The Federal governments review into its proposed backpacker tax has reached a significant milestone with the interdepartmental review process culminating in a proposal being submitted to cabinet for consideration.

With next months Federal budget looming agriculture and tourism bodies have strongly advocated against the introduction of a 32.5% tax rate coming into place on 01 July 2016 for backpackers on working holidays in Australia. The main concern from these industries is that the implementation of the backpacker tax will reduce seasonal workers coming to Australia

A joint progress advisory has been released by the Minister for Tourism, Minister Richard Colbeck, the Assistant Minister to the Senior Minister, Minister Keith Pitt, and Assistant Agriculture and Water Resources Minister Anne Ruston detailing the progress of the interdepartmental review.

The advisory identified that a proposal on the backpacker tax had been drafted in consultation with the inter-departmental committee that was chaired by a representative from Austrade. The advisory made a special point of noting that key agricultural and tourism industry representative had had input into the review.

The joint advisory into the proposed backpacker tax stated:

“This proposal will need to be considered by the government and we will make an announcement in due course.

We have been extremely pleased with the positive and genuine engagement that occurred with the tourism and agriculture industries in developing the options that are now being considered by the government. The tourism and agriculture industries are two of the five key super-growth sectors that will support our transitioning economy over the next decade and the government will be ensuring the policy settings are right to support and capitalise on this growth.”

In March 2016, the Federal government made a major announcement that it would be undertaking a comprehensive review into the controversial backpacker tax due to the vocal opposition from key industry leaders and businesses who rely upon backpackers to address critical labour shortages.

The inter governmental review involved consultations with affected industries, government departmental heads and discourse between the Australian Treasurer, Employment Minister and the Minister for Immigration and Border Control. The advisory identified that relevant industries provided “constructive recommendations” as part of the review.

The advisory quite succinctly identified the concerns of affected industries by stating:

“The main issue for industry is the potential impact on Australia’s regional workforce.

They are concerned that the tax changes could add to already decreasing WHM numbers, impact on seasonal worker availability, hinder our international competiveness in attracting youth travellers and, potentially, result in an increase in unregulated cash payments to these workers.”

While many industries have led campaigns against the proposed backpacker tax, the most vocal has been the National Farmers Federation. In its campaign the National Farmers Association commenced an online petition which was signed by over 30,000 people opposed to the introduction of the backpacker tax.

Currently backpackers on a Working Holiday Visa in Australia pay tax of 19 percent on earning ups to $37,000 and 32.5 percent on earnings from $37,001 up to $80,000. These backpackers on working holidays in Australia are also eligible for a tax free threshold on the first $18,200 that they earn.

Submissions made by the National Farmers Federation identified that backpackers on working holidays in Australia provided significant economic revenue for the Australian economy generating over $3.5 billion dollars for the economy. The National Farmers Federation also submitted that backpackers played a vital role in filling labour shortages within farming communities in regional Australia.

It was somewhat surprising that the submissions of the National Farmers Federation acquiesced the eligibility for backpackers to claim the tax free threshold; however their submissions when read identify the reasoning for the concession. The submissions of the National Farmers Association state,

“Roughly 40,000 backpackers work on farms each year, and without them, the agriculture sector would face severe labour shortages. The NFF supports backpackers paying tax but 32.5c in every dollar is too high. It means many backpackers will choose to go elsewhere, or stay in Australia for shorter periods.

It means fewer workers on Australian farms and more workers attracted to the cash economy. A fairer approach would see the usual tax rules apply to backpackers but with no tax-free threshold. This would keep Australia competitive against comparable tourist destinations (Canada and New Zealand) which is important, because the number of backpackers coming to Australia is declining and other countries have much lower tax rates.”

Shadow Agriculture Minister Joel Fitzgibbon and Shadow Tourism Minister Anthony Albanese have also been vocal opponents of the introduction of the controversial backpacker tax. They have made strong representations to the Federal government to carefully consider implementing the backpacker tax so Australia’s competitiveness for tourism and labour in the agricultural industry was not adversely affected.

