If you are on a working holiday visa in Australia, you may have heard the term backpacker tax. It refers to the specific tax rate that applies to income earned by working holiday makers, and it has been the subject of significant political and legal controversy over the past decade. Understanding the history helps you understand why the current system works the way it does.
What is the backpacker tax?
The backpacker tax is the informal name for the tax regime that applies to holders of working holiday visas, specifically subclass 417 and 462. Rather than being taxed under the standard Australian resident progressive scale, working holiday makers are taxed at a flat rate of 15% on their first $45,000 of income earned in Australia each financial year.
Income above $45,000 is taxed at 30% up to $135,000, and at higher rates beyond that. In practice, the vast majority of working holiday makers earn below $45,000 in a single financial year, so the 15% flat rate is the one that applies to most people.
The history: a decade of controversy
Before 2017, working holiday makers who were considered tax residents of Australia were taxed under the standard progressive resident rates, which meant no tax on the first $18,200 and then increasing rates above that. Those who were considered non-residents were taxed at 32.5% from the first dollar of income.
In 2016, the Australian government proposed introducing a flat 32.5% tax on all working holiday maker income from the first dollar, treating all backpackers as non-residents regardless of their actual residency circumstances. The announcement triggered significant backlash from the agricultural industry, which relies heavily on working holiday labour during harvest season. Farming groups warned that the rate would deter backpackers from coming to Australia and devastate regional economies dependent on that workforce.
After extensive lobbying and debate, the rate was legislated at 15% from 1 January 2017. The compromise also included changes to the superannuation tax applied to departing working holiday makers, which was set at 65% for backpackers and 35% for students — a separate and still controversial measure.
A legal challenge from the UK
In 2019, the backpacker tax faced a significant legal challenge. The United Kingdom argued that applying a higher tax rate to British citizens on working holiday visas than to Australian residents constituted discrimination under the UK-Australia tax treaty. The Full Federal Court of Australia agreed and ruled in favour of the UK claimants.
The case attracted attention from working holiday makers of multiple nationalities and raised questions about whether the tax could be applied to citizens of other countries that had similar non-discrimination clauses in their tax treaties with Australia. The Australian government subsequently amended the legislation to address the court's ruling, and the current regime was put in place with specific provisions that sought to comply with treaty obligations.
What rate applies today?
As of the current financial year, working holiday makers on subclass 417 and 462 visas are taxed at 15% on income up to $45,000. This rate applies regardless of passport nationality in most circumstances. Income above $45,000 is taxed at higher rates in line with the non-resident scale.
The rate is applied from the first dollar of income. There is no tax-free threshold for working holiday makers. This is different from Australian residents, who pay no tax on the first $18,200 they earn.
What this means for your tax return
At the end of the financial year, your employer's PAYG withholding at 15% should broadly match what you owe. Depending on deductions, offsets, and the exact amount withheld throughout the year, you may receive a refund or owe a small additional amount. Most working holiday makers who have the correct rate applied throughout the year and who have legitimate deductions to claim receive a refund when they lodge.
The average tax refund for working holiday makers who lodge through a registered tax agent is around $2,500, though this varies significantly depending on income, deductions, and individual circumstances.
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