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Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills]



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ISSN 1328-8091

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BILLS DIGEST NO. 30, 2016-17 4 NOVEMBER 2016

Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills] Kai Swoboda Economics Section

Robert Dossor Economics Section

Contents

The Bills Digest at a glance ................................................... 3

Purpose of the Bills .............................................................. 4

Background ......................................................................... 4

Policy development ................................................................. 4

2015-16 Budget .................................................................... 4

Relevant reviews ................................................................... 4

Announcement of proposed package as reflected in the Bills ........................................................................................ 6

Working holiday maker definition and statistics ..................... 6

Working Holiday (subclass 417) ............................................ 7

Work and Holiday (subclass 462) .......................................... 8

Characteristics of working holiday makers ........................... 9

Recent trends in visa applications and visas granted ............ 9

Issues with the interpretation of the existing law ................. 10

Tax-free threshold changes ................................................. 10

Resident or non-resident? ................................................... 10

Contribution of working holiday makers to the economy .... 11

Exploitation and compliance ................................................. 12

Passenger movement charge ................................................ 13

Committee consideration .................................................. 14

Senate Economics Committee ............................................... 14

Senate Standing Committee for the Scrutiny of Bills ............ 14

Policy position of non-government parties/independents ... 14

Date introduced: 12 October 2016

House: House of Representatives

Portfolio: Treasury

Commencement: Generally the measures proposed by the Bills will apply from 1 January 2017. The measures to change certain visa application charges and the passenger movement charge and to increase the rate of the departing Australia superannuation payments tax generally apply from 1 July 2017.

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the homepages for the Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016, the Passenger Movement Charge Amendment Bill 2016, the Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016 and the Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016 or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at

November 2016.

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Australian Labor Party ........................................................... 14

Other parties and independents ........................................... 16

Position of major interest groups ....................................... 17

Financial implications ........................................................ 19

Statement of Compatibility with Human Rights .................. 20

Parliamentary Joint Committee on Human Rights ................ 20

Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 ............................................................... 20

Background ............................................................................ 20

Key issues and provisions ...................................................... 20

Can the status quo be maintained? .................................... 21

Is a 19 per cent tax rate on the first dollar earned competitive with other backpacker destinations? .............. 21

Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016 ............................................................... 23

Key issues and provisions ...................................................... 24

Schedule 1—Reduction in visa application charge .............. 24

Schedule 2—Registration of employers of working holiday makers .................................................................... 24

Schedule 3—Reporting on working holiday makers ........... 25

Schedule 4—Protected information .................................... 25

Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016 ................................. 26

Background ............................................................................ 26

Key issues and provisions ...................................................... 26

Should working holiday makers be paid superannuation contributions? ........................................... 26

The Passenger Movement Charge Amendment Bill 2016 ..... 27

Key issues and provisions ...................................................... 27

Efficiency and effectiveness as a tax ................................... 27

Is the Passenger Movement Charge regressive? ................ 28

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The Bills Digest at a glance

Purpose of the Bills

 The four Bills in this package implement the Government’s announcement on 27 September 2016 that working holiday makers (WHMs) would be taxed at a rate of 19 per cent for income from this work up to $37,000, with ordinary tax rates and thresholds applying thereafter.

 Other elements of the announced package include increasing the tax on the Departing Australia Superannuation Payment to 95 per cent, increasing the passenger movement charge (PMC) by five dollars and reducing the application charge for WHM visas by $50.

 Elements of the announced package that are not included in the Bills and need to be implemented through other changes are $10 million funding for Tourism Australia for a youth targeted advertising campaign, changing visa conditions so that an employer with premises in different regions is able to employ a WHM for 12 months, with the WHM working up to six months in each region, and changing visa conditions so that the eligibility age for a WHM visa is lifted from age 30 to age 35.

Background

 As part of the 2015-16 Budget, the Government announced a measure to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes from 1 July 2016. This would have meant that many WHMs would have been taxed at a rate of 32.5 per cent from the first dollar earned and was forecast to raise revenue of $540 million over the forward estimates.

 Following a review process, the Government announced on 27 September 2016 an amended measure that would see tax paid for by WHMs earning below $37,000 at a rate of 19 per cent. Along with other measures, including an increase in the Departing Australia Superannuation Payments (DASP) tax rate and PMC, the announced package of changes are broadly budget neutral.

 The number of WHMs visiting Australia has declined in recent years, with the number of monthly applications in 2016 at their lowest levels over the past five years.

Stakeholder concerns

 Following the 2015-16 Budget announcement, many business groups, particularly those in the agricultural sector, raised concerns that a 32.5 per cent tax rate would be a disincentive for WHMs to come to Australia, instead going to other countries. Without this source of labour, business groups argued that the viability of businesses would be at risk.

 While many agricultural groups see the 19 per cent tax rate as an appropriate compromise, concerns remain, particularly from tourism groups, about the increase in the PMC.

Key issues

 The interpretation of the existing law by the Administrative Appeals Tribunal (AAT) provided some clarification of when WHMs qualify as residents for tax purposes. Retaining existing arrangements may mean that many WHMs should be taxed as non-residents at a 32.5 per cent tax rate.

 A competitive tax environment may be required to continue to attract WHMs. The proposed 19 per cent tax rate provides an after-tax income in Australia that is broadly similar to the regimes that apply in New Zealand, the United Kingdom and Canada.

 The main argument by the Government for the proposed five dollar increase in the PMC is to keep the overall cost of the package budget neutral. An increase in the PMC may have some dampening effect on leisure travel and can be viewed as regressive, as the share it represents in a ticket’s final price falls the more the ticket costs.

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Purpose of the Bills There are four Bills that comprise most elements of the package of measures to change tax arrangements for WHMs as announced by the Treasurer on 27 September 2016. The Bills are:

• Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 20161— amends the Income Tax Rates Act 1986 to implement changed tax arrangements for WHMs to remove eligibility to the general tax-free threshold of $18,200 and provide for a rate of tax of 19 per cent on taxable incomes up to $37,000, beyond which the applicable general marginal tax rates apply

• Treasury Laws Amendment (Working Holiday Maker Reform) Bill 20162—amends the Migration Regulations 1994 and various tax laws to provide for a reduction in the visa application charge for WHMs from $440 to $390 and for employer registration arrangements to implement the WHM tax arrangements

• Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 20163-amends the Superannuation (Departing Australia Superannuation Payments Tax) Act 2007 to increase the various rates of tax (which depend on the component of the superannuation balance) applied to a Departing Australia Superannuation Payment (DASP) to 95 per cent, and

• Passenger Movement Charge Amendment Bill 20164—amends the Passenger Movement Charge Act 1978 to increase the passenger movement charge (PMC) from $55 to $60 from 1 July 2017.

Background Policy development The changes to working holiday tax arrangements were originally announced as part of the 2015-16 Budget, and then modified following a consultation process that overlapped the 2016 election. The final package of changes, which are implemented by the Bills, was announced by the Treasurer on 27 September 2016.

2015-16 Budget As part of the 2015-16 Budget, the Abbott Government announced that it would change the tax residency rules from 1 July 2016 to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here.5 This change would have meant that these people would have been taxed at 32.5 per cent from their first dollar of income up to $80,000, with no access to the tax-free threshold.6

The overarching budgetary context of this measure, which was to provide an additional $540 million over the forward estimates, was to ‘pay’ for expenditure in other parts of the Budget.7

Following the 2015-16 Budget announcement, concerns were expressed by some primary producers, tourism operators and state governments about how the change would impact on labour availability and regional economies.8

Relevant reviews On 16 March 2016, the Turnbull Government announced a review of the tax arrangements for WHMs.9 Announcing the review, the Deputy Prime Minister Barnaby Joyce noted:

1. Parliament of Australia, ‘Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 homepage’, Australian Parliament website. 2. Parliament of Australia, ‘Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016 homepage’, Australian Parliament website. 3. Parliament of Australia, ‘Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016 homepage’, Australian Parliament website.

4. Parliament of Australia, ‘Passenger Movement Charge Amendment Bill 2016 homepage’, Australian Parliament website. 5. Australian Government, Budget measures: budget paper no. 2, 2015-16, p. 26. 6. Ibid.

7. J Hockey, ‘Second reading speech: Appropriation Bill (No. 1) 2015-2016’, House of Representatives, Debates, 12 May 2015, p. 3804. 8. See for example, H Kempton, ‘Anger grows over tax on backpackers’, Hobart Mercury, 15 May 2015, p. 2 and ‘Tax hit for holiday workers tipped to cause headaches’, Northern Territory News, 20 May 2016, p. 19. 9. B Joyce (Deputy Prime Minister), A Ruston (Assistant Minister for Agriculture and Water Resources), K Pitt (Assistant Minister to the Deputy

Prime Minister), Review of taxation arrangements for working holiday maker visa programme a sensible approach for agriculture, joint media release, 16 March 2016.

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We know about 40,000 backpackers work in agriculture for a few months each year, the majority in horticulture at seasonal peaks …

This review is evidence that the Australian Government has listened to the concerns raised about the impact of the ‘backpacker tax’ on our global competitiveness and many of our agricultural industries—especially horticulture. 10

The consultation process for the review included consultation with industry groups and employers.11

On 17 May 2016, following the delivery of the 2016-17 Budget on 3 May 2016, the Government announced that it would review the taxation and supply of working holiday makers.12 As part of this announcement, the commencement date for the policy announced at the 2015-16 Budget was to be delayed from 1 July 2016 to 1 January 2017.13 The then Minister for Small Business and Assistant Treasurer, Kelly O’Dwyer, noted:

It is a whole of government review that’s going to be looking at making sure that we are internationally competitive, making sure that we address the issues to do with the taxation and supply of working holiday makers who are coming to this country and making a fantastic contribution. But also looking at much broader issues around labour force, particularly in rural and regional communities and how it affects our farmers, but also our tourism sector as well, a very critical sector to the Australian economy.

