Australian Politicians Settle on Backpacker Tax Compromise

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Australian Politicians Settle on Backpacker Tax Compromise

Holiday visa holders will face a 15 percent tax, rather than a 32.5 percent tax; impact will take time to judge.

Australian Politicians Settle on Backpacker Tax Compromise
Credit: Flickr / Dwayne Madden

After many months of wrangling between the government and the opposition parties a compromise has been achieved over what has come to be known as the “Backpacker Tax.” Legislation to tax young foreign workers at 15 percent from the first dollar they earn will now pass the Senate.

In the 2015 federal budget the government proposed a “revenue raising” measure that would impose a 32.5 percent tax rate from the first dollar earned for young foreigners who had come to Australia for a working holiday. With the tax-free threshold in Australia being $18,200, this would be have been an undue burden on the visa holder and a significant deterrent for many to obtain it. This was a particular concern for the agricultural industry, which had come to rely on this visa for their seasonal labor force.

There are two visa categories that are impacted by this new legislation. The first is the Working Holiday Visa (417) that is available for 18 to 30-year-olds from Western and Northern European countries, wealthy East Asian countries and regions (Japan, South Korea, Taiwan and Hong Kong), and Canada. The second is the similar Work and Holiday Visa (462) that is available to 18 to 30-year-olds from a range of Eastern European, South American, and Southeast Asian countries, as well as the United States, but this visa comes with the stipulation that an applicant must have undertaken at least 2 years of undergraduate study.

These visas were initially designed as a form of “cultural exchange.” Young people from these countries could come to Australia for a year to travel and be able to obtain work in the country to finance their stay. However, in 2006 the visa scheme was expanded to allow visa holders to obtain a second year-long visa if they spent 88 days working rural areas within the agriculture, mining and construction industries. This change was made in order to try and push labor into rural areas, in particular to fulfil a labor shortage in the seasonal work of fruit and vegetable picking.

However, the consequences of this change was to push the agricultural industry into a position of becoming heavily reliant on the labor from holiday visa holders. With Australians unwilling to perform such tasks in great enough numbers, and restrictions still placed on the Seasonal Worker program (416) aimed at Pacific Islanders, working holiday visa holders became an essential component for getting food from the field to the market.

Due to this reliance on backpacker labor, the visa has shifted away from being an attempt to foster “cultural exchange” between partner countries and instead became simply a low-skill temporary labor program for the agricultural industry. Farmers and growers have now factored the ability to secure this labor force into their business models. This made them extremely concerned at the initial proposal of a 32.5 percent taxation rate, a rate that was clearly a disincentive to work in the essential but low paying harvesting positions.

A reduction to 15 percent from the first dollar earned only softens this policy a little bit. It remains a significant taxation burden to carry for low wage jobs in a high cost of living country. It also does not tackle the problem that a crucial industry — agriculture — is reliant on an unstable workforce, one that is bound to fluctuate even without the disincentive of an unfair tax burden.

There are a number of factors as to why people obtain these visas that are out of the control of both the government and the agricultural industry. From economic downturns in their home countries, to positive currency exchange rates, to shifting political climates, to any number of changeable personal circumstances. There is the fact that many of the visa holders who are in their mid to late 20s obtain the visa to work in the cities of Sydney and Melbourne and further their careers. They don’t view the visa as holiday, but as an opportunity to work in an English-speaking environment in a foreign country, or as a stepping stone to the 457 skilled labor visa. For these people the rural component of the visa is not on their agenda. It is only obtained if they are unable to achieve their goals within the first year of the visa.

With the Parliament having settled at a 15 percent tax rate there is still a significant change from Working Holiday Makers previously being taxed as Australian residents and having a tax-free threshold of $18,200. How this affects both the access to labor in the agricultural sector, and the numbers of people who obtain the visa as whole, may not become obvious for a couple of years.

However, what is obvious is that policy created solely as a revenue raising device, without any thought to the behavioral effects this policy will create, is a fairly amateur way to run a government.