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Economics Legislation Committee

ENGLAND, Mr Andrew, Deputy Commissioner, Policy Analysis and Legislation, Australian Taxation Office

EWING, Mr Robert, Acting Division Head, Tax Analysis Division, Revenue Group, Treasury

FRASER, Mr Bede, Principal Adviser, Individuals and Indirect Tax Division, Treasury

INGERSOLL, Mr Michael, Assistant Commissioner, Individuals, Australian Taxation Office

KELLY, Mr Ben, Assistant Commissioner, Policy, Analysis and Legislation, Australian Taxation Office

LENDON, Ms Alison, Deputy Commissioner, Individuals, Australian Taxation Office

PURVIS-SMITH, Mrs Marisa, Division Head, Individuals and Indirect Tax Division, Treasury


CHAIR: I welcome officers from the Australian Taxation Office and officers from the Treasury. Thank you very much, all of you, for appearing before the committee today. I invite the ATO and the Treasury to make a brief opening statement, should either agency wish to do so, and then the committee will ask some questions. Does each agency wish to make an opening statement?

Mrs Purvis-Smith : I do not wish to make an opening statement.

Mr England : No.

CHAIR: You are very easy customers! May I start by turning the questioning over to Senator Ketter.

Senator KETTER: Thank you very much. My first question is to Treasury. Can you tell us what economic modelling, if any, was undertaken regarding the increase in the passenger movement charge?

Mr Ewing : We did not undertake any economic modelling of the change to the passenger movement charge. The macro-economic models that we have are broad whole-of-economy instruments. They are designed to model large-scale changes to the economy. Changes such as a small change to a price in the economy are not something which we think it is useful to model.

Senator KETTER: You may well be aware of the reaction from the industry today. They would not say that it is an irrelevant increase.

Mr Ewing : I did not say that it was irrelevant, just that it was small relevant to the whole-of-economy models that we use in these instances.

Senator KETTER: Is the PMC necessary for the package to be revenue-neutral?

Mrs Purvis-Smith : The government made a decision in relation to the package, and the PMC was one of those measures that was part of the package in order for it to be revenue-neutral.

Senator KETTER: The answer is yes, it is necessary?

Mrs Purvis-Smith : It is part of the package, to be revenue-neutral.

Senator KETTER: Are you familiar with the modelling that has been done by KPMG, which has been referred to today?

Mrs Purvis-Smith : I am not aware of it. My colleague may be.

Mr Ewing : I am not familiar with that modelling, I am afraid. All I can do is say that the estimates and the costings that we came up with are our best professional judgement of the changes to revenue and expenses as a result of this package.

Senator KETTER: Could you provide an estimated breakdown by percentage and number of the total working holiday-makers into a number of different categories; the number who are claiming residency for tax purposes who are likely to be legitimate; the number who are claiming residency for tax purposes who are not likely to meet the residency rules; and the number of backpackers who classify themselves as nonresidents? Is that something you can do?

Mr Ewing : I do not have that information available to me.

Senator KETTER: That might be a tax office question.

Mrs Purvis-Smith : We might need to take that on notice. My understanding, though, is that that is a level of granularity that the data we have available to us does not allow us to provide. One of the challenges in this issue is that there is a lack of data at a level of granularity. At the moment, we do not need to track our working holiday-makers in accordance with which employer they are employed with, or for how long, unless they are going for their second year; that is my understanding. Part of the issue is that there is not the level of data that is required.

Senator KETTER: Is anybody on the panel able to tell me the average and the median income for working holiday-makers?

Mrs Purvis-Smith : I can tell you that the average income is around $13,000 for a working holiday-maker.

Senator KETTER: And median?

Mrs Purvis-Smith : I do not have that information available, sorry.

Senator KETTER: There was no modelling on the PMC, but I take it there was modelling done on other aspects of the reform package?

Mr Ewing : I do not believe there was economic modelling done of any of the aspects of this package. Again, it comes back to the nature of the economic models that Treasury has available. In particular, the most significant aspect of this package is the change to the tax rates on working holiday-makers. In the macro-economic models that we use we have a single representative household. That single representative household supplies the labour to all of the industries in the economy and so, as a result, modelling of any of the changes where different types of labour are having different tax rates is simply not possible in the models that we have. So we could not do any economic modelling on that aspect of the package.

Senator KETTER: I find that extraordinary—that you are not capable of doing that type of modelling.

Mr Ewing : Those are the capabilities that we have in the models available to us.

Senator XENOPHON: Through you, Chair: supplementary to Senator Ketter's line of questioning, are you saying that you are not capable of doing it, or that you are capable of doing it but you have not done it?

Mr Ewing : I am saying that the models that we have available are not capable of modelling that kind of change to the tax system.

Senator XENOPHON: Are there any models anywhere on the planet that are capable of doing this?

Mr Ewing : There is no model that I am aware of within the Australian economy that does it, but my awareness is not complete. So I could not guarantee that it is.

Senator XENOPHON: Thank you.

Senator KETTER: So you are not able to tell me how, if we continue to have a decline in working holiday-maker numbers, that is going to impact on the industry or the economy?

Mr Ewing : I am not able to provide economic modelling of that question, no.

Senator KETTER: What can you tell me about the departing superannuation tax? Have you done no modelling in respect of that aspect of the package, as well?

Mr Ewing : We did not do economy-wide modelling of that. As with all elements of the package, we did do analysis of the cost of these measures and the impact on the budget.

Senator KETTER: When there are general considerations of changes to tax rates, I would have thought that that is the role of Treasury to model that. And you are telling me—

Mr Ewing : We certainly provide advice on the economic impacts of these changes to policy in general. That would be a normal type of advice that Treasury provides. In terms of economy-wide models, we generally do not use them for these kinds of things. You need to have a very significant change to the tax system in order for it to be worthwhile modelling those—for instance, if you are going to make a significant change to company tax rates, which was modelling that we did around budget this year.