This means, by necessity, that there will be a deferral of the commencement of the measures that were announced in the Budget, two Budgets ago. It will mean that that commencement date does not begin on 1 July this year but will be deferred until the six month period goes past and that there is the full review and the outcomes of that review are known.

14

On 15 August 2016, following the July 2016 election, the Turnbull Government announced the commencement of the review of the taxation and supply of working holiday makers. In announcing the commencement of the review, the Deputy Prime Minister noted:

Both farmers and tourism operators have expressed strong opinions about the supply and taxation of working holiday visa holders.

The proper application of the long-established tax rate of 32.5 per cent for non-residents has been raised as a potential disincentive for backpackers to take on roles that are not being met by Australian workers.

This review will be based on informed understanding not only of the seasonal and temporary labour challenges facing our industries, but also the challenges facing the Australian economy in a global labour market. 15

Part of this review included a call for submissions and the commissioning of a consultant to ‘lead the public engagement process’.16 A copy of the consultant’s report was provided to the Government in September 2016. The report canvassed a range of issues including the importance of 417 and 462 visa holders to the relevant

10. Ibid.

11. C Colbeck (Minister for Tourism and International Education), A Ruston (Assistant Minister for Agriculture and Water Resources), K Pitt (Assistant Minister to the Deputy Prime Minister), Industry consultations begin on working holiday maker tax arrangements, joint media release, 21 March 2016; C Colbeck (Minister for Tourism and International Education), A Ruston (Assistant Minister for Agriculture and Water Resources), K Pitt (Assistant Minister to the Deputy Prime Minister), Statement regarding the review of taxation arrangements for working holiday makers, joint media release, 8 April 2016.

12. K O’Dwyer (Minister for Small Business and Assistant Treasurer), Press conference: Murrumbateman, NSW: working holiday visa review, media release, 17 May 2016. 13. Ibid.

14. Ibid.

15. B Joyce (Deputy Prime Minister) and L Hartsuyker (Assistant Minister to the Deputy Prime Minister), Working holiday maker visa review now underway, joint media release, 15 August 2016. 16. Ibid.

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sectors and the potential impact of proposed changes.17 The review received over 1,700 submissions, from organisations representing the agriculture and tourism sectors, businesses as well as individuals.18

Announcement of proposed package as reflected in the Bills The final package of measures, which are reflected in the Bills presented to the Parliament on 12 October 2016, were announced by the Treasurer on 27 September 2016.19 Announcing the package, the Treasurer noted:

The Turnbull Government recognises that working holiday makers are an important part of Australia’s $43.4 billion tourism industry and a key source of labour, particularly in the agriculture, horticulture, tourism and hospitality sectors. We also recognise, as do stakeholders, that working holiday makers should pay fair tax on their earnings.

At the 2016 election the government committed to review the tax arrangements for working holiday makers by the end of the year.

The Turnbull Government is acting to give certainty to employers and working holiday makers and will move quickly to introduce legislation to give effect to these changes. The Government calls on the Opposition to support this package so the new tax rate can take effect from 1 January 2017. 20

Elements of the proposed package that are included in these Bills are:

• apply a 19 per cent tax rate to the taxable income of WHMs on amounts up to $37,000, with ordinary tax rates and thresholds applying thereafter

• increase tax on the Departing Australia Superannuation Payment to 95 per cent

• increase the passenger movement charge by five dollars

• reduce the application charge for WHM visas by $50

• create a register of employers of WHMs, which will be used to enable tax to be withheld at the lower 19 per cent rate

• provide for the Commissioner of Taxation to prepare an annual report to the Treasurer, for presentation in Parliament, which includes statistics and information derived from the register, and

• allow the Commissioner to disclose to the Fair Work Ombudsman (FWO) information that is relevant to ensuring an entity’s compliance with the appropriate employment arrangements.

Elements of the proposed package that are not included in the Bills and need to be implemented through other changes are:

• funding for Tourism Australia to promote Australia as a potential destination for WHMs through a $10 million global youth targeted advertising campaign

• change visa conditions so that an employer with premises in different regions is able to employ a WHM for 12 months, with the WHM working up to six months in each region

• change visa conditions so that the eligibility age for a WHM visa is lifted from age 30 to age 35.21

Working holiday maker definition and statistics Under Australia’s WHM program, young people (aged 18 to 30 years) from certain countries may apply for one of two visas—Working Holiday (subclass 417) or Work and Holiday (subclass 462).22 The visa available to

17. Deloitte Touche Tohmatsu Limited and Department of Agriculture and Water Resources (DAWR), Independent stakeholder engagement on the working holiday maker visa review, Deloitte, [New York], September 2016. 18. DAWR, ‘Working holiday maker visa review: submissions received’, DAWR website, last reviewed 29 September 2016. 19. S Morrison (Treasurer), Better working holiday maker tax arrangements, media release, 27 September 2016. 20. Ibid.

21. This measure was not included in the Treasurer’s media release on 27 September 2016, but was noted by the Treasurer in a media conference on the same day as another change that would also be made (S Morrison (Treasurer), Press conference Canberra: better working holiday maker tax arrangements; GST; asset recycling, transcript, 27 September 2016, p. 2).

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applicants depends on their country of citizenship, but both visas enable young people to travel in Australia for extended periods and to support themselves during their stay with short-term employment in any industry. The program is usually reciprocal, allowing young Australians to travel and work under similar arrangements in partner countries.23

Holders of these two visa categories are used to define those taxpayers that will be covered by the WHM arrangements proposed by the Bills. While these WHMs are sometimes described as ‘backpackers’, the use of the term ‘backpacker’ or other similar terms can have a different meaning or application (Box 1).

Box 1: Working holiday maker or backpacker?

The terms ‘working holiday maker’ and ‘backpacker’ are sometimes used interchangeably.

While the visa subclasses 417 and 462 cover the youth demographic usually associated with backpackers, backpackers may also be characterised by the types of tourist activities they pursue, the use of budget accommodation or travel arrangements. Also, with backpackers able to utilise other types of visa (such as a general tourist visa or a study visa), the term backpacker can cover groups of overseas visitors to Australia that, while overlapping with WHM visa holders, can also include broader groups.24

Other terms used on occasions to describe WHMs include:

• ‘working tourists’—tourists who engage in situations that combine work with tourism

• ‘travelling workers’ or ‘working holiday tourist’—workers whose travels are considered a working holiday.25

In this Digest, the term ‘WHM’ will generally be used to refer to those holding visa subclasses 417 and 462.

Working Holiday (subclass 417) The Working Holiday (subclass 417) visa is a temporary visa for young people who want to holiday and work in Australia for up to 12 months.26 Introduced in 1975, it was initially only available for young people from the United Kingdom (UK), Ireland and Canada. Since its inception, the visa has been conceived as a cultural program, ‘facilitating the travel of young people to and from Australia to have a cultural experience, supplemented with a limited opportunity to work’.27

Between 1980 and 2006 the program expanded to include many other partner countries, such as Japan, South Korea, Hong Kong, Taiwan and several European nations.28

Today, the largest numbers of entrants under this visa subclass continue to come from the UK, followed by young people from Taiwan, Germany, South Korea and France. Since 2006, no further Working Holiday agreements have been entered into with any partner country—only subclass 462 Work and Holiday agreements (that have more restrictive requirements, including visa caps).

During their 12 month stay, 417 visa holders can work as much or as little as they choose in full-time, part-time, casual, paid or voluntary work. However, the work is restricted to a period of six months with any single employer.29

Permission to work longer than six months with a single employer is possible in certain circumstances, for example if the visa holder is:

• employed as an au pair (as of 21 July 2015) or

22. Department of Immigration and Border Protection (DIBP), ‘What is the working holiday maker program?’, DIBP website. 23. Much of this information in this section is drawn from J Phillips, Working holiday makers in Australia: a quick guide, Research paper series, 2015-16, Parliamentary Library, Canberra, 2016. 24. C Brennan, ‘Backpackers or working holiday makers? Working tourists in Australia’, Qualitative Sociology Review, 10(3), July 2014, pp. 94-114. 25. Ibid., pp. 99-111. 26. DIBP, ‘Working Holiday visa (subclass 417)’, DIBP website. 27. J Howe and A Reilly, Submission to the DIBP, Review of Skilled Migration and temporary activity visa programmes, 2014, p. 8. 28. A full list of partner countries and the year they joined is provided in departmental WHM reports. 29. This period was extended from three to six months in 2006.

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• employed in certain industries in Northern Australia, such as aged and disability care, agriculture, construction, mining and tourism and hospitality (as of 21 November 2015).30

There are no caps on the number of Working Holiday visas issued and the number of grants has increased substantially (from just over 2,690 in 2005-06 to 41,339 in 2014-15) since the option of a second working holiday visa was introduced in November 2005. This option was initially only available to those who had been employed in seasonal agricultural work in regional Australia for three months.

