90% tax rate on superannuation is back

The so-called backpacker tax reform gets more ridiculous every time there is an official intervention

Readers may recall the outrage that occurred when it was realised that, in certain circumstances, excess concessional contributions to superannuation could be subject to an effective tax rate of 93%.

This was seen to be over the top and the law was eventually changed so that a less punitive tax penalty system would apply to such excess contributions. However, it would seem that a tax rate in the mid-90% range is back.

The so-called backpacker tax reform gets more ridiculous every time there is an official intervention on the matter.

The original aim of the government was perceived to be closing a loophole of some sort so as to grab some tax on the earnings of backpackers that were apparently going untaxed. A 32.5% tax rate was proposed.

Any change in that regard was, in fact, unnecessary because had backpackers, their employers, and their tax agents been following the tax law, they would have been paying tax at 32.5% in any case under the foreigner tax-rate scale.

Notwithstanding, a political “shit storm” brewed.

Several months later and we seem to have a 19% tax rate that will be applied to “working holiday-maker taxable income”. So the rate has gone from, what the government [wrongly] said was 0%, to 19%.

Yet there are measures in the bill to balance the changes. An increase in the passenger movement charge from $55 to $60 got plenty of attention from the tourist industry. One wonders why an apparent “increase” in tax rates (0% to 19%) would necessitate filling a revenue hole from other sources.

Another source of increased revenue didn’t get much attention; there is slated to be an increase in the tax rate on departing Australia superannuation payments (DASPs).

A DASP is the way that a temporary resident working in Australia can claim their superannuation account balance when they leave the country. Presently, the tax rates on most DASPs would be about 38%.

Perhaps this is a pretty tricky way for the government to get close to its ultimate goal, which was to grab tax at about 32.5% from backpackers' earnings

The tax rate on DASPs is to increase to 95%. Where is the outrage?

So, 9.5% of a backpacker’s salary will be paid into a superannuation fund by the employer (on top of salary) for the backpacker. 15% of the amount paid into the fund for the backpacker is taken as normal contributions tax on entry into the fund.

And then, the government will hit the backpacker with a 95% tax rate on taking the money out of the fund on the backpacker leaving the country.

In short, the government has pretty much taken all of the super contribution made to the fund for the backpacker in tax through a combination of the normal 15% contribution tax and the 95% tax on the DASP.

Take this example. The backpacker earns $1000 in salary, and therefore, obtains $95 in employer super contribution to their fund.

Overall, it can be said the backpacker earns $1095. There is $190 income tax on the salary (19% of $1000). There is 15% tax ($14) on the $95 on entry into the fund, which leaves $81 after that tax. When the $81 is paid out, there is the 95% tax on the $81 (DASP) which comes to $77.

After these two taxes on the $95, there is only $4 left ($95 minus [$14 + $77]). The total tax on the $1095 is therefore $281 ($190 + $91).

That works out at 25.6% ($281/$1095), which is pretty close to the 32.5% that had the farmers, tourist operators and backpackers up in arms in the first place.

The explanatory memorandum to the Bill states that the increase in the rate of tax on DASPs is consistent with the objective of superannuation, which is to support Australians (not foreigners) in their retirement.

If this is the case, then why have employers contribute to superannuation on behalf of backpackers (foreigners) at all? If it is believed that the money will not form part of an Australian’s retirement savings, then should it ever hit the superannuation system?

Even though problematic, employers of foreigners would welcome exemption from having to make superannuation contributions for them.

Or, is the superannuation system, in this regard, being used as a stealth tax collection mechanism because, in truth, most backpackers wouldn’t even know what is going into superannuation as a result of their labour. How can they be upset at losing it if they never knew it was there in the first place?

Perhaps this is a pretty tricky way for the government to get close to its ultimate goal, which was to grab tax at about 32.5% from backpackers’ earnings.

One would hope that it doesn’t become clear to the backpacker community that this is happening. Because if the pre-change hype is believed, an effective tax take of anywhere near 32.5% will decimate the backpacker inflow and all the industries that rely on that workforce.

One also hopes the 95% tax rate on DASPs does not dominate the media coverage in backpacker home countries as this may also tend to put a dampener on the attractiveness of Australia as a backpacker destination.

Dale Boccabella is an associate professor in the school of taxation and business law at UNSW Business School.