Senator KETTER: Okay, so I am using the wrong terminology. I should not be asking for modelling, I should be asking whether you are able to provide any economic advice about the changes in the reform package. Is that correct? If I ask that question, are you able to provide some information?

Mrs Purvis-Smith : If you are after quantitative and if you are after forecasts, I would go again with my colleague, Mr Ewing, that we are unable to provide that. What we do provide is costings, and we cost the measure of proposals for government. But, as Mr Ewing has outlined, we are unable to provide quantitative economy-wide modelling of changes of this sort.

Senator KETTER: Forgive me, but I fail to understand how you can cost something over a future period unless you have some form of modelling to underpin that.

Mr Ewing : Perhaps it might help if I briefly talked about the process by which we modelled the change to the working holiday-maker rate, and perhaps going back to the 2015 budget measure. I think it might explain exactly what approach we are taking here, and how it is that we cannot answer these questions.

Senator KETTER: Yes, okay. Thank you, Mr Ewing.

Mr Ewing : When we were costing the 2015-16 budget measure, our first step was to work with the ATO to get information on the visa and tax administrative data in order to get some estimates of the amount of tax revenue currently associated with working holiday-makers under the tax regime that existed at the time. We then had a look at that data and what we found is that, owing to the lack of information that we have, there were some concerns in that data. For instance, people in that dataset were tagged with the visa class on which they first arrived, not necessarily the visa class under which they were currently operating. That was just a necessary consequence of the limited amount of information we had. It also was not a perfect match. We were relying on trying to match information on the two sets of data rather than having some perfect linkage record. So we had a number of concerns with the data.

Senator KETTER: Would that lead you to make certain assumptions? Obviously, you did come up with some costings, so there must be some assumptions that underpin that.

Mr Ewing : Absolutely. We first thought that we were going to need to make an adjustment to whatever costing that we had. Our best professional judgement was that we needed to write that data down somewhat in order to arrive at the costing. At the same time, we also thought that there were two other effects that we needed to make sure we incorporated into the costing. One of those was a reduction in the number of working holiday-makers arriving on that visa class and the other was an increase in the number of working holiday-makers operating in the shadow economy—cash-in-hand work and so on—so we would not get the tax revenue from them. Because the data that we had was very uncertain, the information we had on those behavioural responses was very uncertain, our judgement was that the best approach was to make a single adjustment that incorporated all three of those factors, so we made an adjustment to that raw data which incorporated those three factors as a single step. As a result, we cannot disentangle in our costing the effect of any of those three elements, because we did them as a one-step process.

Senator KETTER: Those three elements again were?

Mr Ewing : The issues with the data-matching exercise, the reduction in the number of working holiday-makers you would expect from a higher tax rate and the increase in the number of working holiday-makers operating cash in hand or in the shadow economy.

Senator KETTER: So you made some assumptions about a reduction in the number of working holiday-makers as a result of the increase in the tax rate?

Mr Ewing : We incorporated a single assumption for those three factors that included that, but we never put a number against how many fewer working holiday-makers there would be. I would also say that, when making that adjustment, we thought the single largest factor was the data issues, those other two factors being somewhat smaller.

Senator KETTER: So you cannot disaggregate the final effect?

Mr Ewing : I cannot, no. We literally never thought about it separately. We made a single adjustment to reflect all three factors at once.

Senator KETTER: Can you tell me what percentage of working holiday-makers who leave Australia are claiming superannuation?

Mr Ewing : My understanding is that we are not able to disaggregate the temporary residents claiming superannuation down to that level of detail, but I believe—perhaps my colleagues at the ATO can assist—that it is quite a high percentage claiming that superannuation, something in the order of 95 per cent or above, through their superannuation fund, before it goes into unclaimed moneys.

Ms Lendon : We have figures which show that 100,000 temporary residents—but that is all visa categories; it is not just working holiday-makers—claim back their super when they depart Australia each year. So it is around about that 100,000. But, again, that is the total figure.

Senator KETTER: I have some further questions about consultation. What consultation was undertaken in relation to the increase in the PMC?

Mrs Purvis-Smith : I am not aware of the consultations in relation to the increase in the PMC.

Senator KETTER: You are able to tell me that there was no consultation?

Mrs Purvis-Smith : At a departmental level, we did not consult. I am not aware as to whether the Treasurer may have consulted.

Senator KETTER: My next question is to the ATO. Have you identified any unintended consequences of the proposed measures?

Ms Lendon : I think that is quite a broad question for us at this stage, because we are in the process of designing the administration to a greater level of detail. What I would say, however, is that the new measure does provide more certainty for working holiday-makers in terms of how they will be taxed. At the moment, under the current law, the question of residency is not one that is straightforward, and each working holiday-maker needs to self-assess whether or not they are a resident or a non-resident. That is not straightforward. We provide a lot of information on our website to help people with that, including a tool where they answer some simple questions to come up with whether they are likely to be a resident or not. So certainly I think this is an intended consequence—that, if you are a certain visa class, obviously you know what the tax rate is going to be at the moment. Whether or not you are resident, and if you get that correct—and we believe a number of working holiday-makers do not get that correct—means a different treatment in terms of taxation. If you are a non-resident, clearly it is 32.5 per cent. If you are a resident, it is the normal marginal tax rates that we pay.

Senator KETTER: What about the effect on employers of working holiday-makers who are not a business—so, for example, families employing au pairs?

Ms Lendon : At the moment, those people who are employing in the domestic environment do, depending on their circumstances, have obligations in respect to withholding tax for salaries that they pay. So, in that sense, this measure equally applies to them. But, of course, they do not have an ABN; they have a WPN—a withholding provider number. So they are not on the ABR, of course. There are separate arrangements for them. Once again, we are working through the administration and how we can make it streamlined and easy for people to meet their obligation.