The second Working Holiday visa is valid for a further 12 months. The six month restriction on working with a single employer resets and applies again in the second year, although it is possible to return to the same employer from the previous year for another six months. In 2006 the option of a second visa became available to those working in any regional primary industry, such as mining. In February 2008 the option extended to people who had worked for three months in construction industries in regional areas.31

Work and Holiday (subclass 462) In 2003, the Howard Government began to develop a Work and Holiday (subclass 462) visa category with additional requirements for young people from countries that had not already entered into Working Holiday (subclass 417) visa partner agreements.32

Since 2006 all new partner agreements have been negotiated under this category. Early signatories included Thailand, Chile, Turkey, the United States of America (USA), Indonesia and Malaysia. More recent additions to the program include China, Spain and Slovenia.33 Other countries are currently negotiating agreements or have signed agreements that have yet to come into effect—for example the agreement signed in 2011 with Papua New Guinea (PNG) that is not yet operative.

Under the Work and Holiday visa there are additional requirements.34 For example, applicants from outside the USA must have functional level English, tertiary qualifications and a letter of support from their home government (although applicants from China and Israel are exempt from providing a letter of support). All countries (excluding the USA) have caps on the number of visas available per year under this program.35

In the past only subclass 417 visa holders have been able to apply for a second visa by working in regional Australia. However, in June 2015 the Australian Government proposed some changes to this restriction as part of the Government’s initiatives to support Northern Australia. According to the Department of Immigration and Border Protection (DIBP) website, once the necessary legislative changes take effect all Work and Holiday (subclass 462) visa recipients will be eligible to apply for a second visa if they work for three months (88 days) on their first visa in tourism, hospitality or agriculture in Northern Australia.36 The Government implemented this change through an amendment to the Migration Regulations registered on 1 November 2016.37 The change will come into effect on 19 November 2016.

In addition, as of 2015, both Working Holiday (subclass 417) and Work and Holiday (subclass 462) visa recipients are able to seek an extension for up to 12 months (not just six months) working with the same employer if they:

• work as au pairs (as of 21 July 2015) or

• work in Northern Australia (as of 21 November 2015) in aged and disability care; agriculture, forestry and fishing; construction; mining; or tourism and hospitality.38

30. Phillips, Working holiday makers in Australia: a quick guide, op. cit., p. 2. 31. Ibid.

32. Ibid.

33. A full list of partner countries and the year they joined is provided in departmental WHM reports. 34. DIBP, ‘Work and Holiday visa (subclass 462)’, DIPB website. 35. A full list of the different visa caps are provided in in departmental WHM reports. 36. DIBP, ‘Working Holiday Maker visa (subclasses 417 and 462) initiatives to support northern Australia’, DIBP website. 37. Migration Legislation Amendment (2016 Measures No. 4) Regulation 2016. 38. Phillips, Working holiday makers in Australia: a quick guide, op. cit., p. 2.

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Characteristics of working holiday makers WHMs come from a range of countries and have different motivations for coming to Australia. Summarising the profile of a WHM, University of Adelaide academic Alexander Reilly noted:

We are left with a profile of the contemporary Working Holiday Maker as a complex global traveller, who combines travel and work in a variety of ways that are influenced by (among other things) country of origin, the prevailing economic climate both globally and regionally, family circumstances, existing connections to Australia and migration intentions. This contemporary Working Holiday Maker is highly responsive to changes in the regulation of the Working Holiday visa, factoring these changes into his or her designs for travel and work.

39

Recent trends in visa applications and visas granted In recent months, the number of WHM visa applications and WHM visas granted have fallen to their lowest levels in the past five years (Figure 1).

Figure 1: Trends in working holiday maker visa applications lodged and visas granted, by month, 2011-12 to 2015-16

Working holiday maker visa applications lodged

Working holiday maker visas granted

39. A Reilly, ‘Low-cost labour or cultural exchange? Reforming the Working Holiday visa programme’, The Economic and Labour Relations Review, 26(3), September 2015, p. 480.

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Source: Department of Immigration and Border Protection (DIBP), Working holiday maker visa programme report, DIBP, Canberra, 30 June 2016.

Issues with the interpretation of the existing law Under existing arrangements, ‘non-residents’ do not have access to a tax-free threshold, facing a marginal rate of 32.5 cents for each dollar in income between $0 and $87,000.40 Beyond this income level, tax rates are similar to those for residents (Table 1).

Table 1: Resident and non-resident tax rates for 2016-17 Taxable income Residents marginal rate Non-residents marginal rate

$0-$18,200 Nil

32.5 cents $18,201-$37,000 19 cents

$37,001-$87,000 32.5 cents

$87,001-$180,000 37 cents 37 cents

$180,001 + 45 cents 45 cents

Note: Rates do not include the Medicare levy of two per cent (not paid by non-residents) or the Temporary Budget Repair Levy (an additional two per cent paid on taxable incomes over $180,000). The above rates do not take into account offsets such the low income tax offset.

Source: Section 3 and Schedule 7, Income Tax Rates Act 1986.

Tax-free threshold changes The increase in the nominal tax-free threshold to $18,200 was put in place as part of the implementation of the carbon price from 1 July 2015. This change was part of a package of measures to compensate households for price increases related to the carbon price. When combined with changes to the low income tax offset (LITO), the effective tax-free threshold is $20,542.41

Prior to this change, the nominal tax-free threshold was $6,000. In conjunction with the applicable low income tax offset that applied at the time, the effective tax-free threshold for 2011-12 (the year before the carbon price was implemented) was $16,000.42

Resident or non-resident? Determining whether a person is a resident for tax purposes is complex. In broad terms, an individual is a resident if they meet the ‘ordinary concepts’ test of residence or if any one of three additional tests set out in the Income Tax Assessment Act 1936 are met.43 These three tests cover whether a person is domiciled in Australia (unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia), whether the person has been in Australia during more than one-half of the year of income (the ‘183 day’ test) or whether the person is a contributing member of a superannuation fund for Commonwealth officers.44 The Commission of Taxation set out how these requirements are interpreted in a 1998 tax ruling.45

A series of decisions by the Administrative Appeals Tribunal (AAT) in 2015 provided some clarification of when WHMs qualify as residents, confirming that applying the ‘183 day’ test alone was not sufficient for satisfying residence criteria, and that a full assessment of the facts and circumstances was needed to ascertain residency status.46 In the relevant cases, the AAT concluded that as the WHMs had no plans to live in Australia, they would not be residents during their stay under the 183 days test as:

40. Schedule 7 of the Income Tax Rates Act 1986. 41. Australian Government, Re:think tax discussion paper: better tax system, better Australia, The Treasury, Canberra, March 2015, p. 30. 42. See K Swoboda, Clean Energy (Income Tax Rates Amendments) Bill 2011 [and] Clean Energy (Tax Laws Amendments) Bill 2011, Bills digest, 65, 2011-12, Parliamentary Library, Canberra, 27 October 2011, p. 11.

43. Subsection 6(1), Income Tax Assessment Act 1936. 44. Ibid.

45. Australian Taxation Office, Income tax: residency status of individuals entering Australia, Taxation ruling, TR 98/17. 46. The three AAT decisions are Koustrup and Commissioner of Taxation, [2015] AATA 126; Jaczenko and Commissioner of Taxation, [2015] AATA 125; and Clemens and Commissioner of Taxation, [2015] AATA 124.

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• they had a usual place of abode elsewhere and

• had no intention of taking up residence in Australia.

This meant that despite spending more than 183 days in Australia they were not resident for tax purposes.47

As noted in the Explanatory Memorandum, these AAT decisions mean that most transient WHMS do not satisfy the tax residency tests and should be taxed as non-residents.48 The Explanatory Memorandum also noted that WHMs self-assess their residency status for tax purposes and WHMs that satisfy the tax residency criteria receive the benefit of the tax-free threshold and the Low Income Tax Offset, meaning that they do not pay any tax until their income exceeds $20,542.49

The 2015-16 Budget announcement, while not explicitly recognising that many WHMs should not have access to the tax-free threshold and should be paying 32.5 cents in tax from the first dollar earned, sought in effect to implement the existing law. The Explanatory Memorandum explicitly outlines that this was the objective of the 2015-16 announcement, noting:

The [2015-16 Budget announcement] was designed to ensure greater compliance with the tax laws and align WHMs with other individuals treated as non-residents for tax purposes. 50

Contribution of working holiday makers to the economy The most recent comprehensive information about WHM visa holders and the economic contribution of these visa holders is included in a 2009 National Institute of Labour Studies review of the WHM program.51 Some of the key findings of this review included:

• WHMs contribute more to total expenditure than they do to earnings, and thus on balance make a small contribution to increasing the demand for Australian workers

• the supply of WHM labour is of particular value to employers in the regions, especially agricultural enterprises who employ them to pick produce and to supply general farm labour

• with the main exception of regional agricultural work, WHMs do not contribute much to the reduction of labour or skill shortages. The majority of work done is low skill and in the cities. In these jobs, they compete with the local low skill labour force and with local students who seek similar sorts of jobs while they study.52

A 2012 report by the Australian Tourism Export Council (ATEC) built on the WHM review report to estimate that WHMs spent $2.4 billion annually while they were in Australia (in 2012 dollars).53

Numerous agriculture and tourism industry submissions to the review of working holiday visas noted the importance of WHMs to businesses, covering issues such as workforce shortages, productivity and industry performance (Table 3).

