What was the effect of the non-discrimination clause?
The non-discrimination clause in Article 25(1) of the Australia-UK DTA states the following:
“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 basis of Ms Addy’s submission was that the calculation of her tax liability using WHM tax rates was more burdensome than the taxation and connected requirements which Australian nationals would have been subjected in the same circumstances. In this regard, Ms Addy compared her tax liability with that of a hypothetical Australian national who undertook the same employment as her, derived the same income from that employment, had the same personal history as her and lived at the same share house accommodation, but who did not hold a working holiday visa.
As there was an inconsistency in their respective tax liability, Ms Addy submitted that the effect of Article 25(1) was for her tax not to be assessed by reference to WHM tax rates but, instead, for her to have the benefit of the tax-free threshold (to put her tax liability on equal footing with that of an Australian national in the same circumstances).
The Court reviewed Ms Addy’s submissions and agreed that the non-discrimination clause in Article 25(1) applied to her. Accordingly, she should not have been subject to WHM tax rates (despite being a WHM) and was eligible for a part-year tax-free threshold. In coming to this conclusion, the Court made the following observations:
- The underlying question of whether Article 25(1) applies is whether two residents of the same country are treated differently solely by reason of having a different nationality.
- The application of Article 25(1) is not limited to a situation where discrimination based on nationality is explicit, and also includes disguised forms of discrimination based on nationality.
- WHM tax rates (where applied to a resident WHM) were effectively a disguised form of discrimination based on nationality, as the definition of ‘WHM’ could only extend to an individual who was not an Australian national. A resident national of Australia undertaking the same work as did Ms Addy would not have been taxed by reference to WHM tax rates, and would have had the benefit of the tax-free threshold.
Impact of the Federal Court’s decision
It should be noted the decision in Addy’s case has limited application as it only allows a WHM to disregard WHM tax rates (and claim a tax-free threshold) where they are an Australian resident that comes from the UK, Chile, Finland, Germany, Japan, Norway or Turkey (i.e., countries that have a non-discrimination clause in their DTA with Australia). Refer to the ATO’s factsheet ‘Statement from the ATO on Addy v Commissioner of Taxation’ (QC 60515).
TAX TIP – ATO appealing Federal Court decision
The ATO has recently announced it will appeal the decision in Addy’s case to the Full Federal Court. Pending the outcome of the appeal, the ATO will continue to administer WHM tax rates in line with current practice, and has requested that all employers apply WHM PAYG withholding rates when paying wages to WHM employees (regardless of their circumstances).
The ATO is encouraging WHMs who are potentially eligible for a refund to wait until the appeal has been decided before seeking a refund, amending their tax return or objecting. In the event their amendment period has expired, the ATO will give favourable consideration to any request to extend the time for lodgement of an objection. Refer to the ATO’s factsheet ‘Statement on ATO decision to appeal Addy v Commissioner of Taxation’ (QC 60715).
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