Senator KETTER: Was the ATO consulted about this package?

Ms Lendon : Yes, we were.

Senator KETTER: To what extent?

Ms Lendon : We were part of the inter-departmental committee. Also, as usual, we work with Treasury to provide advice on the administration aspects of any new policy to work through how we would deliver it, the impact on the community in terms of their readiness and what needs to be done—so the usual process that we do around new measures to provide that advice to be taken into the policy context.

Senator KETTER: My original question was: any unintended consequences? That was an intentionally broad question. I am interested in your response. It sounds like you are still working your way through that.

Mr England : I think on the basis of what we know about the measure—and we have not seen any at this time, but, obviously, we have to go through a process to implement the measure—there are no unintended consequences that we are aware of at this time.

Senator KETTER: What about the rules for working holiday-makers employed by labour hire companies? Has that been adequately thought through from the ATO perspective?

Mr Ingersoll : Our current understanding of the design is: the labour hire firm will be required to register. And that provides the registration link. That is how we are working through the design at the moment. So, in a sense, we are not anticipating particular issues with labour hire organisation firms who do provide. They will have to answer the same registration process. But, basically, as long as they are going to be a genuine employer of working holiday-makers we see no impediment to their registration. And after that we will follow up in due course if there are any issues.

Senator KETTER: Will that employer register be accessible to the public?

Mr Ingersoll : Consistent with the design in the law, we will be using the ABN Lookup for those who registered with an ABN—our business registration area. In effect, what we currently do on the ABN Lookup is provide some information about an ABN holder, including whether they are active and some of their roles. This would be an additional role that would be displayed. So, for those who are in business as an employer, there will be, via the ABN Lookup, information so that someone can say, 'Is my employer a registered employer for working holiday-maker purposes?'

Senator KETTER: I do have some other questions but I appreciate that others might have some.

Senator XENOPHON: Can I just ask some questions about the modelling and assumptions. It is not just modelling. I think Senator Ketter traversed some of this as well. We have heard evidence today from tourism operators, and we have heard from the National Farmers' Federation just a few minutes ago who have said that there has been a 40 per cent to 90 per cent decline in some areas in the number of backpackers that will be turning up, and that they are concerned about a real labour shortage. They gave an example of a mango farmer in Humpty Doo in the Northern Territory where 15 per cent of the fruit was not picked last year because of the labour shortage, and he is expecting it to get much worse this year. In addition to that, the farmer will not be expanding his mango production because he just cannot get the labour. Are these the sorts of factors that—as information emerges from credible groups such as the NFF and tourism operators and other peak bodies—you would factor in, in terms of determining what the impact may be on revenue and on economic activity?

Mr Ewing : Certainly when we are doing our estimates of revenue and we are looking at the cost of measures, we are taking into account all the information that is available to us. That said—

Senator XENOPHON: Can we just pause there. In answer to the questions that Senator Ketter asked you, not much information is provided—not because you are not being forthcoming but because there just is not information there. Now that you are aware of more information emerging, including the evidence that this inquiry has heard, will you be going back to reassess what the potential impacts will be to the budget bottom line in terms of tax receipts, economic activity and multiplier effects involved? My fear is that we could literally have many thousands of tonnes of produce around this country left rotting on the ground in the absence of having a labour force to pick it.

Mr Ewing : We would not normally update a cost estimate of a measure. Our normal practice is that we produce a single estimate that is published in the budget or in the MYEFO document, in terms of the fiscal impacts. When we do our economy-wide forecasts and the revenue forecasts for collections, we of course take into account all these sorts of factors. If there are particular trends occurring in particular sectors or regions, we will take them into account in those forecasts. We would not normally separately identify them.

Senator XENOPHON: These are not normal times. We are looking at a cliff that we could be falling off, even with a 19 per cent reduction, as proposed in this bill, which I support, and even any lesser amounts. You have got key farmer groups, key stakeholder groups, saying: 'The damage is already being done.' Is that something that will be taken into account, given that we face an extraordinary situation in just a few weeks' time where there will be a significant reduction in the workforce available to pick our fruit and to work in tourism facilities—that we actually face a real crunch in terms of a labour shortage in the bush and in the regions, and with agriculture generally and horticulture in particular?

Mr Ewing : We will certainly take into account all of those factors when we are updating our economy-wide forecasts—

Senator XENOPHON: After the event or before the event?

Mr Ewing : As information becomes available and as we update those forecasts. However, we do not, in normal practice, update costings of measures, and whether or not to do so is a decision of government.

Senator XENOPHON: So, in the absence of government instructing you to do so, we have to rely on the assumptions and the forecasts made previously?

Mr Ewing : We do not normally update them—that is correct.

Senator XENOPHON: Will you, at the very least, take into account the evidence that this inquiry has heard from groups such as the National Farmers' Federation?

Mr Ewing : 'Take into account' in what, Senator?

Senator XENOPHON: Well, they have said that there is going to be a 40 per cent to 90 per cent drop in the number of backpackers coming to this country and that there will be a massive impact on fruit being picked and agricultural workers. The tourism industry has talked about how they are going to have a real shortage this summer season. Are these the factors you would take into account?

Mr Ewing : As I said, an updated costing is a decision for government, and—

Senator XENOPHON: That is not my question. Can you at least read the Hansard and take into account some of the evidence we have heard here today?

Mr Ewing : Certainly we will take that information into account when we are doing our forecasts. We take into account any information that we have, and we are always grateful to get more information because it is a very difficult exercise. The more information we have, the better. We will certainly—

Senator XENOPHON: I might put this to the ATO as well. Mrs Purvis-Smith, I am just trying to understand what the impact of this will be, because what this will do does not seem to have been thought through. Has any consideration been given in any forecasts to relaxing social security rules so that a young person who is unemployed can earn more money than the current quite strict limits allow and so that they can undertake seasonal work this season? Has that been on the radar at all in terms of any forecasting?