47. See for example: Koustrup and Commissioner of Taxation [2015] AATA 126 , as per Deputy President Professor R Deutsch at paras [23], [48], and [49]: ‘As already set out, plainly the Applicant had no intention of taking up residence in Australia during the year ended 30 June 2013. It follows that despite the Applicant having spent more than one half of the year in Australia, she is not a resident because the qualification in s 6(1)(a)(ii) is satisfied.’ (see also paras [50-51]).

48. Explanatory Memorandum, Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills], p. 42. 49. Ibid.

50. Ibid., p.43. 51. Y Tan, S Richardson, L Lester, T Bai and L Sun, Evaluation of Australia’s working holiday maker (WHM) program, Department of Immigration and Citizenship, Canberra, 27 February 2009. 52. Ibid., p. 1. 53. Australian Tourism Export Council (ATEC), The importance of the Working Holiday visa (subclass 417), Position paper, ATEC, Sydney,

February 2012, p. 10.

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Table 3: Examples of groups citing the benefits of working holiday makers to industry Business/industry group Comments

Cotton Australia ‘In the cotton industry and across the agriculture sector, overseas workers are employed by growers to fill labour gaps, particularly during peak times when local labour is difficult to access. It is often the case that these workers are supplementing a pool of full-time permanent staff during critical periods in the average cotton growers’ season - planting, irrigating and harvesting’.

Australian Mango Industry Association ‘The Australian mango industry is labour intensive and a large employer of permanent and casual/seasonal Australian and foreign workers. It is critical to our

industries future that access to competent and enthusiastic staff is maintained’.

Citrus Australia ‘Labour shortages in regional Australia experienced during harvest create significant production and financial risk to growers … The citrus industry works hard to attract and maintain a reliable workforce of seasonal labourers, with shortfalls in local engagement filled by foreign workers, including backpackers’.

Falls Creek Chamber of Commerce ‘Every season our members have problems filling casual positions and our members heavily rely on International travellers who have the appropriate

working visas. Our season runs from June to October so it’s difficult to find Australian workers who only want to work only for 4-5 months, this is where the international travellers fill the gap. Of our membership, 90% use some international travellers. These International travellers not only fill vacant positions but provide excellent productivity and work ethic’.

Northern Territory Seafood Council ‘Feedback from industry in general is that the fishing industry throughout Australia is having difficulty attracting and retaining local people. There is a

growing trend in businesses seeking experienced and committed crew from overseas, and many businesses also rely heavily on Working Holiday Makers (or backpackers) to assist them during seasonally active periods. NT Seafood Council members continue to report sourcing vessel crew and onshore workers as an ongoing problem.

Unless Industry can source additional labour, in a highly competitive labour market, there is a real chance that the potential of this industry will not be reached and, in fact, it may suffer from a protracted decrease in activity’.

Source: Cotton Australia, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 2 September 2016, p. 2; Australian Mango Industry Association, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 2 September 2016, p. 2; Citrus Australia, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 2 September 2016, p. 4; Falls Creek Chamber of Commerce, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 2016, p. 1; Northern Territory Seafood Council, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 2 September 2016, p. 2.

Exploitation and compliance WHMs can be vulnerable to exploitation due to a range of factors associated with the job and employer characteristics as well as the individual characteristics of WHMs. These were summarised by Alexander Reilly:

Working Holiday Makers possess many of the characteristics of vulnerable workers, and they are often found in work that is inherently precarious. Working Holiday Makers are young workers, mostly working in jobs in which they have no previous employment experience and in which they do not have adequate training. Many Working Holiday Makers will be employed in jobs requiring hard manual labour that they have not previously encountered.

An increasing proportion comes from non-English-speaking backgrounds, which makes it difficult for them to understand safety requirements or to ascertain employment protections. They do not have secure residence status, and as non-citizens, they have limited social and political power.

The vulnerability of Working Holiday Makers is increased as a result of the types of work in which they engage. They work in casual, short-term, labour-intensive employment, in industries highly sensitive to the cost of labour. The

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majority of Working Holiday Makers end up in metropolitan areas where they compete with young Australians for jobs in a tight job market. In such industries where the supply of labour is greater than its demand, employers are particularly powerful in the employment relationship. Many other Working Holiday Makers work in remote, regional locations (and indeed are encouraged to work in such locations to be eligible for a second Working Holiday visa) where conditions of work, including the physical climate, the facilities and the culture, are completely foreign to anything they have previously experienced.

54

The exploitation of some WHMs and other temporary migrant workers—particularly those from non-English speaking countries—has been a topic of public concern in recent years.55

The Senate Standing Committee on Education and Employment’s 2015 inquiry on the impact of Australia’s temporary work visa programs on the Australian labour market and on the temporary work visa holders, received evidence of exploitation of migrant workers on WHM visas and abuse of the WHM visa program by labour hire contractors and sub-contractors. The Committee’s final report—A National Disgrace: The Exploitation of Temporary Work Visa Holders, released in March 2016—noted evidence provided to the Committee of ‘pervasive exploitation’ of WHM visa holders, particularly for workers from Taiwan, Hong Kong and South Korea with low English language proficiency.56

Passenger movement charge The PMC is a tax imposed on a passenger departing from Australia and is collected by airlines and shipping companies at the time of the passenger’s purchase of their ticket. The PMC, previously called the Departure Tax, was introduced in 1978 as a ten dollar tax on a person departing Australia.57 In 1994 the Departure Tax Amendment Act 1994 renamed the Departure Tax the PMC.58 A summary of changes to the level of the PMC prepared by the Tourism Transport Forum shows that changes have at times been related to certain activities or events (Figure 2).

Figure 2: Changes in the level of the passenger movement charge, 1988-2012

Source: Tourism & Transport Forum Australia, ‘Passenger movement charge explained’, Tourism & Transport Forum Australia website, March 2013.

54. Reilly, ‘Low-cost labour or cultural exchange, op. cit., p. 482. 55. See, for example, Fair Work Ombudsman, Fair Work Ombudsman to review entitlements of overseas visa-holders on working holidays, media release, 4 August 2014. 56. Senate Standing References Committee on Education and Employment, A national disgrace: the exploitation of temporary work visa holders,

Senate, Canberra, March 2016, p. 163 and 196. 57. Originally legislated through the Departure Tax Collection Act 1978. 58. Departure Tax Amendment Act 1994.

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The PMC was initially based on cost recovery, recovering the cost of processing incoming and outgoing passengers and the cost of issuing short-term visitors visas.59 In 1998 the PMC increased by three dollars to $30. The Government justified this increase to cover the additional cost associated with the Sydney 2000 Olympic Games.60 The Australia National Audit Office (ANAO) notes that this marked a policy shift.61 From here on the PMC was partially aimed at cost-recovery, but was also used as a general revenue measure.

In 2008 the PMC increased by nine dollars to $47. This increase was justified on the grounds of partially funding national aviation security initiatives.62 It was also stated that the increase was broadly consistent with changes that would have been made had the PMC been indexed.63 Speaking on the 2008 Bill, Mr Morrison stated:

The passenger movement charge … is not a charge; it is a tax. It is a tax, as has been said not only by those who have spoken in this place by also by the ANAO and on the basis of legal advice that has been presented to various hearings over time. It is a tax; it is not a charge. The passenger movement charge increase of $9 announced by the government is a tax grab of almost $460 million over four years.

64

The PMC was last increased in 2012 by eight dollars to $55 to fund the establishment of the Asia Marketing Fund.65 Mr Morrison, then in opposition, was critical of this. He stated specifically:

Had the government’s proposal, which was considered by the House yesterday, to increase the passenger movement charge actually been about genuinely funding border control functions, and directly into those functions, rather than being a naked tax grab, perhaps it would have had more merit. 66

Committee consideration Senate Economics Committee The Bills have been referred to the Senate Economics Legislation Committee for inquiry and report by 7 November 2016.67 Details of the inquiry are at the Committee’s website homepage.68

Senate Standing Committee for the Scrutiny of Bills At the time of writing, the Senate Standing Committee for the Scrutiny of Bills had not yet commented on the Bills.

Policy position of non-government parties/independents Australian Labor Party In May 2015, the Shadow Treasurer stated that the Australian Labor Party (ALP) would support the 2015-16 Budget announcement to tax working holiday makers as non-residents, with Chris Bowen noting:

We’ve also been considering some of the Government’s other measures. Where a measure is sensible and doesn’t offend the principle of fairness, we will facilitate its passage, even if the Government hasn’t gone about it in the way we would in office.

Accordingly, Labor will support the passage of the following measures;

59. Australian National Audit Office (ANAO), Passenger Movement Charge: follow-up audit, Audit report, 12, 2000-01, ANAO, Canberra, October 2000, p. 13. 60. W Truss, ‘Second reading speech: Passenger Movement Charge Amendment Bill 1998’, House of Representatives, Debates, 28 May 1998, p. 4068. 61. ANAO, Passenger movement charge, op. cit., p. 31. 62. R Debus, ‘Second reading speech: Passenger Movement Charge Amendment Bill 2008’, House of Representatives, Debates, 28 May 2008,

p. 3471.

63. Ibid.

64. S Morrison, ‘Second reading speech: Passenger Movement Charge Amendment Bill 2008’, House of Representatives, Debates, 4 June 2008, p. 4416. 65. J Clare, ‘Second reading speech: Passenger movement Charge Amendment Bill 2012’, House of Representatives, Debates, 23 May 2012, p. 5223. 66. S Morrison, ‘Second reading speech: Migration (Visa Evidence) Charge Bill 2012, Migration (Visa Evidence) Charge (Consequential

Amendments) Bill 2012’, House of Representatives, Debates, 21 June 2012, p. 7572. 67. Australia, Senate, Journals, 11, 2016-17, 13 October 2016, p. 326. 68. Senate Standing References Committee on Economics, ‘Working Holiday Maker Reform package’, Inquiry homepage.

