The High Court’s decision on the so-called “backpacker tax”, Addy vs Commissioner of Taxation1, made international news in November 2021. It found that the income tax imposed on Ms Addy, a UK national in Australia on a working holiday visa, was more burdensome than the tax imposed on an Australian national in the same circumstances. While this case had an international flavour, there are some key takeaways for the interpretation of treaties in Australian domestic law.
The facts
- Ms Addy was a UK national who had come to Australia on a Working Holiday Visa Subclass 417
- Ms Addy worked as a waitress in FY2017, earning approximately $26,000
- Her working holiday income was taxed at a flat 15%; she did not get the tax-free threshold for the first $18,200 (which applied to Australian tax residents).2 This meant she paid an extra $2,000 in income tax
- It was not in dispute that Ms Addy was an Australian resident for tax purposes in FY2017.
Ms Addy’s claim was focused on the interpretation of a bilateral tax treaty between Australia and the UK.3 Specifically, Article 25(1) contained a binding clause prohibiting Australia imposing more burdensome tax on UK nationals, when compared to an Australian national in the same circumstances (and specifically with respect to residence).
Importantly, Art 25 was incorporated into Australian domestic law,4 including provisions which provided that it would prevail
over domestic law to the extent of any inconsistency and that the more advantageous domestic rules for Australian nationals would apply instead.
The High Court considered a discrete question: whether the more burdensome taxation which was imposed on Ms Addy was owing to her nationality.
In a unanimous decision, the High Court rejected the Commissioner’s argument that Art 25 was not engaged in Ms Addy’s case. The Commissioner argued that:
The differential taxation was imposed because of Ms Addy’s visa type and not her nationality; and
Relying on a New Zealand case5 relating to a similar non-discrimination clause, to be “in the same circumstances” for the purposes of Art 25 required an identical or exact comparison. Since an Australian national could not earn working holiday income on a relevant visa, no comparison was possible.
Rather, the High Court took a more liberal and purposive approach to interpreting Art 25 than it would to exclusively domestic legislation, looking to “the context, object and treaty provisions as well as the text”. The High Court was persuaded by the following:
That Ms Addy was considered a tax resident of Australia. Under the tax treaty, contracting states can impose other or more burdensome tax requirements on foreign nationals where they are foreign residents.
The principles of discrimination law based on Australian jurisprudence; the very point being to carve out the differentiating factor (in this case, visa status which depends on nationality) from “the same circumstances” to conduct a comparison to determine any discriminatory impact.
While the Court noted the OECD Model Convention commentary on the interpretation of Art 25, it was simply to note that it “reinforced” the Court’s construction. The Court did not form a view on whether commentaries issued after Australia adopted the treaty into domestic law would be relevant to its interpretation.
Our key takeaway
From a statutory interpretation context, it is interesting to note that the High Court was willing to, quite liberally, look to “the context, object and purpose of treaty provisions” in interpreting Art 25. Addy v Commissioner of Taxation could be a hint that the High Court is softening its stance on the interpretation of international instruments in domestic law, compared to the earlier High Court decision in Project Blue Sky vs Australian Broadcasting Corporation.6
References
- [2021] HCA 34
- Pt III and Part I of Sch 7 to the Income Tax Rates Act 1986 (Cth)
- Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains
- International Tax Agreements Act 1953 (Cth)
- Commissioner of Inland Revenue v United Dominions Trust Ltd [1973] 2 NZLR 555
- [1998] HCA 28