Mrs Purvis-Smith : We will not have costed—that is not in our forecasts as that is not government policy. We put government policy in our forecasts. As Mr Ewing was saying, although we do not update measure costings on an individual basis we do take into account information about the economy—where revenue is, revenue forecasts—and put those into the forecasts in general, rather than specifically identifying and re-costing individual measures. So additional information as it comes about will be taken into account when we look at our revenue forecasts in total rather than the individual measure.

Senator XENOPHON: Do you take into account fewer backpackers? So not just the revenue you might get from the backpackers paying tax, but if fewer backpackers come here there is less economic activity on farms and in tourism operations. This will have flow-on effects on those businesses and on regional economies because backpackers come here, earn an income and spend money. If there is going to be a contraction in horticulture production, for instance, is that the sort of thing that is even on your radar to take into account?

Mrs Purvis-Smith : We might be getting into a discussion of whether we take into account on a general basis second-round effects. What we do is cost first-round effects; we do not cost second-round effects. But we do, and I cannot be more specific than this, take into account additional information as it becomes available if there is something in this space or any other space that affects the revenue forecast. We take that into account, but revenue then is forecast at a more aggregated level rather than at the level of the individual measure.

Senator XENOPHON: But why wouldn't you take second-round effects into account here, given the profound impact that backpackers can have in communities—they are working, they are spending money in their local communities. Often these are communities that may not get much tourism, for instance in some of the fruit picking areas. There might be some pockets of them in some small towns where they might not get much tourism but they will have a lot of backpackers. You do not take second-round effects into account at all?

Mr Ewing : We do take them into account; we do not include them in our costings. So when we do the formal estimates that go into the budget papers, there we only take into account the first-round effects, the direct impacts of the measure. When the economic and revenue forecasts are being put together, they take into account the totality of circumstance—all of the information we have about economic conditions, what is happening with revenue collections and government policy. It is taken into account at that stage. We have to make a call, and this is the long-standing practice of successive governments, about whether or not to try and incorporate all of the effects down the road of a measure or just say this is what this measure accounts for and the other parts will be included in the more general, high-level forecasts.

Senator XENOPHON: I will not take it any further. Thank you.

Senator LAMBIE: Correct me if I am wrong, but, when it comes to detailed costs and the negative impact that this is going to have, both the tax office and Treasury are flying blind?

Mr Ewing : I would not say that we are blind. I would say that we have less information than would be ideal.

Senator LAMBIE: They have their blinkers on. This is Joe Hockey's; is that correct? Or is it Scott Morrison's? Whose idea is this—is it Hockey's or Morrison's?

Mr Fraser : It was developed in the 2015-16 budget.

Senator LAMBIE: So it is Joe Hockey's?

Senator XENOPHON: His Excellency Joe Hockey! He is an ambassador now.

Mrs Purvis-Smith : I think he was Treasurer at the time.

Senator LAMBIE: Okay. What instructions did he at the time give both your offices when it comes to the working holiday-maker reform package? Did he just say, 'This is what I'm having. I don't want any modelling done. I don't give a stuff about the negative impacts.' Tell me how we have got to where we are now without any modelling, anything about negative impacts, what this is going to do to the future, and yet we are about to put on a tax, if they have their own way, of 32.5 per cent. How did this come about?

Mrs Purvis-Smith : I am afraid I am unable to give you all of the details of that.

Senator LAMBIE: Why is that?

Mrs Purvis-Smith : I was not at the genesis of this measure.

Senator LAMBIE: Are there notes that were taken over that time that you can supply to the committee?

Mrs Purvis-Smith : I can tell you that this was a budget measure. It went through ERC and cabinet processes, the normal budget processes, and the government made a decision to treat all working holiday-makers as nonresidents. Up until that time, there was this distinction between working holiday-makers, where some of them were treated as residents and some were treated as nonresidents, meaning that some working holiday-makers were being taxed at 32 ½ per cent and some were being taxed as residents at the lower rate. The government decision at that time was to treat all working holiday-makers the same, as nonresidents.

Senator LAMBIE: Yes, I am just trying to establish how we got to the starting point. At the starting point, I want to know who was in the room. What notes were taken? I just want to know who in that initial meeting—whether it be the Treasury or the tax office, with the Treasurer—decided it would be a good idea to go down this track?

Mrs Purvis-Smith : It is a government measure, Senator. It is a government decision.

Senator LAMBIE: So you just do as you are told, then. You do not supply modelling. It is not in the best interests of the country if you supply modelling and tell them the negative impacts?

Mrs Purvis-Smith : We might provide advice, but it is a government—

Senator LAMBIE: Yes, that is what I am looking for: what advice was supplied during this time to the former Treasurer?

Mrs Purvis-Smith : I cannot tell you. I do not have that available to me. I cannot tell you that, I am afraid. I do not have that with me, but we also do not provide the advice that we provide to government

Senator LAMBIE: Okay. Can you tell me how much financial harm this is going to cause Tasmania?

Mr Ewing : None of the costings that we have done were disaggregated by state.

Senator LAMBIE: All right. How much tax is expected to be raised by using the 32.5 per cent, the 19 per cent or the 10.5 per cent? I would assume that you have averaged all three of them out.

Mrs Purvis-Smith : Sorry, Senator, could you clarify that for me?

Senator LAMBIE: What amount of tax do you anticipate will be raised at 32.5 per cent, 19 per cent and 10.5 per cent?