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• The change to taxation of holders of Work and Holiday visa holders.

• The abolition of the large family bonus.

• The removal of the zone tax offset for fly-in fly out workers.

• Changes to work-related car expense deduction methods.

• The implementation of the “No Jab, No pay” policy.

As I said not all these measures are exactly what we would have done in government and we trust the government has thought through all the implications and has conducted adequate consultations. 69

This policy position by the ALP was essentially taken to the 2016 election, as no separate policy to abolish this arrangement is included in the Parliamentary Budget Office costings of ALP policies.70

That said, the ALP’s position on the 2015-16 announcement has been critical of the policy at times, although this criticism is focussed mainly on the policy development process and then the delays in implementation. In February 2016, the position was that the tax changes needed to be ‘properly considered’, with a joint media release from the responsible shadow ministers noting:

Labor believes that any tax on working holiday maker earnings must be properly considered, designed and carefully calibrated to ensure measures do not have a counterproductive effect on labour, jobs or tourism expenditure.

There also needs to be careful consideration of any new plan to ensure that the effect of a new regime does not simply result in working holiday makers being pushed into the cash economy, where no tax will be paid at all.

Labor calls on the Government to take evidence based approach to the redesign of its working holiday maker taxation policy, in close consultation with the tourism and agriculture industries. 71

In April 2016, the ALP outlined ‘three key tests’ for the Government relating to the 2015-16 Budget announcement (which at this time was being considered by a review led by the Minister for Tourism and International Education Senator Richard Colbeck):

First, the Government must demonstrate that it has a plan to protect and grow demand for working holiday maker visas, not just cede our competitive edge to lower taxing nations in our region and allow application figures to continue to fall.

Second, Minister Colbeck must be able to show that the Government is using reliable data on backpacker earnings to generate an estimate of revenue earned from the introduction of a new backpacker tax.

Third, the proposal must have the broad support of the tourism and agricultural sectors following proper consultation, taking into account the unique nature of the tourism industry as both an employer of, and supplier to, working holiday makers. 72

69. C Bowen (Shadow Treasurer), Labor and the economy owning the future: National Press Club address, transcript, 20 May 2015, p. 7. 70. Parliamentary Budget Office (PBO), ‘Appendix F: costing documentation for Labor’s election commitments’, Post-election report of election commitments: 2016 general election, PBO, Canberra, 5 August 2016. 71. C Bowen (Shadow Treasurer), A Albanese (Shadow Minister for Tourism) and J Fitzgibbon (Shadow Minister for Agriculture, Fisheries and

Forestry), Government must consult on backpacker tax, joint media release, 23 February 2016.

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On 21 June 2016, the ALP remained critical of the implementation of the policy, noting that advice about a delay to the announced start date of the proposal (1 July 2016) had not been included in the Pre-Election Fiscal Outlook and that the Australian Taxation Office had provided, then retracted, public advice that the measure would commence from 1 July 2016.73 The joint media release from the responsible Shadow Ministers noted:

The Government's mishandling of this issue has caused great uncertainty in the tourism, hospitality and agriculture sectors in particular. There are around 145,000 working holiday makers present in Australia at any time, employed across the hospitality, tourism, construction and agricultural sectors.

But the major uncertainty created by the Coalition since the announcement of backpacker tax and the subsequent confusion has seen applications and arrivals drop significantly, jeopardising harvests across the country. 74

During debate on the Bills in the House of Representatives on 17 October 2016, the ALP confirmed that it would not oppose the Bills in the House of Representatives, but that it would ‘reserve our rights for a Senate inquiry to have a proper examination of the issues that get raised’.75 The Shadow Treasurer Chris Bowen noted:

We know that the original proposal for this was made with absolutely no consultation. When we responded to the 2015 budget, we said at the time, 'We trust that the government has thought through all the implications and has conducted adequate consultations.' Now we know that that simply was not the case.

The approach that the Labor Party are taking to this matter is not to oppose the passage of this legislation through the House; rather, we will ensure in the other place that affected sectors—horticulture, agriculture, tourism and hospitality—are given the chance to be consulted and to have their say in a way that they have not been by this government.

76

Other parties and independents Bob Katter supported the 27 September 2016 changes to the proposed backpacker tax arrangements, but considered that superannuation payments to backpackers should not be made.77 Mr Katter noted:

I don’t want to the farmers to have to pay superannuation to a person who is not an Australian resident and who on average makes $13 000 a year if they’re lucky. This 95 per cent grab on superannuation is tax by another name. 78

Cathy McGowan indicated that she supported the 27 September 2016 changes to the proposed backpacker tax arrangements, but was critical of the policy process.79 Ms McGowan noted:

The government could get its policies right the first time if it consulted relevant industries and engaged with rural and regional communities before making uninformed decisions. This would save considerable time and expense for those people affected. 80

72. A Albanese (Shadow Minister for Tourism) and J Fitzgibbon (Shadow Minister for Agriculture, Fisheries and Forestry), New backpacker tax must stack up, joint media release, 6 April 2016. 73. C Bowen (Shadow Treasurer), A Albanese (Shadow Minister for Tourism) and J Fitzgibbon (Shadow Minister for Agriculture, Fisheries and Forestry), Coalition shambles on backpacker tax exposed, joint media release, 21 June 2016. 74. Ibid.

75. C Bowen, ‘Second reading speech: Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016, Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016, Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016, Passenger Movement Charge Amendment Bill 2016’, House of Representatives, Debates, 17 October 2016, p. 25.

76. Ibid.

77. B Katter (Leader of Katter’s Australian Party), Backpacker’s tax 2.0 is no victory, media release, 29 September 2016. 78. Ibid.

79. C McGowan (Independent Member for Indi), Government must treat rural and regional Australia better: McGowan, media release, 28 September 2016.

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Senator Lambie has proposed that the tax arrangements in Australia should ‘at least’ match the arrangements in place in New Zealand and flagged some amendments to elements of the Bills.81 Senator Lambie noted:

When it comes to competing for vital backpacker farm labour and tourists - New Zealand is one of our biggest and most aggressive competitors. So it makes sense for our Government to at least reduce our backpacker tax rate to one that’s competitive with NZ - at 10.5%.

I understand that our farmers want the Government backpacker legislation - to pass quickly through the Senate - but I will introduce amendments to the Government’s legislation in the Senate, which reduces the rate of the Government’s proposed tax from 19% to 10.5%. 82

The Australian Greens oppose the new tax arrangements, considering the changes will have a negative impact on growers and the tourism industry.83 The Australian Greens Treasury spokesman, Senator Peter Whish-Wilson, noted in response to the Government’s 27 September 2016 announcement:

The Greens will vote this new tax down when it comes before parliament and we are calling on Labor and the cross-bench to do the same. Rather than penny-pinching from low-paid workers, and putting our agricultural producers at risk, the Treasurer should be embarking on real economic reform to raise the billions needed to run our economy. New backpacker arrivals are already down and that is before the new tax is in place. The Government needs to abandon this new tax before the impact hits home.

84

The Nick Xenophon Team supported the reduction in the tax rate from 32.5 per cent to 19 per cent, but considered that it remained higher than in New Zealand.85 Rebekah Sharkie and Senator Nick Xenophon noted:

The real concern with farms in my electorate is that this new tax rate is still too high compared to NZ, and in any event, many backpackers have made a decision not to come to Australia this summer.

The changes announced by the government are, of course, welcome, but the tax rate still puts us at a big competitive disadvantage compared to New Zealand - another reason why this employment strategy that NXT is behind will address the barriers many unemployed people experience in relation to taking on short term work as well as increase the casual workforce pool for farmers who need every pair of hand[s] working at harvest time.

86

Position of major interest groups With the change in some elements of the policy since the 2015-16 Budget, the position of major interest groups outlined below relates to the final package, as announced by the Treasurer on 27 September 2016.

The National Farmers’ Federation (NFF) opposed the tax changes for WHMs announced in the 2015-16 Budget. In February 2016, the NFF along with its member organisations launched a campaign to encourage the Government not to proceed with the proposed tax changes, on the basis that they would ‘erode the agriculture workforce and the prosperity of regional communities’.87 The Chair of the NFF Workforce Productivity Committee, Charlie Armstrong, noted:

80. Ibid.

81. J Lambie (Jacqui Lambie Network Independent Tasmanian Senator), Australia’s backpacker tax should match New Zealand’s at 10.5% - Lambie, media release, 27 September 2016. 82. Ibid.

83. R Siewert (Australian Greens spokesperson on Agriculture), Don’t defer the backpacker tax, dump it: Greens, media release, 17 May 2016. 84. P Whish-Wilson (Greens Treasury spokesperson), Liberals congratulate themselves on removing our fruit growers' competitive advantage, media release, 29 September 2016. 85. Nick Xenophon Team, Backpakcer tax change: not so much a backflip as a sideways shuffle, media release, 28 September 2016. 86. Ibid.

87. National Farmers’ Federation, Petition launched against proposed backpackers' tax, media release, 2 February 2016.

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The agriculture industry relies on backpackers to fill severe labour shortages which are often seasonal and temporary, for example, when crops are being harvested or milk production is at its peak.

Taxing backpackers at a rate of 32.5 per cent will make work in Australian agriculture a highly unprofitable proposition.

