The backpacker tax has been a textbook example of how not to develop policy and a good reminder to those living in rural areas that having the National party as automatic members of a coalition with the Liberal party does little to serve their interests.
Tourists – namely backpackers – are a massive part of the labour force in the fruit industry. The working holiday visa allows foreign citizens under the age of 30 to come here for a year and work. Such workers are employed throughout Australia – including in city areas, often as restaurant staff – but are especially concentrated in rural areas where there is fruit picking.
The industry was thrown into chaos in 2015 due to a decision by then treasurer Joe Hockey to change the tax rate they pay.
As a general rule, holiday workers claimed residency while here and claimed the tax-free threshold. This meant they paid no tax on the first $18,200 they earned (and most don’t earn more than that).
In March 2015 the Administrative Appeals Tribunal ruled that backpackers – even if they were here for more than six months – were not necessarily residents, and thus could not automatically claim the tax-free threshold.
Instead they would have to pay 32.5% tax on every dollar they earned up to $80,000, like other foreign workers.
In the May 2015 budget Hockey removed any wriggle room the AAT decision might have offered by announcing that all holiday workers would pay 32.5% tax from the first dollar of income earned. He claimed it would bring in $540m in extra revenue over three years.
But the government at the time held no consultation with the sector and, to make matters worse, did no modelling on the impact of the changes – something that was discovered during Senate committee hearings last month.
You didn’t need to be a scholar of international labour to know there would be a number of impacts.
Firstly, Australia would become a much less attractive place to come on a working holiday. Under Hockey’s proposal someone who would previously have earned $15,000 would now be paying $4,875 in tax – certainly enough to make them think that maybe New Zealand or Canada would be a better place to go.
It was also quite obvious that the 32.5% rate would encourage a boom in cash-in-hand work.
What would you prefer if you were a student out from Ireland working in Cairns – the $17.70 minimum wage less $5.75 in tax, or $13 cash-in-hand?
This would not only reduce the tax revenue, it would undercut the wages of Australian workers and place holiday workers outside the system – thus, ripe for exploitation – something the Fair Work ombudsman has already found happens in abundance.
Altogether it was a train wreck of a policy – masterminded by Joe Hockey, and overseen by the minister for agriculture, Barnaby Joyce.
Prior to the 2016 election, in response to the industry’s loud complaints, the government pushed out the start date for the 32.5% tax rate from 1 July to 1 January, and pledged to review the decision.
Subsequently it decided to make the tax rate 19%, but the legislation last week was voted down in the Senate with an amended rate of 10.5% – the same as for similar workers in New Zealand – supported by senator Jaqui Lambie and the ALP.
Unfortunately for the government, Joyce has been the lead advocate on the policy.
And Joyce has been all over the shop.
Laughably, he tried to paint it as an issue of fairness because the 10.5% rate would see Australian workers pay a higher tax rate than foreign workers.
You would have thought that given he was once the shadow finance minister, Joyce would understand the concept of average tax rates, and that the 19% tax rate paid is only on the income over $18,200.
By the time the Australian worker starts paying tax, the foreign holiday worker would have paid $1,921 in tax if the rate is 10.5% (and they pay tax from the first dollar earned) and from $3,477 if it is at the government’s preferred rate of 19%.
Joyce has also been trying to lay all the blame on the AAT, telling the ABC’s Fran Kelly this week the 19% rate is already a “compromise” and there was “never a vote to have a 32.5% tax”.
Joyce likes to overlook the 2015 budget – a budget delivered when he was minister for agriculture. He was happy to defend the 32.5% rate, telling 7.30’s Leigh Sales in May last year the rate wasn’t an issue because he thought “the vast majority come here because we still have a great wage rate”.