Backpacker Tax Rate: 15% to $45,000

What has to be true before 15% is actually applied?

Three conditions, and most people only know the first. Your TFN has to be with the employer, the Tax File Number Declaration has to record you as a working holiday maker, and the employer has to be registered with the ATO as an employer of working holiday makers.

If the TFN is missing, withholding is 45%. If the employer is not registered, withholding is 30% even with a correct TFN and declaration, because an unregistered employer must apply foreign resident rates. That third condition is invisible from your side and is the commonest cause of a payslip that looks wrong.

What does the rate look like in practice?

A flat rate is the same every week, with no step and no tapering across the first $45,000.

• $1,000 a week: $150 withheld, $850 to you
• $1,500 a week: $225 withheld, $1,275 to you
• $2,000 a week: $300 withheld, $1,700 to you

Above $45,000 the rate rises: 30% from $45,001 to $135,000, 37% to $190,000, and 45% above that. Few working holiday makers reach those levels, though mining and specialist trades occasionally do.

How does it compare with resident and ordinary foreign resident rates?

It sits between the two. An Australian tax resident pays nothing on the first $18,200 and then rising rates. An ordinary foreign resident pays 30% from the first dollar. A working holiday maker pays 15% from the first dollar.

At typical backpacker earnings that beats a foreign resident and trails a resident. A narrow exception exists where a year is assessed differently, but it hangs on a residency judgement that is easy to call wrongly in both directions, and a position is taken only after the whole year has been reviewed. Our guide to tax residency for working holiday makers covers why it is not a box you can tick yourself.

Why do people with correct 15% withholding still get refunds?

Because 15% withheld correctly all year is the exception rather than the rule. The typical year has at least one period where something else applied, and that period is where the refund comes from.

• Weeks before the TFN reached the employer, withheld at 45% rather than 15%
• Work for an employer who was not registered as a working holiday maker employer, withheld at 30%
• A declaration completed as foreign resident rather than working holiday maker
• Deductions for work related expenses that are only applied at assessment
• The 2% Medicare levy, which is only removed if the exemption is claimed

Take a year in which someone earned $37,000 but spent three weeks with a new employer before the TFN was recorded. The tax properly payable at 15% is $5,550. If $4,000 was withheld at 45% rather than 15%, $1,200 more was taken than was owed, and that is what the return recovers before any deduction.

What is not true about the backpacker tax?

Four claims circulate in hostels and backpacker groups, and each costs somebody money every year. Each contains a grain of truth, which is what makes them convincing.

• That backpackers pay no tax at all. The 15% applies from the first dollar, with no threshold.
• That correct withholding means there is nothing to claim. Deductions, the Medicare levy exemption and any mis withheld period all remain.
• That the rate varies by state. It does not. It is federal, though payroll errors are commoner with smaller regional employers.
• That leaving Australia ends the matter. A return can be lodged from overseas and the refund paid to an Australian account.

Does the Medicare levy sit on top of the 15%?

Generally not, but only if it is claimed. The 2% levy applies to people entitled to Medicare, and most working holiday makers are not entitled. It is not removed automatically.

The exemption has to be claimed on the return and evidenced by a Medicare Entitlement Statement from Services Australia, which commonly takes weeks to issue. Entitlement follows the passport: a British passport holder is generally entitled and therefore pays the levy, while German and Japanese passport holders generally are not.

What happens when your stay crosses two financial years?

You get two assessments rather than one, each calculated as though it were a whole year. A stay that feels like twelve months of steady work produces two part year returns, and part year earnings are systematically over withheld.

Payroll withholds from each pay as though that rate of earning continues all year, so someone who worked eight months and earned $30,000 was withheld as though heading for a much larger annual figure. The correction happens at assessment, in your favour, in both years.

Does ABN income get taxed at the same rate?

Yes, and the identical rate is what catches people out. Income invoiced under an ABN is assessed at the same 15% on the first $45,000, but nothing was withheld along the way, so the tax arrives as an amount payable.

Someone with both wages and ABN income usually finds the PAYG withheld from the wages absorbs the tax owed on the ABN side. Someone with ABN income only, who set nothing aside, gets a bill in a year they expected a refund.

The rate is fixed. Your refund is not.

The rate is fixed by statute. What you actually paid, and what comes back, is decided by facts specific to your year, and your payslips already show most of them.

• Whether every employer had your TFN from the first pay, and how long any gap ran.
• Whether each employer was registered with the ATO as a working holiday maker employer.
• How the residency and working holiday maker boxes on each declaration were completed.
• Which passport you hold, which decides the Medicare levy question and can matter elsewhere, case by case.
• Whether you also had ABN income, which carries no withholding at all.
• Whether the year was a part year, since part year withholding routinely overshoots.

All of it is reconciled in the working holiday tax return, and you can estimate your tax refund once you know what each employer actually withheld.