Furthermore, it will lead to reduced agricultural productivity and will strip regional communities and businesses of much needed tourism spending. Already we are seeing signs that the proposed tax rate of 32.5 per cent is scaring working holiday makers away from Australia. In nations like Canada and New Zealand, they are just as likely to be able to find farm work that attracts substantially lower amounts of taxation.

88

In its submission to the 2016-17 Budget, the NFF advocated for the removal of the tax-free threshold, but for a lower rate to apply than the 32.5 cents as proposed in the 2015-16 Budget.89 The NFF noted:

The NFF supports backpackers paying tax, but 32.5c in every dollar is too high. It means many backpackers will choose to go elsewhere, or stay in Australia for shorter periods. It means fewer workers on Australian farms, and more workers attracted to the cash economy.

A fairer approach would see the usual tax rules apply to backpackers, but with no tax-free threshold. This would keep Australia competitive against comparable tourist destinations (Canada, New Zealand) which is important, because the number of backpackers coming to Australia is declining, and other countries have much lower tax rates.

90

Following the 27 September 2016 announcement, the NFF generally welcomed the reduction in the proposed tax rate from 32.5 per cent to 19 per cent, with the NFF President being reported as saying the changes were ‘fair and reasonable’.91

The peak body for Queensland horticulture, Growcom, considered that the reduction in the tax rate to 19 per cent would be competitive relative to other working holiday destinations.92 The CEO of Growcom noted:

[I]t was pleasing to see that the Federal Government had finally taken the deep concerns of the agricultural and tourism sectors seriously, even if it took two reviews and countless hours of lobbying to do so.

The government has taken on board the warnings of the tax’s dire economic effects on horticultural growers and other small businesses in regional towns which are dependent on healthy backpacker numbers.

Growers across Australia will be breathing a sigh of relief at this news and can finally make decisions about planting next year’s crop. 93

Horticulture industry group Ausveg also welcomed the changes to the WHM tax arrangements announced on 27 September 2016.94 The CEO of Ausveg noted:

The decision to reduce the tax rate from 32.5 per cent is a welcome relief for our industry and we are pleased to see a tax more in line with the rate that backpackers pay in New Zealand, Canada and the United Kingdom.

It remains to be seen what impact the revised tax rate will have on the number of backpackers coming to Australia, but we are thankful to the government for coming to a compromise position significantly lower than what was

88. Ibid.

89. National Farmers’ Federation, Submission to the Treasury, 2016-17 pre-Budget submissions, The Treasury, Canberra, 22 February 2016, p.21. 90. Ibid.

91. K Barow, ‘Turnbull Government drops proposed 32.5 percent backpacker tax: instead, working holidaymakers will be taxed at a lower rate’, The Huffington Post Australia, 27 September 2016. 92. Growcom, 19% backpacker tax rate decision is a relief for horticulture growers, media release, 27 September 2016. 93. Ibid.

94. AUSVEG, Backpacker tax resolution a relief for growers, media release, 27 September 2016.

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initially proposed. We will monitor backpacker numbers under the revised rate to see if backpacker numbers falter and whether further intervention is required. 95

The Tourism & Transport Forum (TTF) generally welcomed the reduction in the proposed tax rate from 32.5 per cent to 19 per cent but considered that the five dollar increase in the PMC was a ‘blatant cash grab’.96 The TTF CEO noted:

While I am very disappointed that the Federal Government wishes to push ahead with the backpacker tax, 19 per cent is a lot better than 32.5 per cent … Industry has been completely blindsided by this decision to increase the PMC by $5 - a 9 per cent hike in the rate. At no point was it flagged in any discussions in which we took part and is a bitter disappointment that we’ve been slapped with this tax hike on every traveller - Australian or international visitor - heading overseas.

97

The Australian Chamber of Commerce and Industry (ACCI) welcomed the changes made by the Government in its 27 September 2016 announcement, but considered the overall impact of the changes ‘will be a damaging brake on tourism’.98 The CEO of ACCI noted:

The Government is slugging tourism exports in a way it would not do for agricultural or mineral exports. Tourism is one of Australia’s export heroes, delivering jobs, export income and government revenue. The Government is undermining this progress on the questionable assumption that demand will not be affected by price. 99

Financial implications The policy as announced at the 2015-16 election was expected to provide additional revenue of $540 million in accrual terms over the four years to 2018-19.100

During the election period, the Treasury costed the Government’s announcement of a deferral of the start date for the original package from 1 July 2016 to 1 January 2017 to be a reduction in expected revenue of $40 million over the years 2016-17 and 2017-18 in accrual terms.101

The financial impact of the final package of measures, as announced by the Treasurer on 27 September 2016, included further information in cash terms of the impact of the revised and additional measures included in the package (Table 4).102

95. Ibid.

96. Tourism & Transport Forum Australia, Backpacker tax decision still treats tourism industry as a cash cow, media release, 27 September 2016. 97. Ibid.

98. Australian Chamber of Commerce and Industry, Backpacker changes give with one hand but take with the other, media release, 27 September 2016. 99. Ibid.

100. Australian Government, Budget measures: budget paper no. 2: 2015-16, op. cit., p. 26. 101. The Treasury and Department of Finance, Public release of 2016 election commitment costing: delay to commencement of working holiday makers 2015-16 Budget measure, Costing identifier, COA 005, The Treasury and Department of Finance, Canberra, 17 May 2016. 102. Morrison, Better working holiday maker tax arrangements, op. cit.

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Table 4: Financial impact in cash terms of measures proposed by the Bills and related policies ($ million) Measures 2016-17 2017-18 2018-19 2019-20 Total

Measures included in the Bill

Lower tax rate for all working holiday makers

-25 -75 -100 -100 -300

Increase tax on the Departing Australia Superannuation Payment to 95 per cent

0 35 35 35 105

Providing greater flexibility for employers of working holiday makers

0 0 0 0 0

Reduce working holiday maker visa application charge by $50

0 -10 -10 -10 -30

Increase passenger movement charge by $5

0 55 100 105 260

Measures to be included in future appropriation Bills

Tourism Australia advertising campaign

-2.5 -5.0 -2.5 0 -10

Compliance for working holiday makers employer register

-3.5 -3.5 -1.5 -1.5 -10

Total -31 -3.5 21 28.5 15

Source: Explanatory Memorandum, Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills], pp. 6-7.

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.103

Parliamentary Joint Committee on Human Rights At the time of writing, the Parliamentary Joint Committee on Human Rights had not yet commented on the Bills.

Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 The Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 makes amendments to the Income Tax Rates Act 1986104 to define the terms working holiday maker and working holiday taxable income and specify the relevant tax rates that apply to different levels of income.

Background As previously noted, many WHMs currently claim the tax-free threshold available to resident taxpayers when they are unlikely to be eligible for it. As such, they should be taxed as non-resident taxpayers and face tax rates of 32.5 per cent from the first dollar earned.

Key issues and provisions Item 2 amends the Income Tax Rates Act 1986 to insert new section 3A to define the terms working holiday maker and working holiday taxable income. The definition of a working holiday maker covers those that hold

103. The Statement of Compatibility with Human Rights can be found at page 33 of the Explanatory Memorandum to the Bills. 104. Income Tax Rates Act 1986.

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either a Working Holiday (subclass 417) visa or Work and Holiday (subclass 462) visa or a bridging visa in certain circumstances. The definition of working holiday taxable income essentially covers income from sources in Australia earned while working as a WHM less any appropriate deductions.

Items 3 to 7 insert provisions to:

• specify the rates of tax on a taxpayer’s working holiday taxable income to be 19 cents per dollar for incomes up to $37,000

• the applicable rates on thresholds beyond this and

• to provide that the tax rates for residents and non-residents apply as appropriate for taxable income that is not earned as a WHM.

Item 8 provides that the changes proposed by the Bill will commence on 1 January 2017.

Can the status quo be maintained? As previously noted, the interpretation of the existing law in several decisions by the AAT provided some clarification of when WHMs qualify as residents and confirmed that applying the ‘183 day’ test alone was not sufficient for satisfying residence criteria, and that a full assessment of the facts and circumstances is required to ascertain residency status.105

Under the existing law it appears that many WHMs should already be paying tax at the non-resident rate of 32.5 per cent from the first dollar earned. At this tax rate, it may be that concerns about labour supply and tax competitiveness become more prominent.

In evidence to the Senate Economics Committee inquiry to the Bills, KPMG noted:

Retaining the current legislation regime will perpetuate the uncertainty over the current residency test and the associated tax compliance risks. 106

This view was confirmed by the Commissioner of Taxation in a media release on 3 November 2016, which set out how the ATO would apply the tax law to WHMs if the Bills do not pass the Parliament:

The ATO will apply the current law. Working holiday makers who are travelling and working in various locations around Australia will be non-residents for tax purposes, meaning they will commence paying 32.5% tax from the first dollar for income earned in Australia.

We consider that most working holiday makers are non-residents due to their pattern of working and holidaying while in Australia.

We will help working holiday makers understand Australia’s self-assessment tax system, so that they correctly advise their employers of their residency status and have correct tax withheld. We will also work to ensure that working holiday makers correctly prepare their tax returns. This will include working with tax agents so that their advice is consistent with the ATO view, as confirmed by recent Tribunal decisions. It will also include some checking of returns.