Mr Ewing : I do not have those figures available. I can tell you that in 2015-16 we expected the measure, which was the 32.5 per cent rate, would raise $540 million over the forward estimates period. We then had a further measure that was an election commitment, and I believe that was $40 million. So that reduced that $540 million by $40 million over the forward estimates. Then, finally, we had the change to 19 per cent, which is a further reduction in revenue of $300 million over the forward estimates. If you were to add the three of those together, you would get about $200 million. Sorry, no—I cannot do that, because it is the wrong forward estimates. Those are the three published costings that we had. We do not have the numbers for what the different tax rates would raise, because that is not the way that we have done the costings.

Senator LAMBIE: Could you tell me roughly how much tax Tasmanian farmers and rural industries already pay? Do you have that at all?

Mrs Purvis-Smith : We do not have information on a state-by-state basis. The ATO might be able to provide additional information, but I am not sure.

Mr England : I am not sure either. We would have to look at that.

Senator LAMBIE: Okay. Can you take that on notice, then?

Mrs Purvis-Smith : My understanding is that it is not usually broken down on a state-by-state basis.

Senator LAMBIE: Why not? Wouldn't you want to know? Why do we not break it down that far?

Ms Lendon : We would have to take that on notice—

Senator LAMBIE: Yes, if you can do that, that would be wonderful.

Ms Lendon : to understand what we have got and, if we do not have it, why that is the case.

Senator LAMBIE: If Tasmanian businesses, especially farming businesses, are harmed financially by the backpacker tax crisis and they find it difficult to pay their tax bills, will they receive special consideration from the tax department in waiving that bill, or part of those bills, because of the negative impact that the working holiday-makers reform package is about to have on them?

Ms Lendon : Our approach where people are having difficulty paying any tax bills is to work with them to assist in payment plans and so forth. That is our normal practice to do that, whatever the circumstances might be that put someone in a difficult situation. We would look at that as we normally do with any financial hardship.

Senator LAMBIE: If it is the government's fault that they go into financial hardship, are you going to waive their tax debt? These things can be waived; I guess that is what I am asking you.

Ms Lendon : Our approach to someone who is having difficulty in making their payments would be to work with them, and as long as they are prepared to work with us then we will work out payment plans and hope to achieve the payment over time.

Senator LAMBIE: Can you tell me how many Tasmanian farming businesses are in financial hardship now?

Ms Lendon : I would have to take that on notice. We do not have that information with us. I would have to go and check.

Senator LAMBIE: Okay. You said the average backpacker earns about $13,000. When does an Australian start paying tax? How much do they have to earn before they start paying tax? Is it about $19,200?

Mrs Purvis-Smith : The tax-free threshold is $18,200, so they do not pay any tax—

Senator LAMBIE: Until then?

Mrs Purvis-Smith : below $18,200. That is the tax-free threshold.

Senator LAMBIE: It is obviously double standards here; the normal Australian does not have to start paying until $18,200. For the backpacker, it does not matter how much money they make from zero dollars upwards. Is this not going to be a problem in our legal system?

Mr England : It has always been the case—

Senator LAMBIE: Is that discrimination?

Mr England : that non-residents pay tax from the first dollar that they earn. Non-residents, at the moment, pay a 32.5 per cent rate on each dollar they earn up to $87,000. It has been a longstanding feature of the income tax system that non-residents do not have that tax-free threshold.

Senator LAMBIE: Can you tell me where the so-called money that is supposed to be raised from the working holiday-maker reform package is allocated to go?

Mr Ewing : I do not believe there is any allocation beyond general revenue.

Senator LAMBIE: Okay. So we do not have a specific point for that money? You do not have a specific place where that money is actually forecast to go? We have just put an industry in upheaval, but we have no idea where you are going to spend that little bit of money? We cannot actually justify that?

Mrs Purvis-Smith : As part of the package that is offset there are spending proposals as well. But it is not usual for revenue raised from measures to be hypothecated to particular areas of spending; revenue raised usually goes into consolidated revenue, and the government spends the revenue money where it makes the decisions to do so, as per its priorities.

Senator LAMBIE: They put in a tax return so obviously these guys are paying tax, so what is the go when they leave and they pay so much tax? Do they get any of that back, if they put in a return?

Mr Ingersoll : When you say these are typical working holiday-makers, there are two issues that relate to their tax. One is the withholding that has occurred for them as they have been working. That is dependent on what they advise their employer as to their status as an employee. Their employer, just like other employers, will withhold tax from them. At the end of the year, they will provide the working holiday-maker with their payment summary—what used to be called a group certificate—which will then advise the working holiday-maker as to the amount of tax that has been withheld. Some working holiday-makers may have more than one employer. Then they can lodge a tax return, just like any other individual. When they lodge their tax return, they will complete the return based on the information they have. At the end of that the return is processed and will be matched against what tax rates apply to them.

Senator LAMBIE: Just one more question on that: out of the money that is raised from this package, how much do you predict is going to come back out in the tax returns of these overseas backpackers?

Mr Ingersoll : On this measure, our aim in our administration is to as much as possible make that the amount the employer withholds—which generally is 19 per cent, up to $37,000—will be the amount that is levied to them on assessment, so that, unless they have a few work-related deductions which would reduce their income, they generally should have a nil tax position on assessment when they lodge their return. As I said, and you might be aware, but in the measure, if their employer does not register then the employer is required to withhold at a higher rate for them of 32½ per cent. If a working holiday-maker does work for an employer who does not register and withholds at 32½ per cent, when they lodge their return, they will get a refund of that difference in the tax rate between 19 and 32½ per cent, assuming that their actual income was less than $37,000 in that year.

Senator LAMBIE: How many extra staff are you going to need to be able to sort out this issue now, when these backpackers put in their refunds or returns?

