Tax treaties and personal allowances - check carefully!

As the eagle-eyed may have spotted, a case has been passing through the Australian courts concerning a British backpacker claiming discrimination under the terms of the UK/Australian double tax treaty. Although not a UK case, it is nevertheless interesting, and highlights issues that we commonly see with internationally-mobile individuals.

The case involved a British backpacker who travelled to Australia on a working holiday visa, under the terms of which she was subject to a flat 15% tax rate, with no deduction for the personal allowances available to ordinary Australians.

As is often the case with backpackers, her holiday was of such a length that she became Australian tax-resident under local domestic law, and broke UK residence, so generally she became subject to local Australian tax law.

We are still receiving regular questions on the Taxline around remote workers who find themselves having changed their tax residence during the pandemic, with similar issues as here. Spending six months (or 183 days) in another jurisdiction is often a key point, as it not only breaches the employment article of most treaties, but is often the trigger point for becoming tax-resident.

With the backpacker case, the Australian tax authority lost not on a question of her tax residence, but on her British citizenship. Almost all treaties include a non-discrimination clause that states that certain individuals of one jurisdiction should be no worse off under local tax legislation than an equivalent person of that other state.

For most treaties, this clause references individuals who are both nationals and residents of the first state, and if that were the case here, the backpacker would have lost, as she was not UK resident.  

However, the non-discrimination clause within the UK/Australian treaty makes reference purely to ‘nationals of a contracting state’, so it applies to the backpacker as a UK national, regardless of her tax residence. 

The High Court of Australia therefore concluded that she had been discriminated against, in that she was denied the use of the personal allowance that would have been available to any Australian national doing the same work – after all, no Australian would ever be working under such a visa.

Following the ruling, the Australian Tax Authorities have confirmed seven other jurisdiction whose citizens will have the same right to personal allowances due to the wording of their tax treaties with Australia.

Eligibility to UK personal allowances for persons outside the EU is usually based on the same non-discrimination clause (in the absence of a specific Article), and HMRC has helpfully published lists in the SA109 Notes and its International Manual.

Importantly, this case highlights the fact that eligibility is not necessarily based on residence, and that we should also check the position for the country of nationality.

For further information, or for assistance, please contact Chris Holmes.