107

Is a 19 per cent tax rate on the first dollar earned competitive with other backpacker destinations? One of the arguments for the proposed package is that treating WHMs as non-resident taxpayers facing a marginal tax rate of 32.5 per cent from the first dollar earned made Australia ‘uncompetitive’ as a backpacker destination.108

105. Explanatory Memorandum, Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills], op. cit., p. 42. 106. KPMG, Submission, no. 7, to the Senate Standing Committee on Economics Legislation, Inquiry into the Working Holiday Maker Reform package, 20 October 2016, p. 1. 107. Australian Taxation Office, Commissioner clarifies tax arrangements for working holiday makers, media release, 3 November 2016. 108. Explanatory Memorandum, Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills], op. cit., p. 45; S

Morrison (Treasurer), ‘Second reading speech: Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016’, House of Representatives, Debates, 12 October 2016, p. 5.

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A number of recent surveys have pointed to the imposition of the tax having a ‘chilling’ effect on the number of WHMs visiting Australia. For example, a survey undertaken by Monash University and YHA showed the government is risking a ‘60 per cent plummet in the number of WHMs coming to Australia’ and that ‘57 per cent of WHMs said they would spend less time travelling in Australia and 69 per cent would spend less on tours’.109 Other surveys cited by the NFF in its submission to the review had similar findings:

A survey of 1434 mostly working holiday makers after the 2015 Budget found that:

- 69% knew about how Australian taxes worked before they came here;

- 86% thought they were eligible for the tax free threshold;

- 52% had decided not to stay working in Australia after 1 July 2016; and

- 84% had since heard of backpackers changing their plans about coming to Australia.

A second survey of 5000 working holiday makers in January 2016 showed similar results:

- 89% of respondents said if they knew about the backpacker tax before coming to Australia they would have considered going elsewhere;

- 90% of respondents said they would not do fruit picking / harvest / 2nd year visa work if taxed 32.5%;

- 89% of respondents said paying 32.5% would deter them from working in Australia altogether; and

- 95% of respondents thought the tax would deter future working holiday makers from visiting Australia. 110

Included in the material accompanying the Treasurer’s 27 September 2016 announcement of the revised package of measures was information about the relative tax position of WHMs in selected countries:

• the United Kingdom

• New Zealand and

• Canada.111

This material is also reproduced in the Explanatory Memorandum.112 Using exchange rates based on purchasing power parity (which use the price that a person is able to purchase the same bundle of goods and services across different countries), the net after tax income under the proposed 19 per cent rate was higher than the selected countries, in which WHMs paid no, or very little tax. In light of Senator Lambie’s proposal to apply a 10 per cent rate, this scenario is also included, providing an even higher after-tax income than the selected countries (Figure 3).

109. Tourism & Transport Forum Australia, Survey shows backpacker tax could smash number of working holiday makers by 60 per cent, media release, 23 August 2016. 110. National Farmers’ Federation, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 1 September 2016, p. 12. 111. The Treasury, Working holiday maker reform packagehttp://sjm.ministers.treasury.gov.au/files/2016/09/104-2016.pdf,

Fact sheet, The Treasury, 2016. 112. Explanatory Memorandum, Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills], op. cit., p. 51.

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Figure 3: International comparison of total income and net income (average per WHM, Purchasing Power Parity adjusted exchange rate)

Source: Explanatory Memorandum, Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills], p. 51; Parliamentary Library estimates for the Australia 10 per cent and Australian existing arrangements (resident) scenario based on applicable tax rates.

Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016 The Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016 includes changes to a range of legislation and regulations. It will:

• amend the Migration Regulations 1994113 to change the cost of applying for a Work and Holiday (US) visa and a working holiday visa from $440 to $390114

• amend the A New Tax System (Australian Business Number) Act 1999,115 Income Tax Assessment Act 1997116and Taxation Administration Act 1953117 to:

- implement a registration framework for the employers of WHMs118 - to provide the administrative arrangements for tax to be withheld at the appropriate rate for these taxpayers119 - require the Commissioner of Taxation to report annually on the operation of the tax arrangements,120 and - allow the Commissioner to provide relevant information to the FWO.121

113. Migration Regulations 1994. 114. Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016, Schedule 1, item 1. 115. A New Tax System (Australian Business Number) Act 1999. 116. Income Tax Assessment Act 1997. 117. Taxation Administration Act 1953. 118. Treasury Laws Amendment (Working Holiday Maker Reform) Bill 2016, Schedule 2, items 4 and 5. 119. Ibid., Schedule 2, item 4. 120. Ibid., Schedule 3, items 1 to 3. 121. Ibid., Schedule 4, item 1.

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Key issues and provisions

Schedule 1—Reduction in visa application charge Persons seeking a visa are generally required to pay an application fee.122 These fees are set out in the Migration Regulations 1994. Visa application charges for WHM visas have more than doubled in nominal and real terms since 2008-09. The proposed reduction to $390 puts the application at around the same level as 2013-14 but would still be almost double the 2008-09 amount if it had been linked to inflation (Figure 4).

Figure 4: Working holiday maker visa application charges, 2008-09 to 2016-17

Source: Explanatory Memorandum, Income Tax Rates Amendment (Working Holiday Maker Reform) Bill 2016 [and related Bills], p. 44; Parliamentary Library estimates based on Australian Bureau of Statistics (ABS), Consumer Price Index, Australia, Jun 2016, ‘Tables 1 and 2: CPI: all groups, index numbers and percentage changes’, cat. no. 6401.0, ABS, Canberra, 27 July 2016.

Item 1 of Schedule 1 of the Bill amends the Migration Regulations 1994 to change the visa application charge for the Work and Holiday visa (subclass 462) and Working Holiday visa (subclass 417) from $440 to $390.

Schedule 2—Registration of employers of working holiday makers Under existing arrangements, employers are required to be registered by the Australian Taxation Office to facilitate the payment of tax withheld from employees. Employers are required to remit tax withheld on a twice-weekly, monthly or quarterly basis (depending on the annual amounts withheld each year).123

Item 4 includes amendments to the Taxation Administration Act 1953 to require employers of WHMs to be registered with the Commissioner of Taxation to allow them to withhold tax at the applicable WHM tax rates. The Commissioner will be required to register an entity following a declaration that the entity:

• has a genuine business requirement to employ one or more WHMs (unless the entity is not carrying on a business)

• agrees to comply with the Fair Work Act 2009 in relation to its employment of any individual who is a WHM, and

• agrees to check that any individual it employs as a WHM holds a visa that causes that person to be a WHM (proposed subsection 16-147(1) of Schedule 1 to the Taxation Administration Act 1953).

Such registration is one of the matters the Commissioner must have regard to in making a withholding schedule (item 3).

122. DIBP, ‘Fees and charges for visas’, DIBP website. 123. Australian Taxation Office (ATO), ‘Pay as you go (PAYG) withholding’, ATO website, last modified 11 May 2015; Section 16-75 of Schedule 1 to the Taxation Administration Act 1953.

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A failure to be registered in accordance with the requirements will leave the entity liable to an administrative penalty of a maximum 20 penalty units (currently $3,600) (proposed subsection 16-146(4) of Schedule 1 to the Taxation Administration Act 1953).124

Not all information contained in the Australian Business Register (established by the A New Tax System (Australian Business Number) Act 1999) is publicly available. Information that may be provided is set out in subsection 26(3) of the A New Tax System (Australian Business Number) Act 1999 and in related regulations.125 Information that may be disclosed includes details such as the entity’s name, Australian Business Number (ABN) and contact details.126

Item 1 amends subsection 26(3) of the A New Tax System (Australian Business Number) Act 1999 so as to allow information on whether the entity is registered as a WHM employer or whether the entity’s WHM employer registration has been cancelled to be disclosed.

This change will allow individuals to look up a business on the Australian Business Register to determine whether they are registered to withhold tax for WHMs at the applicable tax rates. 127

Schedule 3—Reporting on working holiday makers Existing section 352-5 of Schedule 1 to the Taxation Administration Act 1953 requires the Commissioner of Taxation to prepare an annual report on the working of indirect tax laws. The report is required to include a report on ‘any breaches or evasions of the indirect tax laws that the Commissioner knows about’.128 These requirements are satisfied through reporting in the Australian Taxation Office’s annual report.129

Schedule 3 of the Bill amends the Taxation Administration Act 1953 to include provisions that will require the Commissioner of Taxation to prepare an annual report on WHMs. There are no prescriptive requirements about what is to be included in such a report, except that it must include statistics and information derived by the Commissioner from the registration process (proposed subsection 352-25(2)). The Treasury fact sheet that accompanied the Treasurer’s 27 September announcement includes examples of possible reporting on WHM employment, which covers issues such as:

• location of WHM employers

• numbers of WHMs employed by state/territory and sector, and

• average earnings of WHMs.130

Schedule 4—Protected information The Taxation Administration Act 1953 creates an offence for the disclosure of ‘protected information’ by ‘taxation officers’.131 However, there are a range of circumstances where disclosure of tax information to another entity is permitted. This includes disclosure to the FWO where the record or disclosure:

(a) is of the fact of an entity’s actual or reasonably suspected non-compliance with a taxation law; and

(b) is for the purpose of ensuring the entity’s compliance with the Fair Work Act 2009. 132

Item 1 of Schedule 4 amends these arrangements so as to remove the requirement for disclosures to the FWO to concern an entity’s non-compliance with a taxation law. Instead, the Commissioner will be able to disclose information to the FWO for the broader purpose of ensuring an entity’s compliance with the Fair Work Act.

