Watch from 14.07.
… 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 uncertainty and debate about how much tax working holiday makers should pay on their income, the Coalition has committed to a “backpacker tax” rate of 15%.
While the negotiations were underway, Deputy Prime Minister Barnaby Joyce said that a 19% tax rate would mean backpackers were better off coming to Australia than to New Zealand, Canada or England.
Let’s check how the numbers stack up for both the 19% and 15% 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 is correct. Whether the rate is 19% or 15%, backpackers are better off, in terms of after-tax wages, coming to 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.
The government’s subsequent commitment to a 15% tax rate makes 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 tax rates and calculations used in the Department of Agriculture and Water Resources submission are accurate, and take into account the tax-free thresholds in Canada and the United Kingdom.
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 – which is what the government has since agreed to bring in – 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).
So whether it’s a 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.
Superannuation claw-back
Under the proposed 15% tax, any superannuation payments earned by working holidays makers will be taxed at 95% when they leave Australia. This results 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.
Verdict
Barnaby Joyce’s statement that working holiday makers are better off in terms of net take home pay in Australia than they are in New Zealand, England or Canada is 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.
At the 15% tax rate the Coalition has now committed to, backpackers would be even better off. – Kathrin Bain.
Review
The author is correct based on the above facts and assumptions made by the Department of Agriculture and Water Resources. The figures are correct given that the tax rate is now 15%.
The author has been fair and they have represented the data accurately. This is reinforced by the fact that if employers of backpackers have to register with the ATO and accurately withhold 15% from each employee then the facts are perfectly accurate.
This would mean that no backpacker would be able to claim their tax status as being that of a resident and use the tax free threshold of $18,200 in order to pay no income tax. It would mean that the playing field is now level and the above FactCheck is accurate as an international comparison. – John McLaren.
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