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The One Tax Change Every Backpacker in Australia Must Understand

EDIT: So exactly one day after posting this article, and six weeks before the proposed tax was set to take effect, I receive an email stating that the government suspended the implementation of the tax until January 2017. Great news!

Still, the government is facing an upcoming election cycle and it’s possible they delayed the proposed changes only to keep favor with people reliant of agricultural working backpackers. I will follow the situation closely as they are likely to change in the upcoming months. In the meantime, I’ll let my original post remain.

A man walks into the doctor’s office. The doctor enters and says, “Sir, I’m afraid I have some bad news. You only have 5 to live.”

“5 what?” the man quickly asks.

The doctor replies, “4…3…2…”

Brace yourself backpackers in Australia. Things just got, ahh, what’s the Australian for “crap?”

Btw, this post is pretty dry and runs through a lot of dull numbers. But considering how Australia has typically been a very convenient stopping point for travelers looking to replenish their personal travel fund, the upcoming changes are INSANELY important to understand.

Sailing the WhitsundaysOkay, let’s start with the good news. From the sun drenched beaches in the north to the world’s most livable cities in the South, Earth’s largest island certainly lives up to the hype. Not surprisingly thousands of young backpackers book their golden tickets every year looking to write their own adventure.

And with 416 visas available for most Europeans and Canadians, and 462 visas available for citizens from the US and a small hand full of other countries, the idea of a working holiday is certainly appealing. These visas allow holders to live, work and drink in Australia for up to one year – extendable for another year for 416 visa holders who meet certain rural work qualifications. The Australian immigration site is loaded with information for those looking to apply. Major credit cards accepted!

Of course countries like Australia don’t come cheap. A dorm bed in Sydney costs around $25 USD. A case of beer about $40. So unless you’ve got a sugar daddy (or maybe just dad) bankrolling your trip, that cash goes quick. Most young 20-somethings simply don’t have the resources to sustain themselves for more than a month. So when money gets tight, and with Working Holiday visa in hand, they begin looking for work.


Which brings us to the crap news. Beginning on July 1, 2016 one big change will rob working holiday makers out of thousands of dollars.

“…but in this world nothing can be said to be certain, but death and taxes.”    – Benjamin Franklin

No, not death. That would be too painless. I’m talking of course about taxes. Beginning July 1, 2016, if you’re a legally employed backpacker in Australia, your tax rate will increase nearly 300%!

As I said earlier, this will get a little number heavy but stick with me to understand exactly what’s going on.

The change essentially comes in how working holiday visa holders, aka “backpackers,” are classified. Prior to this upcoming legislation, backpackers were classified as resident Australians for tax purposes. This meant that they paid the same tax rates as the majority of Australian citizens and legal residents.

The tax code applied to their earnings used a progressive tax scale, but most backpackers could expect to pay around 12% of their earnings to the government – prior to July 2016. If they earned less than $18,000 AUD they paid an effective tax rate of zero. They would have a small amount of taxes withheld during their earning periods but could then apply for a refund at the conclusion of the tax year.

Beginning in July 2016 working holiday holders (again, backpackers) will be reclassified as NON-Residents. And this tiny change has some huge ramifications. Non-residents are taxed at a flat rate of 32.5% on ALL earnings, starting from the first dollar earned.

In other words, even if you’re earning minimum wage cleaning toilets in the basement of a Sydney restaurant, you will always pay nearly 1/3 of all earnings to the government with no options for claiming a tax refund. Ever. Beginning from day one. Ouch!

Let’s use my personal experience as a real-world example for how substantial this tax change is.

In 2012 I spent three months pruning apple orchards in Western Australia. It was, generally speaking, a dark period in my travels lit only by the large group of perpetually inebriated Irishmen and my growing dependence on boxed wine. Nonetheless I was there primarily there to save some money and get me started in Australia’s big city. The strategy worked. I earned $19AUD/hour and typically worked 35-40 hours per week. My typical bi-weekly paycheck looked like this.