The Shadow Minister for Agriculture and the Shadow Minister for Tourism earlier this month released a joint statement into the proposed introduction of the backpacker tax stating,

“First, the government must demonstrate that it has a plan to protect and grow demand for working holiday maker visas, not just cede our competitive edge to lower taxing nations in our region and allow application figures to continue to fall.

Second, Minister Colbeck must be able to show that the government is using reliable data on backpacker earnings to generate an estimate of revenue earned from the introduction of a new backpacker tax.

Third, the proposal must have the broad support of the tourism and agricultural sectors following proper consultation, taking into account the unique nature of the tourism industry as both an employer of, and supplier to, working holiday makers.
How the Government’s proposal stacks up against these criteria will be the real test.
Australia’s tourism and agricultural sectors deserve better than another ill-considered and counterproductive measure introduced in haste.”

It is not only opposition politicians who have opposed the introduction of the backpackers tax with some rural government politicians also being opposed to the introduction of the backpacker tax. There has been concern from those in government who represent rural constituents that consultation was lacking in the preparation of the budget and that various proposals. The proposed backpacker tax is likely to have its greatest affect on those living and working in regional Australia.

Even though government politicians from regional Australia have opposed the introduction of the backpacker tax the Federal Treasurer has made it clear that any changes to the proposed introduction of the backpacker tax being implemented on 01 July 2016, must be cost neutral to the Federal Budget. In other words, the projected money to be raised through the backpacker tax must be found elsewhere.

Shadow Minister for Agriculture, Mr. Fitzgibbon stated in March that the proposed backpacker tax was a hasty decision that was brought about without consultation with the agriculture and tourism industries. He also stated his concern that no economic modelling had been undertaken by the government to identify the impacts that the backpacker tax would have on the economy.

What was ultimately concerning was the statement of the Shadow Minister for Agriculture that identified that the review into the backpacker tax was delegated to a government backbench committee. While this in itself is not concerning his comment that, “the chair of the backbench committee said he knows nothing of the review”

During the course of the review into the proposed backpacker tax, some important initiatives were also raised by industry leaders and those involved in the consultation process. Many of these initiatives were focussed around streamlining superannuation payment processing for backpackers and adjusting the taxation rates imposed on superannuation payments for backpackers.

These proposed initiatives have the potential of coming up with a cost neutral alternative to the proposed backpacker tax and will essentially have a lesser impact not only backpackers but also the Australian economy and current labour shortages. The implementation of a backpacker tax would have short term and ongoing consequences for backpackers whereas adjusting the rate of taxation on superannuation payments for backpackers is a once of consequence.

Obviously the government would be well advised to undertake economic modelling on how changes to the superannuation tax rate would have an affect on backpackers and the impacts that this may also have on the Australian economy. However, it is considered that as the consequences in adjusting the tax rate on superannuation payments for backpackers are long term there is likely to be less of an adverse impact than there would be with the introduction of the backpacker tax.

There is no disputing that statistics produced by the Australian Bureau of Statistics have shown that the number of backpackers who come to Australia each year has been steadily dropping. With backpackers providing a vital element in the Australian economy it is important that the government ensures that they implement government policies which are not going to deter any backpackers coming to Australia on a working holiday. The current projections identify that there is going to be a serious labour shortage for the agricultural industry if backpacker numbers keep declining.

Will the Treasurer of Australia go back on his proposal to implement a backpacker tax? That is currently still not known. What is known is that there has been vocal advocacy against the implementation of the backpacker tax from experienced industry leaders. This advocacy has obviously gained the attention of the government who in response have undertaken an inter government review of the feasibility of the backpacker tax.

Consultation with industry leaders before announcing the backpacker tax may have been a more sensible approach to take as the review has undoubtedly incurred huge expenses unnecessarily. However, the fact remains that this consultation was not undertaken so now matters have to be considered retrospectively.

Many young people around the world who are considering travelling to Australia on a working holiday are obviously awaiting the government’s decision on the backpacker tax. Industry leaders and small businesses who rely on backpackers to counter labour shortages are also awaiting the government’s final decision.

What happens after the government finally makes a decision on whether to implement or abolish the backpacker is yet to be seen. Hopefully, the decision is made sooner rather than later so that there will be some certainty about the proposed backpacker tax.