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Understanding the Impact of Non-Discrimination Clause on Taxation

In the Australia-UK Double Taxation Agreement (DTA), Article 25(1) includes a non-discrimination clause, which essentially ensures that individuals from one contracting state aren't subjected to more burdensome taxation or related requirements in the other contracting state compared to nationals of that state in similar circumstances, particularly regarding residency.

Ms. Addy's case revolved around the assertion that her tax liability, calculated using Working Holiday Maker (WHM) tax rates, was more burdensome than what Australian nationals would face in similar situations. To illustrate, she compared her tax liability with that of an Australian national in identical circumstances, except for the visa type.

She argued that Article 25(1) should entitle her to the same tax-free threshold as an Australian national in a similar situation, rather than being taxed at WHM rates. The court agreed, recognizing the application of the non-discrimination clause to her case. Consequently, she shouldn't have been taxed at WHM rates and was eligible for a part-year tax-free threshold.

The court's decision highlighted:

• The essence of Article 25(1), which addresses differential treatment based solely on nationality.
• Discrimination based on nationality, even if not explicit, falls under Article 25(1), including disguised forms.
• WHM tax rates, when applied to resident WHMs, constituted a disguised form of discrimination, as only non-Australian nationals qualified for WHM status.

Impact of the Federal Court's Ruling

It's essential to recognize that the decision in Ms. Addy's case has limited scope. It permits WHMs from certain countries (like the UK, Chile, Finland, Germany, Japan, Norway, or Turkey) to bypass WHM tax rates, citing the non-discrimination clause in their DTAs with Australia.

Tax Tip - ATO's Appeal

The Australian Taxation Office (ATO) has announced its intention to appeal the decision in Ms. Addy's case to the Full Federal Court. During this appeal process, the ATO will maintain the current practice of administering WHM tax rates and urges employers to continue applying WHM PAYG withholding rates for WHM employees, regardless of individual circumstances.

For WHMs potentially eligible for refunds, the ATO advises waiting until the appeal outcome before seeking refunds, amending tax returns, or objecting. If the amendment period has lapsed, the ATO will consider requests for an extension favorably.

Got questions? Reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment on our live calendar.

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