Screen shot 2016-05-13 at 10.28.38 AM

(17/1377.50)*100 = An effective tax rate of 12.48%

My employer could only estimate my yearly earnings and accordingly applied a tax rate of about 12.5%. Again, if my earning fell below the $18,000 threshold, I could apply for a tax refund at the end of the tax year.

As you can see, my bi-weekly take home pay was $1205.50 AUD. Further, I could likely apply for a refund at the end of the year, which again totally depended on earnings, but was generally somewhere between $1,000 to $2,000. Not too bad for a guy hanging out on the farm.

Now let’s look at an identical situation post July 2016.

$19/hour * 72.5 = $1,377.50.  Gross wages obviously don’t change.

Effective tax rate of 32.5%. So, $1,377.50 * .675 = $929.81 AUD

In other words my bi-weekly paycheck drops by $275.69 or $137 per week!! That’s the cost of rent.

Like I mentioned earlier, I spent three months working on the farm. With the upcoming changes, I would earn $1,654 less during the same three month period.

I couldn’t find any information on how much of the year each Working Holiday Maker is actually employed, but let’s assume the average backpacker spends eight months of their year working to fund their Australian holiday. Again assuming that on average they’re earning $19/hour working a standard 38 hour work week, over the course of their year they will earn approximately $4,400 less under the upcoming changes!

ProposedChanges

Not exactly chump change. Here’s a full link to the changes proposed by Parliament.

As someone who was benefited quit a bit from a year working in Australia, the upcoming changes are difficult to understand. Part of me is angry. All of me empathizes with the future holiday makers who will earn substantially less over the upcoming year.

In fairness to the Australian government, the program was never designed to be and never evolved into a a financial windfall for working holiday visa holders. The law clearly states that “work must not be the primary purpose of their visit to Australia.” Of course, interpretation and enforcement of this phrase is wholly subjective.

Nonetheless it stings pretty bad knowing that there are Australian citizens making $75,000 per year paying a lower tax rate than some poor banana picking instant noodle eating German 22 year old who’s just trying to scrape together enough cash for that road trip down the Great Ocean Road.

If you have Australia in your sights, you’re likely laying prostrate on the floor looking for the nearest tourniquet to stop the financial hemorrhage. Queue sardonic laugh; it gets worse.

Australia has something called Superannuation. Essentially this is privately run and administered retirement program for Australians where both employer and employee are required to contribute. Employees contribute in part while their employers contribute as well for a total of 9.50% of their gross salalry.

And the great news is used to be that for most backpackers leaving Australia permanently they could claim and withdrawal their superannuation balance once they permanently depart the country.

Surprise, surprise, the tax rates go up on that as well. Previously they were taxed at a flat 20%. So for example, a $5,000 superannuation fund would see $4,000 refunded.

Tax rates now increase to 38-47%. I’m assuming the exact rate paid depends on the available balance. That little extra “departure bonus” just got a whole lot smaller.


As much as we like to think of our politicians as lobotomized zombies who somehow hoodwinked the generally public into getting elected, Australian Parliament does have at least some understanding of Economics 101. Their analysis of the changes recognize that many more backpackers will seek “under the table” positions, popular with service sector positions.

They further recognize that even bigger changesScreen shot 2016-05-16 at 2.17.08 PM will likely occur with remote farm work. Agriculture is huge industry in Australia and the seasonal harvests align perfectly with the transient nature of backpackers seeking work. In fact entire pamphlets have been printed for backpackers explaining which harvest occur in which regions of Australia where they will likely find work. The upcoming tax changes are a massive disincentive for backpackers who are much less willing to perform back breaking work for substantially less money. Not surprisingly, there has been a huge effort on the part of agricultural farmers to defeat the proposed changes.


Should you still consider Australia? If your sole purpose of being in Australia is to work, the upcoming changes are definitely important to consider. But the reality is the most young 20-somethings aren’t there to live a pauper life while grabbing every available shift. Put simply, the country and backpacking experience offers so much more. They’re there to make friends and create indelible memories so in the future they can look back at a time that was truly inspiring. So while some laws have changed there’s still a huge continent of opportunity. So I guess each person just needs to decide for themselves.

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