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Backpackers Tax explained – employers take note!

A collective sigh of relief could be heard across the country on 5 December 2016 when the Federal Government finally passed the Working Holiday Maker Reform Bill 2016.

For the past 18 months the issue had been debated in Parliament and in the community with varying rates of tax being considered and many industry groups becoming increasingly concerned about the impact such debate would have on their workforce and therefore their businesses.

The changes come into effect from 1 January 2017.  If you employ working holiday makers or intend to employ working holiday makers, it is your responsibility to ensure that you meet the requirements of this new legislation.

 

WHAT RATES OF TAX NOW APPLY UNDER THE NEW RULES?

The main subject of debate was the tax rate that applies to those working holiday makers who earn less than $37,000.  From 1 January this rate has reduced from 32.5% down to 15%.  This means that working holiday makers will pay tax at 15% on every dollar from $1 – $37,000 and no tax free threshold applies.  So on $37,000, the tax payable is $5,550. (Just for noting, an Australian resident pays $3,572 plus the Medicare levy.)

For incomes over $37,000 there are no changes to the existing non-resident income tax rates that applied pre-1 January 2017.

 

WHAT IS A WORKING HOLIDAY MAKER?

A working holiday maker is an individual holding one of the following temporary visas:

  • Subclass 417 (working holiday) visa
  • Subclass 462 (working holiday) visa

A working holiday maker may also be an individual who holds a bridging visa permitting the individual to work in Australia if:

  • The bridging visa was granted under the Migration Act 1958 in relation to an application for one of the visas referred to above
  • The Immigration Ministers decision on that application is yet to be made
  • The most recent visa, other than a bridging visa, held by the individual was a subclass 417 (working holiday) visa or subclass 462 (working holiday) visa

 

WHAT DOES AN EMPLOYER NEED TO DO BEFORE EMPLOYING A WORKING HOLIDAY MAKER?

Once the employer has registered they can then withhold at a rate of 15% on the first $37,000 of income.

If you employ, or plan to employ, a working holiday maker you must register with the Australian Taxation Office before 31 January 2017 (note: this date has been extended from the original date of 1 January 2017 due to issues with the ATO website in December 2016).

Employers can register online using the following link: 
https://www.ato.gov.au/business/registration/work-out-which-registrations-you-need/taxation-registrations/employer-registration–working-holiday-makers/

WHAT ARE THE PENALTIES FOR THE EMPLOYER IF THEY DO NOT REGISTER WITH THE ATO?

If you fail to register as an employer of working holiday makers, then you must withhold at 32.5% on the first $37,000 of income.  The ATO have also advised that penalties may apply for those who do not register, however there are no indications as yet as to what those penalties may be.

 

WHAT ABOUT MY PAYROLL SOFTWARE?

The ATO will be issuing new withholding tax tables before 1 January 2017.  You should ensure that your payroll software recognises these changes.  Your accountant will be able to help you with this if you are unsure whether your software has the correct rates from 1 January 2017.

 

WHAT ABOUT PAYMENT SUMMARIES?

Where a business already employed working holiday makers before 1 January 2017, it will need to issue two payment summaries to employees for the year – one for the period 1 July 2016 to 31 December 2016 and another for pay periods from 1 January 2017.

 

Joanne Gilbert, Principal – RSM Australia