Ms Lendon : There is some funding coming to us to assist with setting up the measure and for some help and some compliance activity, but it will feed into our normal processing approaches that we have. We are processing returns now, and these will be part of that approach, but there is some money for us to set up the register process and to do some compliance activity on employers.

Senator LAMBIE: If you get paid $13,000, how much tax are you going to be paying? That is what is you are telling me the average backpacker earns. What sort of tax refund are they going to get back in return?

Mr Ingersoll : I am just doing 19 per cent of $13,000 in my head, which is—

Mrs Purvis-Smith : $2,470.

Mr Ingersoll : Thank you: $2,470. As I said, to take the simple case, if they have worked for one employer for five months to earn that $13,000, at the end of the year the employer provides them the payment summary which will disclose, 'Here's your $13,000 income, and $2,470 has been withheld for you.' If they wait a little bit, we will prefill it, but if they just lodge it in their return, they will get a nil assessment at the end and no refund.

If they have other income, for example, which has had no tax withheld, they might have to pay something and it is possible that they may have some work-related expense deductions. Let us say they have chosen to be a union member and they pay $300 in union fees. Then they would get a refund on 19 per cent of $300—I should have picked a figure that I could do more quickly in my head, but three times 19—so a $57 refund in that case.

Mr Kelly : It depends on the circumstances of the individual.

Senator LAMBIE: But you have no modelling because you do not know what those individual circumstances are, do you, on the 130,000 backpackers—or what was it?

Mr Ingersoll : Your question asked about the individual backpackers and how we are going to approach assessing. I can tell you, as I said, we are still doing our design at the moment. The most practical difference that you would see in a tax return is that we think we will need a new label in the income side for someone to be able to record the income they have earned as working holiday-maker.

Senator LAMBIE: What is the total expected refund Australia pays to all our backpackers? What refunds do you pay already to backpackers?

Ms Lendon : We have to take that on notice. We do not have the figures.

Senator LAMBIE: That would be great. Could you have for us in the last five years, please.

Ms Lendon : Yes.

Senator WHISH-WILSON: The 2015-16 budget implies that most backpackers are currently not paying tax or are paying very little tax. It said:

Currently, a working holiday-maker can be treated as a resident for tax purposes if they satisfy the tax residency rules, typically that they are in Australia for more than six months. This means they are able to access resident tax treatment, including the tax-free threshold, the low income tax offset (LITO) and the lower tax rate of 19 per cent for income above the tax-free threshold up to $37,000.

They are the exact words from the budget statement. My question is to the ATO. Is tax ruling TR 98/17 still current?

Mr Ingersoll : Yes, the ruling is still current. That ruling does deal with the meaning of the word 'resides' in the residency definition and it is still current.

Senator WHISH-WILSON: If there is no legislative change before [inaudible], and assuming there is no revision of TR 98/17 or any issuance of a new public ruling dealing specifically with the residency of working holiday visa holders, is the default position going to be essentially zero per cent tax for backpackers—under $18,200?

Ms Lendon : We need to administer the law around residency for working holiday-makers in the sense that we believe that a number of working holiday-makers are self-assessing themselves as residents when they are nonresidents. And to support this we are aware of tax agents in the community who specialise in backpacker tax returns advertising, 'As long as you are here for more than six months we can get all your tax back.' We have some recent AAT cases, some tribunal cases, which show that if someone is a transient working holiday-maker—they are moving from farm to farm, for example, with different employers and moving around—then they are more likely to be nonresidents. In fact, the cases concluded that people were nonresidents regardless of the length of time that they were here in Australia. We do have some confusion out in the community on this point. It has always been our view—and our website information supports this—that generally working holiday-makers who are moving around from place to place and not setting any roots into the community that they are living in through joining community organisations or whatever it might be—

Senator WHISH-WILSON: I am familiar with those [inaudible]. What is the implication of this reform package on that tax ruling TR 98/17? Is there going to be any implication at all?

Mr Ingersoll : Currently, that ruling does have an example and refers to people who would be the same as working holiday-makers. Since 1998, when that ruling was put out, there have been changes to the working holiday-maker visa scheme. But, basically, for the purpose of that resides test, it is still applicable. Obviously, if this law changed, we would need to have a look at that ruling because, as from 1 January 2017, any references to working holiday-makers would only be relevant to working holiday-makers working in Australia before 1 January 2017. So, in our ordinary course of any new measure, part of the things that we do is review our public information and guidance, and our ATO view products—our law interpretation products—to identify whether they need any change as a result of a change in law.

Senator WHISH-WILSON: And what happens if the law does not change? What happens if parliament [inaudible] pass these bills and we do not [inaudible] a new tax ruling?

Mr Ingersoll : We need to continue to administer the law. As Alison has indicated, we are aware—and this whole process has certainly put a lot more public information out there about how working holiday-makers actually work and travel, and what they do in Australia and the range of circumstances. We would like to work with the tax agents and understand why, in the light of those AAT decisions, they may still have information that suggests that simply working here, or being in Australia for more than six months, means that they will accept you as a resident when we would say that is not consistent with the outcome of those decisions. From that, once we understand that we would come back and look at what it would mean for our ongoing administration of the tax law.

Senator WHISH-WILSON: And administration would mean cracking down and auditing tax returns of backpackers that are here for a month or two months—that kind of thing?

Ms Lendon : We do look at cases where it would appear on face value that someone who is a working holiday-maker—because they are here for a very short time when they lodge their tax return, and there might be some multiple employers, for example. We already look at those cases through our risk engine. Again, as I think Mr Kelly said, it really does come down to the personal circumstances. We have to ask questions to establish what someone's circumstances are and whether or not they are a resident.

Senator WHISH-WILSON: So with or without a law change, tax ruling 98/17 still provides a mechanism for backpackers to be treated as residents for tax purposes?

Mr Ingersoll : Sorry—still says they can be treated as residents?

