Working Holiday Makers

Working holiday makers (‘WHMs’) have long been considered important contributors to the Australian economy. In addition to being an important source of international tourism, WHMs are also a key source of seasonal labour in regional areas, particularly in the agriculture, horticulture, tourism and hospitality sectors.

The Federal Government recognised that the number of WHMs was declining as a consequence of various factors including exchange rate variations and changed economic conditions in home countries. Furthermore, many WHMs were non-residents and were unable to obtain the benefit of the tax-free threshold. Accordingly, they were often taxed at a rate of 32.5% from their first dollar of income, with higher tax rates applying once their income exceeded prescribed thresholds.

To combat falling WHM numbers, the Federal Government implemented a package of reforms aimed at increasing Australia’s attractiveness as a destination of choice for WHMs, whilst ensuring a fair rate of tax applied to their earnings in Australia.

This included the introduction of new tax rates applicable to WHMs from 1 January 2017. Broadly, under these new rules, the first $37,000 of a WHM’s Australian sourced income is taxed at 15% with the balance taxed at resident rates. Refer to the Income Tax Rates Amendment (Working Holiday Maker Reform) Act 2016. The new tax rates benefit the majority of WHMs, many of whom would otherwise be subject to higher non-resident tax rates.

The tax rates applicable to a WHM in the 2019- and 2020-income years are shown in the following table (as compared with corresponding marginal tax rates for residents and non-residents).

TAX WARNING – WHMs are not always better off under WHM tax rates

Where a taxpayer is a WHM, the WHM tax rates apply (regardless of the taxpayer’s residency status). While a non-resident WHM generally benefits from WHM tax rates (as they are lower than non-resident tax rates), the opposite is true for a resident WHM.

As shown in the table above, a resident taxpayer generally has a tax-free threshold of $18,200 in the 2019- and 2020-income years (i.e., their first $18,200 of taxable income is tax-free). However, if the taxpayer is also a WHM, a 15% marginal tax rate applies to the first $37,000 of taxable income (to the extent the income is Australian sourced). In other words, when the WHM tax rates apply, a resident WHM has increased their tax liability as the tax-free threshold does not apply to any part of their Australian sourced income.

All legislative references in this segment of the notes are to the Income Tax Rates Act 1986, unless otherwise indicated.