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Addy Case: Key Insights from ATO Decision Impact 

In the landmark Addy v Commissioner of Taxation case, a pivotal court decision reshaped the Australian taxation landscape. The ATO, responding to this significant ruling, released a Decision Impact Statement on December 17, 2021, delving deep into the nuances of the Addy case. This statement comprehensively covers the court’s determinations, alongside the ATO’s interpretation and stance on these crucial findings. Furthermore, addressing the broader implications for working holidaymakers, the ATO has detailed guidance on tax return lodgment and amendments in light of this decision, offering essential insights on their website for those impacted.

Addy, originally from the UK, embarked on an Australian adventure, leaving behind her personal belongings at her family’s residence, signalling her intent to return post her Australian sojourn. In August 2015, her journey began with a Subclass 417 visa, marking her entry into a new chapter as a working holiday traveler. Settling in Sydney, she embraced the communal life of shared housing, living alongside several others in a dynamic, informal setting. Her travel spirit took her beyond Australian borders to Southeast Asia between January and March 2016.

Upon her return in April 2016, Addy ventured into rural Australia, working on a horse farm in Western Australia. This three-month stint was followed by a return to Sydney’s urban landscape, where she served as a waitress. Her journey in Australia was extended with a renewed working holiday visa in July 2016, allowing her to continue her explorative and working stint until May 2017. Her income during this period, totalling $26,576, became the subject of a significant tax dispute. Taxed at the WHM rate of 15% as per the Income Tax Rates Act 1986, Addy found herself at odds with this “ATO Ruling on Addy Court Decision,” challenging its applicability and igniting a legal battle over the “Addy Case Tax Implications for WHM.” Her disagreement with the ATO’s assessment spurred a prolonged legal confrontation, ultimately leading her to the doors of the Federal Court.

In the notable Addy case, the court meticulously dissected two fundamental issues: the determination of Addy’s Australian residency status and the application of the Non-Discrimination Article (NDA). These rulings predominantly tilted against the Commissioner’s standpoint.

Delving into the first issue, the “Full Federal Court Decision on Residency” played a pivotal role. The Court affirmed that, under the 183-day test, Addy was indeed a resident for tax purposes. However, it diverged in its assessment under the ordinary resides test, attributing a ‘fluid nature’ to her stay. This characterization likened her presence in Australia more to an extended holiday rather than permanent residency, a conclusion that aligned with her original declaration when obtaining her visa. There was no substantial evidence suggesting any shift in her intentions during her stay.

The Court further elaborated on the “Australian Residency Status in Tax Law,” concluding that Addy’s residency effectively ceased upon her departure from Australia in May 2017. Consequently, she was entitled only to a portion of the tax-free threshold under the Income Tax Rates Act 1986 (ITRA 1986), as opposed to the full threshold generally accorded to permanent residents.

In addressing the second issue, the High Court made a significant ruling regarding the NDA. It found that the NDA had been contravened, leading to a notable shift in the “ATO Ruling on Addy

Court Decision.” This contravention implied that Addy was to be taxed at rates applicable to resident nationals, as outlined in Part I of Schedule 7 to the ITRA 1986. This decision marked a critical point in interpreting the application of NDA in tax law, especially concerning non-resident individuals in similar circumstances.

Following the significant ruling in the Addy case, the Australian Taxation Office (ATO) has delineated specific criteria that will impact Working Holiday Makers (WHMs). Crucially, these criteria determine who falls under the new tax implications. A WHM must either hold a Subclass 417 (Working Holiday) or 462 (Work and Holiday) visa. Additionally, they must be recognized as a tax resident in Australia. Another key aspect is their country of origin: it must be among those listed under the Non-Discrimination Article (NDA). This list includes nations such as Chile, Finland, Germany (from 1 July 2017 onwards), Israel (from 1 July 2020 onwards), Japan, Norway, Turkey, and the United Kingdom.

These eligibility criteria lead directly to significant “Addy Case Tax Implications for WHM”. If a WHM satisfies these conditions, they are presented with an option fundamentally altering their tax filing process. They can now choose to lodge their income tax return akin to that of an Australian resident, a notable shift in the “Addy Case and Backpacker Taxation Reform”.

Choosing this option means the WHM will be taxed following the rates applicable to Australian residents for tax purposes. This eligibility also opens up potential benefits like the low-income tax offset and the low and middle-income tax offset. Another critical aspect is the global scope of taxation – now, their worldwide income becomes taxable in Australia, just like an Australian tax resident. However, this global taxation is subject to the terms of relevant double taxation agreements, which might exclude certain foreign incomes from being assessed in Australia. Additionally, eligible WHMs may need to consider the Medicare levy.

Conversely, WHMs from NDA countries not qualifying as Australian residents, or those from non-NDA countries, will continue to be taxed at the standard WHM rate. This distinction is crucial in understanding the varied impacts of the Addy case on backpackers’ taxation in Australia.

​​The Addy case presents a nuanced scenario for Working Holiday Makers (WHMs) regarding their tax obligations in Australia. While the implications of this case won’t affect the majority of WHMs – as most are either non-residents or from Non-Discrimination Article (NDA) countries – it introduces significant changes for a specific group. Specifically, WHMs from NDA countries who are considered Australian residents for tax purposes now have the option to be taxed similarly to Australian nationals under the NDA provisions.

This change means that affected WHMs wishing to be taxed at the resident rate must actively lodge a tax return with the Australian Taxation Office (ATO) for the current or any future period.

Furthermore, the ATO offers the possibility to amend the previous year’s tax returns for WHMs impacted by this ruling. However, due to the complexity of these amendments, it’s advisable for WHMs to seek guidance from a professional tax advisor to ensure accurate lodgment and amendment of their tax returns.

For any enquiries related to this update, contact us today.

Shenny Yee

Shenny Yee, Tax Manager of Corporate & International Tax at Andersen Australia, leverages 15+ years of global experience in Singapore and Malaysia. She applies analytical skills to deliver tailored solutions in corporate tax, GST reporting, PE risks analysis, and more.

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