Senator WHISH-WILSON: Yes.

Mr Ingersoll : What it actually says is—it is about when someone resides; it is not about the six-month rule in the tax law. So it would apply if there was no law change and someone did meet that definition of reside—so makes those community connections and commitment, or might take a lease. I think one of the leading cases on it was someone who had a lease for nine months in Sydney and worked as a working holiday-maker. In those circumstances, then that ruling would continue to apply.

Senator WHISH-WILSON: So for—let's call them interest groups; I will not name them—interest groups or politicians to be making public statements right now that if this legislation does not pass parliament the default rate will be 32.5 per cent for all backpackers is a factually incorrect statement?

Ms Lendon : It is true to say that not all backpackers are non-residents. So, yes, that is true.

Senator WHISH-WILSON: I will point to your attention that those statements have been made, including by politicians and by some interest groups. I accept this is confusing because it is complex situation about these rulings, but I think we need to have some honesty. If the law does not pass the Senate, it is possible that for some backpackers they will [inaudible] no tax. So the default position will be [inaudible]. Correct?

Mr Fraser : Those transient backpackers will be the ones that would be more likely to be paying 32.5 as non-residents.

Senator WHISH-WILSON: Okay. And how much would you have to spend on compliance to, let's say, crack down or clamp down on those transient backpackers?

Ms Lendon : It is one of our challenges as administrators in this area. Because the working holiday-makers are moving around and they are here for a set amount of time, one of our challenges, once we do identify cases to have a look at, is trying to get the information. So they tend to end up being quite lengthy compliance cases, and indeed it is difficult to get some of the data to establish whether or not someone is a resident. It is a costly process, so we have to make a determination as to how much to invest, given that we look at risks right across the tax system in the individual space, and then make a call on what we will invest. In the scheme of all of our risks, it is not right up there, but it is certainly something from the point of view of the integrity of the system that we need to pay attention to, which is why we put a lot of effort into assisting people with information and support on the website, and working with tax practitioners to provide that guidance as well.

Senator WHISH-WILSON: I get that. It would be complicated, and a lengthy process. I suppose, given your answers to Senator Lambie's questions about average refunds, it would not be a high priority for you—trying to recover tax avoidance or tax dodges. Would that be correct?

Ms Lendon : Sorry, I did not quite hear that.

Mr Ingersoll : Would it be a high priority for us in terms of tax dodging.

Ms Lendon : In the range of risks that we cover, it is not a priority. It is obviously on our radar, but it is not the highest priority.

Senator WHISH-WILSON: Do the ATO have any estimations of the proportion of backpackers who are paid in cash currently, and do you expect the proposed reform package will encourage more employers to pay backpackers in cash?

Ms Lendon : I do not have any statistics around that. What I would say, however, is that the new measure does increase the level of data and transparency in the community. We believe that that extra information will certainly help us to identify where we might expect employers would have registered but have not, so we can go and have a look at what is happening there and see what support they need. Having given more information to working holiday-makers themselves, and this being an issue from a community perspective that has got quite a bit of attention will also help—with that community support—to identify where there might be cash economy issues happening. But our usual approach and strategies around cash economies would apply as well. So we would continue with that, but we think we will be armed with additional data and information that will certainly help us.

Senator WHISH-WILSON: In terms of any potential new tax ruling—by either revising TR 98/17 or issuing a new public ruling that deals specifically with the residency of working holiday visa holders—that would exclude them, I suppose, from the current interpretation of 'resident' under ordinary concepts, has the ATO received any legal advice on whether a tax ruling would likely be challenged in the courts, and on the risk of a legal challenge on any new tax ruling?

Mr Ingersoll : Do we think that there would be any challenge to, basically, assessments we would make if this law were passed?

Senator WHISH-WILSON: Would it be prone to challenge, yes.

Mr Ingersoll : My position is I do not think so. Based on my reading of the bill, it is a clear change to the rates act that applies to people while they are on that visa, so it is a fairly factual—

Senator WHISH-WILSON: Sorry—not the bill before the parliament. If the bill does not get through parliament, and the ATO decides to change the tax ruling, do you believe that that would be prone to challenge?

Mr Ingersoll : If we did do further cases in this area, whilst, yes, we do have the three tribunal decisions on what we call the 'usual place of abode' test which were favourable to the Commissioner, individual taxpayers or their representatives could still seek to challenge the application of the ATO. This is currently an area of the law that is highly fact and circumstance dependent. So, whilst we would in our best endeavours apply the law correctly, there would be continued likelihood of legal challenge to any assessments where we assessed someone as a nonresident when they considered they were a resident.

Senator WHISH-WILSON: Thank you. My last question is a simple one, and it is probably more for the department. Given that our competitors such as New Zealand and Canada—I mean competitors for the pool of backpacker or working holiday labour—charge higher tax rates on the first dollars earned, do you believe that changing that tax status will remove our competitive advantage in attracting that labour?

Mrs Purvis-Smith : Can I clarify, Senator. Is your question in relation to the proposal before legislation, the 19 per cent?

Senator WHISH-WILSON: Correct—19 or 32 per cent.

Mrs Purvis-Smith : At the 19 per cent rate, we have undertaken some work that shows that, with that rate, Australia is competitive with our competitors. There is more than just the tax rate that goes into whether Australia is competitive for working holiday-makers. It also goes to our minimum wage, which is higher than other countries'. We have also taken into account the exchange rates and cost of living. After all of those have been taken into account in comparison with Canada, New Zealand and the United Kingdom, we are competitive in relation to the net income a working holiday-maker would earn in order to make around $13,000, which is the average income earned by a working holiday-maker.

Senator WHISH-WILSON: The fact that our ministers have been over in London this week, advertising Australia as the destination for workers—is it $10 million that we are spending on that advertising? Is that correct?

