For WHM tax rates to apply to an individual, both of the following conditions must be satisfied in respect of the individual:
- The individual is a WHM – An individual is a WHM under S.3A(1) at a particular time if, at that time, the individual holds either:
- a Subclass 417 (Working Holiday) visa;
- a Subclass 462 (Work and Holiday) visa; or
- a bridging visa permitting the individual to work in Australia, that is granted in relation to a Subclass 417 or Subclass 462 visa application, where certain other conditions are
- The individual has earned working holiday taxable income (‘WHTI’) – An individual’s WHTI effectively comprises of their net Australian sourced taxable income (excluding certain amounts). This is broadly calculated in S.3A(2) and (3) as:
- the individual’s assessable income derived from sources in Australia while the individual is a WHM (excluding any superannuation remainder or employment termination remainder) less
- deductions that may be claimed against that assessable
Where an individual is subject to WHM tax rates (i.e., where they have satisfied both of the above conditions), it is important to note these rates of tax only apply to the extent of their WHTI. Where the individual has also earned other income (i.e., income that is not WHTI), the general resident or non-resident tax rates (as relevant) apply to their non-WHTI. That is, the resident tax rates apply if the individual is a resident, and the non-resident tax rates apply if the individual is a non-resident.
The calculation of an individual’s WHTI varies depending on their residency status. Where an individual is a non-resident, certain categories of Australian sourced income are not assessable to them (and are therefore not WHTI). Common examples include interest, dividends and certain managed fund distributions which are, instead, subject to the withholding tax rules. Refer to S.128D of the ITAA 1936 and S.840-815 of the ITAA 1997.
In contrast to a non-resident (who is generally only assessed on Australian sourced income), a resident individual is assessed on worldwide income. In saying this, the WHTI definition (in S.3A(2) and (3)) limits their WHTI to income from Australian sources. That is, the WHM tax rates will not apply to a resident WHM’s foreign sourced income.
TAX TIP – Special rules for temporary residents
Broadly speaking, an individual is a temporary resident where they hold a temporary visa (including a Subclass 417 or Subclass 462 visa), and neither the individual nor their spouse are Australian residents for social security purposes. Refer to S.995-1(1) of the ITAA 1997.
Importantly, where an individual (whether a resident or otherwise) is a temporary resident, they may exclude certain amounts from their assessable income. Most notably, foreign sourced income (with the broad exception of income from employment or services) and capital gains on assets that are not taxable Australian property (even if they have an Australian source) are excluded from a temporary resident’s assessable income. Refer to the definition of ‘taxable Australian property’ in S.855-15 of the ITAA 1997, as well as to S.768-910 and S.768-915 of the ITAA 1997.
The exclusion for capital gains in S.768-915 has particular relevance for a resident WHM who meets the definition of ‘temporary resident’, as capital gains on listed Australian company shares (as well as on any other Australian sourced non-taxable Australian property) are also excluded from their WHTI.
Since the introduction of WHM tax rates (from 1 January 2017), in most cases, resident WHMs and non-resident WHMs are all broadly subject to the same rates of tax (i.e., WHM tax rates) on Australian sourced income (refer to the TAX TIP above), and foreign sourced income is generally excluded from a WHM’s WHTI regardless of their residency status (provided that, if they are a resident, they are also a temporary resident, which is generally the case).
However, a recent test case decision of the Federal Court has raised questions about the validity of WHM tax rates being applied to particular resident WHMs. Refer to Addy v FCT [2019] FCA 1768 (‘Addy’s case’). This decision now represents another tax issue based around residency, and is a further reason for affected WHMs to argue they are residents (rather than non-residents).
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