HomeCase CommentaryAustralian Court Upholds the Rule of Law in International Tax Case

Australian Court Upholds the Rule of Law in International Tax Case

Last month the High Court of Australia released its decision in Addy v Commissioner of Taxation [2021] HCA 24 (“Addy”). The Australian apex court’s decision has received an unusual (for an income tax case) amount of attention as “the backpacker’s case”. But the High Court’s ruling is interesting for a number of reasons and should be on the radar of any jurist broadly interested in the rule of law.

Perhaps mercifully for non-tax lawyers, the facts of the case are relatively straightforward. The taxpayer is a national of the United Kingdom who obtained a working holiday visa in Australia. Working holiday visa agreements are in place between several advanced countries. They allow young people to obtain open work permits in reciprocating countries for one or two years so that they can work and travel on a sort of extended foreign sabbatical. The taxpayer worked as a waitress in Sydney in 2017 and subsequently filed her income tax return.

Unfortunately for the taxpayer, the Australian income tax regime applies a higher rate of tax on those who earn employment income in Australia while holding a working holiday visa. This has been referred to as the “backpacker tax.” After the taxpayer filed her return, the Commissioner re-assessed her and applied the backpacker tax pursuant to Part II Schedule 7 of the Income Tax Rates Act 1986, thus subjecting her to a higher tax burden than she had anticipated.

But as the High Court’s ultimate decision demonstrated, Australia’s domestic tax legislation does not operate in isolation. Critically, Australia and the United Kingdom are both signatories to the Convention between Australia and United Kingdom for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (“the tax treaty”). The tax treaty between the taxpayer’s country of nationality and country of residence for the tax year in question contains a nondiscrimination clause. The crux of such a provision is to forbid either state from the imposition of taxation on each other’s’ nationals due only to their nationality. The provision is contained at Article 25(1) of the tax treaty and reads:

Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected

The taxpayer thus filed an objection with the Commissioner, arguing that she was not subject to the backpacker tax because it applied a more burdensome tax liability on her that if she had been an Australian national, and thus infringed Article 25(1) of the tax treaty.

The Commissioner rejected her objection and the taxpayer appealed to the Federal Court, where was successful at first instance. However, the Commissioner subsequently appealed to a full sitting of the Federal Court which found in a split decision – inter alia – that the re-assessment imposing the backpacker tax rate did not contravene Article 25(1) of the tax treaty. The taxpayer sought and received leave to appeal to the High Court.

The High Court accepted the taxpayer’s argument that Article 25(1) was infringed unanimously and resoundingly.

The question is whether that more burdensome taxation was imposed on Ms Addy owing to her nationality. The short answer is “yes”. When the position of Ms Addy is compared with that of an Australian national, as it must be, that is the only conclusion which may be drawn. […] She did the same kind of work and earned the same amount of income from the same source; yet an Australian national was required by Pt I of Sch 7 to the Rates Act to pay less tax. In contravention of Art 25(1) of the United Kingdom convention, the more burdensome taxation was imposed on Ms Addy owing to her nationality and, for that reason, the tax rates in Pt III of Sch 7 did not apply to Ms Addy in the 2017 income year. The appeal should be allowed. [Addy at 8]

Backpackers on working holiday visas in Australia should pause, however, before ordering a ‘shout’ of VB for their friends at the local watering-hole. Addy will likely only have application where:

  1. There is a tax treaty in place between the working holiday maker’s country of nationality and Australia;
  2. The tax treaty contains a nondiscrimination clause similar to the UK-Australia tax treaty;
  3. The working holiday maker can establish residency for income tax purposes in Australia.

From a Canadian perspective, it is worthwhile to note that the Canada-Australia Income Tax Convention does not contain a nondiscrimination clause.

The High Court’s decision in Addy serves as a clear example of how international tax law can shape domestic tax policy. The binding commitments that states make when they sign tax treaties and shape customary international law will delineate certain limits to their internal public finance agendas. As cash-strapped states look for ways to raise revenue in the aftermath of the global pandemic, fiscal policymakers will need to be aware of limits imposed by international tax law.

A more foundational takeaway from the case is that international tax law is very much part of international law, as Reuven Avi-Yonah has convincingly argued. International lawyers have a curious blind-spot to a subsection of international law that real-world actors pay attention to on a daily basis (similarly, I would add, to how administrative law scholars are all-too-often utterly disinterested in tax authorities, which tend to be the single most important administrative decision-makers in any given jurisdiction). But as Avi-Yonah notes, “the network of two thousand or more bilateral tax treaties that are largely similar in policy, and even in language, constitutes an international tax regime, which has definable principles that underlie it and are common to the treaties.”[1] Although the decision in Addy centered on a finding of a contravention of a treaty-based nondiscrimination clause, given the broader attention the decision has received as the backpacker’s case one might also speculate whether the case will strengthen the argument that a principle of nondiscrimination sits as part of customary international law. This is something that Avi-Yonah has (again, convincingly) argued in the past.

The rule of law demands no less of tax authorities as it does of any other government official. What Addy demonstrates is that the principles of the rule of law that tax authorities are subordinate to can flow from unexpected sources.

Thomas A. Falcone is an LLM Taxation candidate at the University of British Columbia Peter A. Allard School of Law. He holds an LLM (Common law) also from UBC, an LLB from the University of London, and a BA and an MA in political science and philosophy.

[1] Reuven Avi-Yonah, International Tax as International Law: An Analysis of the International Tax Regime (Cambridge: Cambridge University Press, 2007) at 3