Mr Fraser : There was $10 million in the package.

Senator WHISH-WILSON: Ten million dollars?

Mr Fraser : Yes, that is right.

Senator WHISH-WILSON: Is that an admission by the government that we have suffered reputation damage from this debate, and that we are going to lose backpackers, given the legislative agenda before us?

Mrs Purvis-Smith : You might have to ask the government or the Treasurer that. But I can say that, as part of the package, the government did provide $10 million to advertise that there is a change—there is a new rate. They did provide $10 million for an advertising campaign to working holiday-makers.

Senator WHISH-WILSON: Okay. Thank you.

Senator KETTER: Mr Ewing, I am going to have another go at trying to understand how you come up with some of your figures. I refer to the Treasurer's media release of 27 September, which had a table in it on the financial impact of the working holiday-maker reform package, and I refer specifically to the $5 increase to the passenger movement charge. It gives some estimates of the financial impact of that over the period to 2019-20, starting at $55 million in 2017-18, going to $100 million in the next year and then $105 million in the next. How did you arrive at those figures? I know this is one of the concerns of the TTF organisation.

Mr Ewing : Fortunately, I will be telling a short story than before. This is a relatively simple costing. We just applied the change in the passenger movement charge to the forecast passenger number figures that we had available to us. That is information provided to us by the Department of Immigration and Border Protection. In this instance we judged that, given that the proposed increase was a relatively small proportion of an international ticket, it was not appropriate to impose any behavioural change assumptions on that. We then also have to make an adjustment for timing, because tickets are not necessarily purchased at the same time as they are used, and that flows through to that small step up that you see in the costing you have in front of you.

Senator KETTER: That assumption that you have made that there will be no behavioural impact is very much at odds with evidence we heard earlier today.

Mr Ewing : It is an assumption not that there is no behavioural impact but, rather, that the behavioural impact is negligible, it is small, and it would not have impacted our costing. We make it normal practice, where these sorts of impacts are small, to not incorporate them.

Senator KETTER: I now want to go back to my question on the register of employers. I want to understand how that register will operate where the working holiday-maker works for a labour hire company. For example, if that working holiday-maker has issues with the employer and the Fair Work Ombudsman is going to need to be involved, how would the FWO know which businesses to visit? If the registration is by the labour hire company, that does not tell us the actual workplace the backpacker is going to be at.

Mr Ingersoll : We are still working through some of our approaches to the new power we will have. This is a new power the proposed legislation would provide to us to disclose information to the Fair Work Ombudsman for the purposes of Fair Work compliance. We currently have a memorandum of understanding with the Fair Work Ombudsman and we will look through that framework to discuss with them what sort of information. The ATO has a range of sources of information. If something came to our attention about a particular place where labour is being deployed via a labour hire organisation, if the labour hire organisation is technically the employer we would then have to work through our normal compliance on that case and see what we can share with the Fair Work Ombudsman.

Senator KETTER: The details of the employer will not necessarily record the location where the employee worked.

Mr Ingersoll : The information we will be asking for up-front will be sufficient to register and provide that information via the ABN. In terms of what information we share, we need to work through more broadly what information sources we have in the ATO so that we can put that together in a way that would assist the Fair Work Ombudsman.

Senator KETTER: Has the ATO considered whether there will be an increased risk of noncompliance as a result of the reform package?

Mr Ingersoll : As Treasury indicated, with the first package that was something we did consider. We always consider how we would administer any new measure. Where there is a measure that is about taxation, like this, we look at the issues for compliance. In this case, with a rate of 19 per cent and the controls through the employer and the registration process, we will be looking at how we help make sure that employers, firstly, do register because there is always a level of risk of ignorance. Our initial response, particularly with the time frame of a 1 January start date, will be to work as quickly as we can with employers and getting them registered. If an employer said to us, 'I fully understand the law but I refuse to register', we would look at what steps to take to use the powers we have. Otherwise, we will be working with them.

Over time, though, as my Deputy Commissioner indicated, if we have information that would suggest we would expect a number of employers in a particular area to have registered and they have not, we would use that information to do some field work to understand what is going on. So we could expect that there would be some employers who would choose not to register as there would be some impact on the cash, or shadow, economy. Therefore, we will be advising our areas to deal with this: 'There is this new measure and change. Please build it into your normal risk profiling and plans.'

Senator KETTER: Do you consider that the $10 million allocated to the Fair Work Ombudsman and to the ATO to establish the employer register and to assist with ongoing compliance issues is sufficient?

Ms Lendon : Obviously we cannot comment on the Fair Work component of that. But we will certainly be looking at our approaches and what we can do and feeding into the work that we already do in terms of compliance as well. We have a program, for example, around obligations for employers. So this will become a part of that program of work. It is not a big addition to do that and it ensures that we get the kind of coverage that we need. Time will tell how the community reacts, and the compliance rates, and we will be on top of that to see what we can do. At this stage, we are confident with what we have got.

Senator KETTER: Will you be consulting with industry stakeholders in relation to the development of the employer register?

Ms Lendon : Absolutely. When we introduce new forms or new processes our standard process is to consult with the people who will have to use them. It is definitely part of our approach to test that and get some feedback from them to make sure it is as streamlined and simple as it can be.

CHAIR: I really do not have very many questions for you at all. I think both agencies have done a good job today, considering that a lot of the questions you received were beyond your remit. Well done. The impression I get today is that the certainty that this bill offers, the competitive rate, the promotional package and the superannuation component have all been well received. We did have one group today that submitted a report on the passenger movement charge that questioned some of the assumptions in the Treasury modelling. I would like you on notice to have a look at this and perhaps report back to this committee about the assumptions that underpin their assumptions about your assumptions. If you could take that on notice, that would be terrific. Thank you for appearing before the committee today.

Committee adjourned at 17:01