiday visa.  From August 2015 and May 2017, Ms Addy primarily lived and worked in Australia while holding a working holiday visa.

During the 2017 income year, she derived taxable income of $26,576 working in casual employment as a food and beverage waiter in Sydney.  In December 2016, a new tax rate applicable to persons holding working holiday visas was enacted by inserting a new Pt III into Sch 7 to the Income Tax Rates Act 1986 (Cth) ("the Rates Act"), to take effect in relation to assessable income derived on or after 1 January 2017.   Part III applied a flat rate of tax of 15 per cent to the first $37,000 of an individual's "working holiday taxable income", a maximum tax liability of $5,550.  On 20 December 2017, the Commissioner of Taxation ("the Commissioner") issued Ms Addy with an amended notice of assessment for the 2017 income year which applied Pt III of Sch 7 to Ms Addy's assessable income after 1 January 2017.  Ms Addy claims that the application of Pt III of Sch 7 to her assessable income contravened Art 25(1) of the United Kingdom convention.  

The Commissioner found that Ms Addy was "an Australian resident for taxation purposes during the 2017 [income] year" and a "working holiday maker" earning "working holiday taxable income" within the meaning of s 3A of the Rates Act and was, therefore, subject to the tax rates in Pt III of Sch 7.  But, the Commissioner did not accept Ms Addy's ground of objection based on Art 25(1) of the United Kingdom convention.  Ms Addy commenced proceedings in the Federal Court of Australia appealing the objection decision.  The Federal Court allowed the appeal and ordered that the matter be remitted to the Commissioner for the making of a consequential amended assessment.

Ms Addy sought and was granted special leave to appeal to this Court. The sole ground of appeal was that the majority in the Full Court erred in holding that Ms Addy should not obtain relief under Art 25(1).

Issue:

Whether or not Pt III of Sch 7 to the Rates Act imposed a more burdensome taxation requirement on Ms Addy in contravention of Art 25(1) of the United Kingdom convention. 

Applicable law:

Income Tax Act 1986 (Cth) ss 4 and 5(1) incorporates the Assessment Acts and imposes income tax at the rates declared by the Rates Act.
Income Tax Rates Act 1986 (Cth) 
Pts I and III of Sch 7 - applied a 15 per cent income tax rate to "working holiday taxable income" derived by a "working holiday maker" on amounts up to $37,000, with ordinary income tax rates applying for income exceeding this amount.

Migration Act  s 3A(1) - provides that an individual was a "working holiday maker" if the person relevantly held a working holiday visa, or a bridging visa granted in relation to a working holiday visa.

The United Kingdom Convention [2003] ATS 22relevantly provides that nationals of the United Kingdom shall not be subjected in Australia to "other or more burdensome" taxation than is imposed on Australian nationals "in the same circumstances, in particular with respect to residence". 

Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225 at 230-231 -provides that the transposed text of Articles in the United Kingdom convention that are applied as domestic law "should bear the same meaning in the domestic statute as it bears in the treaty".

Chong v Commissioner of Taxation [2000] FCA 635 - provides that the bilateral agreements, or treaties, based on the OECD Model Convention allocate the taxing powers between the two Contracting States.

Thiel v Federal Commissioner of Taxation [1990] HCA 37 - where the principles of interpretation applicable to a tax treaty are well settled.

Minister for Immigration and Multicultural and Indigenous Affairs v QAAH of 2004 [2006] HCA 53 -  provides that although the text of the treaty is the starting point and has primacy in the interpretation process, it is mandatory "that courts look to the context, object and purpose of treaty provisions as well as the text ... consistent with the general principle that international instruments should be interpreted in a more liberal manner than would be adopted if the court was required to construe exclusively domestic legislation"

Purvis v New South Wales [2003] HCA 62 - where it was held that discrimination jurisprudence establishes that the circumstances of the person alleged to have suffered discriminatory treatment and which are related to the prohibited ground are to be excluded from the circumstances of the comparator.

Federal Commissioner of Taxation v Pike (2020) 280 FCR 429 at 445-446 [28] - provides that article 25(1) of the United Kingdom convention which relevantly provides that nationals of the United Kingdom shall not be subjected in Australia to "other or more burdensome" taxation than is imposed on Australian nationals "in the same circumstances, in particular with respect to residence" prevails over the Income Tax Assessment Act 1936 (Cth).

Analysis:

As has been observed, Ms Addy was a resident of Australia for the purposes of Australian tax, she derived wages in Australia and her wages were taxed in Australia.  Art 25(1) disapplies any domestic taxing provision which imposes different or more onerous tax treatment on nationals of the United Kingdom in Australia than that imposed on Australian nationals deriving the same income from the same source in the same circumstances.  Ms Addy contended, first, that Art 25(1) is not confined to prohibiting discriminatory treatment based solely on nationality.  Second, Ms Addy contended that, in any event, contrary to Art 25(1), Pt III of Sch 7 does discriminate solely on the basis of nationality. 

The Commissioner, on the other hand, contended that Art 25(1) is concerned with differential taxation that is imposed solely by reason of nationality, but that here the differential rates were imposed because of Ms Addy's visa type and not her nationality.  The Commissioner further submitted that the words "in the same circumstances" in Art 25(1) mean "identical in all matters relevant to the imposition of taxation except nationality" and that, because here "it was not possible for an Australian national to earn working holiday income while holding a working holiday visa", an Australian national could never be "in the same circumstances" as Ms Addy.

The holding of a working holiday visa was not necessarily bound to nationality, such that there was no causal nexus between Ms Addy's nationality and her liability to pay tax at the rates imposed by Pt III of Sch 7.  Although Ms Addy held a working holiday visa, she did not hold it because she was a British national: it was "not a necessary concomitant" of her nationality.  Holding a working holiday visa was a distinguishing tax‑related characteristic which could not be excluded when attempting to make the required comparison.  S 3A of the Rates Act did "not refer at all to a person's nationality".

The circumstances of the hypothetical taxpayer that go to, or affect, tax liability had to be the "same" in order for Art 25(1) to be engaged and the circumstances therefore had to include the holding of the same visa.  The "same circumstances" that must be considered of the hypothetical comparator cannot include being or not being the holder of a working holiday visa just as they cannot include being or not being an Australian national. 

Conclusion:

The Court concluded that the new tax rate imposed on working holiday visa holders was more burdensome than the tax rate imposed on Australian nationals deriving taxable income from the same source during the same period.  The application of Pt III of Sch 7 contravened Art 25(1) of United Kingdom convention.  The Court allowed the appeal with costs.  Orders 1 and 3 of the orders of the Full Court of the Federal Court of Australia made on 6 August 2020 are set aside.  In their place, the Court ordered that the appeal to that Court be dismissed. 

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