124. Section 4AA, Crimes Act 1914. 125. A New Tax System (Australian Business Number) Regulations 1999. 126. Subsection 26(3), A New Tax System (Australian Business Number) Act 1999. 127. Australian Business Register (ABN), ‘ABN lookup’, ABN website. 128. Subsection 352-5(2), Taxation Administration Act 1953. 129. See for example, Commissioner of Taxation, Annual report, 1, 2014-15, ATO, Canberra, October 2015, p. 101. 130. The Treasury, Working holiday maker reform package, Fact sheet, op. cit., p. 2. 131. Section 355-25 of Schedule 1 to the Taxation Administration Act 1953. ‘Protected information’ is defined in subsection 355-30 of the Act to

cover information that was disclosed or obtained under or for the purposes of a law that was a taxation law, relates to the affairs of an entity and identifies, or is reasonably capable of being used to identify, the entity. 132. Subsection 355-65(8), Table 7, item 5, Schedule 1 to the Taxation Administration Act 1953.

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Item 2 of Schedule 4 of the Bill provides that the expanded disclosure arrangements will commence on 1 January 2017. After that date, relevant information can be disclosed to the FWO regardless of whether it was acquired by the Commissioner before or after that date.

Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016 The Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016 amends the Superannuation (Departing Australia Superannuation Payments Tax) Act 2007 133 to increase to 95 per cent the rate of tax on superannuation payments to WHMs from 1 July 2017 after they leave Australia.

Background Under the Superannuation Guarantee (Administration) Act 1992,134 employers are generally required to contribute a minimum percentage (the ‘charge percentage’) of an employee’s ordinary earnings to a superannuation fund on behalf of the employee. This percentage is currently 9.5 per cent.135 One of the key exemptions relevant to WHMs is that no contribution for an employee is required if their salary or wages is less than $450 per month.136 This $450 threshold has remained unchanged since the introduction of the superannuation guarantee scheme from 1 July 1992.137

Upon leaving Australia, a WHM is generally able to claim these employer contributions, known as the Departing Australia Superannuation Payment (DASP), less an amount of tax. The DASP and tax arrangements were introduced from 1 July 2002.138

Under existing arrangements, the rate of tax applied to the DASP depends on the composition of the balance of the member’s superannuation:

• tax free component—nil

• element taxed in the fund of the taxable component—35 per cent, and

• element untaxed in the fund of the taxable component—45 per cent.139

There is limited information on the extent of revenue raised from the application of the DASP tax.140

Key issues and provisions Item 1 of Schedule 1 of the Superannuation (Departing Australia Superannuation Payments Tax) Amendment Bill 2016 inserts proposed subsection 5(3) into the Superannuation (Departing Australia Superannuation Payments Tax) Act 2007 to provide that the DASP payable to a WHM will be taxed at a uniform tax rate of 95 per cent, except for the tax-free component, which will retain a nil tax rate.

Should working holiday makers be paid superannuation contributions? The application of a 95 per cent withholding tax rate for DASP amounts effectively means that almost all amounts paid as employer superannuation contributions will ultimately be transferred to the Australian Government. As such, some participants have argued that this on-cost is an additional tax on labour in certain industries and can also impose additional administration and compliance costs on employers.

There have been a number of suggestions for changes to superannuation contribution arrangements as an alternative to this, including:

• no employer contribution required but instead paid directly to relevant employees141

133. Superannuation (Departing Australia Superannuation Payments Tax) Act 2007. 134. Superannuation Guarantee (Administration) Act 1992. 135. Ibid., Subsection 19(2),. 136. Ibid., section 27(2). 137. Subsection 27(2), Superannuation Guarantee (Administration) Act 1992 (as made). 138. Taxation Laws Amendment (Superannuation) Act (No. 1) 2002; Income Tax (Superannuation Payments Withholding Tax) Act 2002. 139. Section 5, Superannuation (Departing Australia Superannuation Payments Tax) Act 2007. 140. Parliamentary Library estimates based on a 95 per cent DASP rate raising $35 million, so that the 35 per cent and 45 per cent rates raise about

twice this amount.

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• no employer contribution required/employers exempted from making contributions142

• no employer contribution with amounts redirected for other purposes such as regional youth employment programs or other workforce development initiatives or rural research and development organisations143

• higher minimum monthly threshold required for employer contributions.144

The Deloitte report conducted as part of the visa review canvassed views about superannuation arrangements and noted:

In each stakeholder engagement superannuation was raised as a contentious matter amongst employers of working holiday makers in both the agriculture and tourism sectors. The primary objection was around why such money was put aside for workers who had no intention of retiring in Australia. Equality between Australian workers and foreign workers was important to all stakeholders, however at the moment employers feel the system is not equitable, or serving its purpose. Some stakeholders did acknowledge the difficulties around making any changes to the superannuation scheme.

Stakeholder engagements and submissions raised questions around whether working holiday makers fit the purpose of why superannuation was implemented. General consensus was that people should not be paid superannuation if they have no intention to use it for its intended purpose. Superannuation was viewed by many employers as a bonus that working holiday makers take out of the country upon leaving.

145

The Passenger Movement Charge Amendment Bill 2016 The Passenger Movement Charge Amendment Bill 2016 amends the Passenger Movement Charge Act 1978146 to increase the Passenger Movement Charge from $55 to $60 from 1 July 2017.

Key issues and provisions Section 6 of the Passenger Movement Charge Act 1978 currently specifies that the rate of the passenger movement charge is $55. Item 1 of the Bill amends section 6 to replace $55 with $60.

Efficiency and effectiveness as a tax An effective tax is a tax which does little to distort the market and is simple to administer. Modelling by the International Air Transport Association suggests that an increase in the PMC by ten per cent will decrease the number of leisure passengers travelling from Australia by five to seven per cent.147 This implies that there is inelastic demand at that point, meaning demand will decrease proportionally less than the increase in price. It should also be noted that this relates to leisure passengers. The business passengers’ demand is likely to be even more inelastic.

The PMC is currently collected at the time of ticket sale by airline and shipping companies before it is distributed to the Commonwealth. Airline and shipping companies have likely developed effective systems to manage this process. Airlines have argued however, that the PMC imposed significant net costs.148 Their concerns seem to primarily relate to when passengers are not initially charged the PMC (such as when tickets are purchased internationally or via code-share) in which case the airlines are still liable for the PMC regardless of non-payment

141. See for example, Stonecrest Cherries Tasmania, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 30 August 2016, p. 1; Tasmanian Farmers and Graziers Association, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 2 September 2016, p. 2.

142. See for example, Mansell Farms, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 2016, p. 3; National Farmers’ Federation, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 1 September 2016, p. 53.

143. See for example, GrainGrowers, Submission to Department of Agriculture and Water Resources, Inquiry into working holiday maker visa review, 26 August 2016, p. 3. 144. See for example, National Farmers’ Federation, Submission to Department of Agriculture and Water Resources, op. cit., p. 53. 145. Deloitte and DAWR, Independent stakeholder engagement on the working holiday maker visa review, op. cit., p. 37. 146. Passenger Movement Charge Act 1978. 147. Australian Tourism Export Council, Submission, no. 16, to the Productivity Commission, Inquiry into Service Exports, May 2015, p. 7. 148. Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Passenger Movement Charge Amendment Bill 2008, The

Senate, Canberra, June 2008, p. 15.

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by the passenger.149 It is questionable whether this constitutes a significant net cost. Previously the airlines were allowed a margin or tolerance in these cases which had the effect of excusing them from liability in cases where passengers had not paid the PMC, up to a prescribed maximum percentage of their total PMC liability.150 This arrangement ceased by 2001.

The PMC is an effective tax, as it likely does little to distort the market, and collects charges in relation to passengers departing Australia, even if the actual passenger does not pay it (and airlines instead cover the charge). It is another matter, however, whether the PMC is an efficient tax.

The Henry Tax Review criticised the PMC stating:

As the PMC does not provide meaningful price signals related to the costs or risk associated with border protection, and is on a relatively narrow base, other sources of tax revenue would be more efficient. Further, the funding provided by the charge may impede the adoption of more efficient cost recovery, such as charging airports directly for some of these services.

151

The Senate Standing Committee on Legal and Constitutional Affairs, however, previously said that it was:

… of the view that it is reasonable that a proportion of the costs of providing aviation security should be paid for by those who actually use aviation services. The PMC, as such, appears to be an appropriately targeted tax. 152

Is the Passenger Movement Charge regressive? Increasing the PMC by five dollars (just under 10 per cent) would only reduce demand by leisure passengers by five to seven per cent, according to figures provided by the Australian Tourism Export Council. It is likely that the reduction in demand from business passengers would be even less. Increasing the PMC would, however, further add to the regressive nature of the PMC.

The PMC is regressive, as the share it represents in a ticket’s final price falls the more the ticket costs. The PMC, for example, represents a far higher share for short international flights, such as to New Zealand or Bali, compared to more expensive long haul flights. This is even more so considering the PMC does not differentiate between airfares, such as business and first class.

The PMC is therefore an effective tax, but it is also regressive and inefficient.

149. Ibid., p. 15. 150. Ibid. 151. K Henry, Australia’s future tax system: report to the Treasurer, (Henry Tax Review), ‘Part two: detailed analysis’, vol. 2, The Treasury, Canberra, December 2009, p. 336.

152. Senate Standing Committee on Legal and Constitutional Affairs, Inquiry into the Passenger Movement Charge Amendment Bill 2008, op. cit., p. 16.

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