Editor’s note: The original version of this article, published at 12.19pm AEDT on November 30, 2016, has been updated to reflect the news that the government’s proposed 15% backpacker tax suffered a surprise defeat in the Senate.
The Senate instead supported Labor’s amendment for a 10.5% rate. If an agreement can’t be reached, the rate will default to 32.5%.
We come up with a rate – 19%. Why? Because that means that we are competitive in net take home pay for backpackers coming to Australia. In fact, they’re better off coming to Australia than if they went to New Zealand, Canada or England… – Deputy Prime Minister Barnaby Joyce, speaking to journalists, November 23, 2016. (Watch from 13:25.)
After 18 months of debate about how much tax working holiday makers should pay on their income, uncertainty over the “backpacker tax” continues.
While negotiations were underway last week, Deputy Prime Minister Barnaby Joyce said that the government’s proposed 19% tax rate would mean backpackers were better off coming to Australia than to New Zealand, Canada or England.
By Monday, the Coalition agreed to drop that tax rate from 19% to 15%, in a deal that was expected to pass the Senate crossbench.
But on Wednesday – around the time this FactCheck was first published – that proposal was defeated, with the Senate supporting Labor’s amendment for a 10.5% rate.
So while the arguments in Parliament continue, The Conversation asked two experts to check if Barnaby Joyce was right: would backpackers have been better off working in Australia and paying a 19% tax rate than if they worked in New Zealand, Canada or England? And how does that compare to backpackers’ take home pay if they were paying lower 15% or 10.5% tax rates?
Checking the source
When asked for sources to support the statement, a spokesperson for Barnaby Joyce provided an extensive response, including a table (reproduced below) showing the tax paid and net income for working holiday makers, based on a Department of Agriculture and Water Resources submission to a Senate committee.
You can read the rest of the spokesperson’s response here.
Was Joyce right?
The deputy prime minister was correct. Whether the rate is 19%, 15% or 10.5%, backpackers are better off – in terms of after-tax wages – working in Australia than New Zealand, Canada or England.
Even after accounting for the tax-free thresholds in Canada and England, at a 19% tax rate a working holiday maker earning the minimum wage would take home a bigger pay packet in Australia than in New Zealand, Canada or England.
A 15% or 10.5% tax rate would make Australia more favourable from an after-tax income perspective.
How do we calculate this?
To calculate how much take home pay backpackers would receive, we need to compare the minimum wages, tax rates and cost of living in each of the countries mentioned.
Joyce based his calculations on data contained in the Department of Agriculture and Water Resources’ submission (the Department’s submission is number 23, found on page 2) to the recent parliamentary inquiry into the backpacker tax.
The department calculated the after-tax income received by a working holiday maker who works 734.5 hours (approximately 28.25 hrs per week) on the minimum wage, and adjusted for cost of living differences by using purchasing power parity exchange rates.
Using those figures, a working holiday maker in Australia taxed at 19% would receive an after-tax income of A$10,530. This does not include compulsory superannuation. So a working holiday maker in Australia would end up receiving more than this, even with the 95% tax they will pay on superannuation payments when they leave the country.
The same working holiday maker would receive after-tax income of A$10,126 in New Zealand, A$9,837 in Canada and A$10,470 in the United Kingdom.
With a lower 15% rate, a working holiday maker in Australia would receive after tax income of A$11,050 (before superannuation), or A$11,112 (including superannuation and the tax on superannuation).
And if the rate were cut to 10.5%, as Labor and others are pushing for (though the government looks unlikely to support that), a working holiday maker in Australia would receive after-tax income of A$11,635 (before superannuation), or A$11,697 (including superannuation and the tax on superannuation).
So whether it’s a 10.5% rate, 15% rate or a 19% rate, working holiday makers receive a higher after-tax income in Australia than they would in New Zealand, Canada and the United Kingdom. This is despite the fact that working holiday makers in Canada and the United Kingdom receive the benefit of a tax-free threshold. That’s because Australia’s minimum wage is higher than those in Canada, NZ and the UK.
Residents and non-residents
The amount of tax a working holiday maker currently pays in Australia depends on whether or not they’re considered an Australian resident. Residents are entitled to a tax-free threshold of A$18,200. After that, Australian residents pay 19% tax on income up to A$37,000, and 32.5% tax on amounts between A$37,000 and A$87,000. Residents who earn less than A$66,667 are entitled to a low-income tax offset.
In contrast, non-residents are taxed at 32.5% from their first dollar earned in Australia.
The same tax rates apply for residents and nonresidents for amounts above A$80,000.
Under the current law, there’s no set tax residency status for working holiday makers. A working holiday maker is considered a resident for tax purposes if they are in Australia for 183 days or more during the income year, unless their usual place of abode is outside Australia and they don’t intend to take up residence in Australia. In that case, they will be a non-resident for tax purposes irrespective of whether they were in Australia for more than 183 days.
Tax rate not the only factor
New Zealand’s 10.5% tax rate has been a point of comparison during the debate over the backpacker tax. But the tax rate is just one factor that determines the take home pay earned by working holiday makers. Minimum wages make a big difference to the outcome – and Australia has the highest minimum wage of the countries discussed.
It’s worth noting that the 10.5% rate in New Zealand applies to all taxpayers, not just working holiday makers. And there are other differences between the tax systems in Australia and New Zealand. For example, in New Zealand, taxpayers aren’t able to claim any work-related deductions.
Under the 15% deal proposed by the Coalition on Monday (but then rejected in the Senate on Wednesday), any superannuation payments earned by working holidays makers would be taxed at 95% when they leave Australia. This would result in an effective tax rate of approximately 24%. That’s 15% income tax and 9% from superannuation.
At first blush this appears high when compared to New Zealand’s 10.5%. But working holiday makers in New Zealand don’t receive superannuation at all.
New Zealand does have a “KiwiSaver” retirement savings program, similar to Australia’s superannuation program. But to be eligible to join KiwiSaver you must be a New Zealand citizen or entitled to live in New Zealand indefinitely. Someome who holds a temporary, visitor, or work permit isn’t able to join.
A working holiday maker in Australia working 734.5 hrs at the minimum wage would be entitled to A$1,235 in superannuation payments. When they leave Australia, they would keep A$61.75 of their superannuation. But that’s in addition to their after-tax salary of A$11,050, which is higher than what they would receive in New Zealand.
Barnaby Joyce’s statement that with a 19% tax rate in place, working holiday makers would be better off in terms of net take home pay in Australia than in New Zealand, England or Canada was correct.
Even after taking into account the tax-free thresholds in Canada and the UK, and the 10.5% tax rate in New Zealand, at a 19% tax rate a working holiday maker earning the minimum wage would receive a bigger pay packet in Australia than in New Zealand, Canada or the United England.
The author is correct based on the above facts and assumptions made by the Department of Agriculture and Water Resources.
The author has been fair and they have represented the data accurately. – John McLaren