Article 25(1) of the Treaty
323 For convenience I reproduce Art. 25(1) below:
Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected.
324 I should also set out Art. 25(5) of the Treaty. It supports an important attribute of Art. 25(1), namely that it is concerned only with discrimination by reason of nationality and not by reason of residence. Article 25(5) provides:
Nothing contained in this Article shall be construed as obliging a Contracting State to grant to individuals who are residents of the other Contracting State any of the personal allowances, reliefs and reductions for tax purposes which are granted to individuals so resident.
325 The foregoing Article does not appear in the O.E.C.D.'s "Model Tax Convention on Income and on Capital."
326 It is not disputed that the taxpayer's nationality was British. Article 3 of the Treaty defines the term "national" in relation to the United Kingdom as follows:
... any British citizen, or any British subject not possessing the citizenship of any other Commonwealth country or territory, provided that individual has the right of abode in the United Kingdom; and any company deriving its status as such from the law in force in the United Kingdom;
…
327 The definition in the Treaty of a "national", in relation to Australia, included not only an Australian citizen, but also a non-citizen who had been granted "permanent residency status" (Art. 3).
328 Nationality is not the same as residency. According to the O.E.C.D. Commentary on Art. 24 (the equivalent to Art. 25 in the Treaty), the principle of non-discrimination set out in Art. 24 pre-dates the creation of the first double tax treaties. Its origin was said to lie in the broader need "to extend and strengthen the diplomatic protection of [a State's] nationals wherever resident…" (para. 2 of the Commentary on Art. 24). As such, Art. 25 (and Art. 24 of the Model Convention) may, in a practical sense, now be of limited relevance in the 21st century.
329 By its terms, Art. 25(1) calls for a comparison to be made between the taxation of the taxpayer and the taxation of a hypothetical Australian national who is "in the same circumstances" of the taxpayer. Thus, Art. 25(1) requires the position of the taxpayer to be compared to another notional taxpayer:
(a) who is an Australian citizen or a non-citizen with permanent residency status (such a person could be a citizen of another country); and
(b) who is "in the same circumstances" of the taxpayer. All parties accepted that this could not include the nationality of the taxpayer.
330 Before the learned primary judge there was a dispute about which of the taxpayer's circumstances should be attributed to the hypothetical taxpayer. The Commissioner submitted below, and again presses before this Court, that the same circumstances must include a person who also held the same working holiday visa as the taxpayer. Because an Australian citizen and a person with permanent residency in Australia are not eligible for the grant of such a visa, the comparison could not take place. It therefore followed that the taxpayer could not seek any relief pursuant to Art. 25(1). A similar result, albeit in the case of an English company, occurred in Commissioner of Inland Revenue v. United Dominions Trust Ltd [1973] 2 N.Z.L.R. 555, a decision of the New Zealand Court of Appeal.
331 The learned primary judge rejected the Commissioner's submission. In his Honour's view, the lawful ability of the taxpayer to have remained in Australia by reason of her holding a working holiday visa, was so bound up with her nationality it should be ignored. As his Honour reasoned at [90]:
In relation to individuals, the definition of "national" in Art 3(1)(l) of the Double Taxation Agreement assimilates citizenship with, in the case of the UK, a right of abode and, in the case of Australia, a grant of permanent resident status. Either by mutual assumption or necessary implication, Art 25(1) envisages that a comparison is possible between, materially, a UK citizen in Australia who does not hold a permanent resident visa and not just an Australian citizen but also a UK or other non-Australian citizen who holds a permanent resident visa (who is also, by definition, a "national" of Australia) "in" Australia. Where his or her presence is lawful (and that is the case here) the "national" of the "Contracting State" will only ever be "in" the "other State" if he or she holds whatever the law of the "other State" requires to permit that individual to enter that "other State". It seems to me to follow from these features of the text of Art 25(1) that the inability of a national of the "other State" to hold a particular visa of that "other State" authorising him or her to be "in" that "other State" must be taken to have been regarded as nothing to the point in relation to what might constitute "the same circumstances" for comparative purposes. The Commissioner's submission based on an inability of an Australian citizen to hold a working holiday visa (or any other Australian visa) is, for this reason, flawed.
332 The learned primary judge relied upon parts of both the well-known text "Klaus Vogel on Double Taxation Conventions" and the O.E.C.D.'s "Commentaries on the Articles of the Model Convention." As for Vogel, his Honour relied upon the following observation (at [95]):
Ascertainment of a case of discrimination requires a hypothetical comparison with a person who is a national. The comparison must be based on the actual circumstances which are decisive in connection with the taxation procedure.
(Emphasis in original.)
333 As for the O.E.C.D. Commentaries, the learned primary judge relied upon the following passage at [96]:
This Article deals with the elimination of tax discrimination in certain precise circumstances. All tax systems incorporate legitimate distinctions based, for example, on differences in liability to tax or ability to pay. The non-discrimination provisions of the Article seek to balance the need to prevent unjustified discrimination with the need to take account of these legitimate distinctions. For that reason, the Article should not be unduly extended to cover so-called "indirect" discrimination. For example, whilst paragraph 1, which deals with discrimination on the basis of nationality, would prevent a different treatment that is really a disguised form of discrimination based on nationality such as a different treatment of individuals based on whether or not they hold, or are entitled to, a passport issued by the State, it could not be argued that non-residents of a given State include primarily persons who are not nationals of that State to conclude that a different treatment based on residence is indirectly a discrimination based on nationality for purposes of that paragraph.
(Emphasis added by his Honour below.)
334 The learned primary judge reasoned that because the definition of a "working holiday maker" in the Rates Act necessarily referred to a person who was not of Australian nationality, and because that Act differentially taxed Australian residents and working holiday makers, it followed that it discriminated on the basis of nationality. It was a "disguised form of discrimination", to use the language of the O.E.C.D. Commentaries, based on nationality (at [104]). As his Honour said at [103]:
The Rates Act expressly envisages that, in respect of persons who are resident in Australia, a different rate of tax will apply in respect of income derived in Australia from the same source, depending on whether the individual deriving that income is or is not a "working holiday maker" (as defined). On examination, the definition of "working holiday maker" in s 3A(1) of the Rates Act necessarily extends only to particular individuals who are not nationals of Australia. Likewise by reference to s 3A(2) of the Rates Act, it is only such persons who may derive "working holiday taxable income". These are what Vogel terms the "actual circumstances which are decisive in connection with the taxation procedure". In my view, this means that the discrimination between resident derived income from the same source in Australia is based on nationality. It is disguised by the reference to "working holiday maker" but the definition of that term makes it plain that what the disguise covers is nationality. A resident "national" of Australia undertaking the same work as did Ms Addy, in other words "in the same circumstances", would not be taxed by reference to the rates specified in Pt III of Sch 7 to the Rates Act. Such a person would have the benefit of the tax free threshold.
335 It followed, according to the learned primary judge, that the taxpayer should have been taxed at the rates prescribed by Pt. I of Sch. 7 rather than by Pt. III. Whilst not expressly adverted to, it would appear to have been accepted below that being taxed by reference to Pt. III of Sch. 7 was to be made subject to taxation which is "other or more burdensome" than tax imposed on Australian nationals in the same circumstances.
336 In reaching the foregoing conclusion, the learned primary judge did not need to decide upon the correctness of two competing constructions of the phrase "in the same circumstances." According to the O.E.C.D. Commentaries, this phrase is a reference to taxpayers in "substantially similar circumstances both in law and in fact" (para. 3 to the Commentary on Art. 24). The New Zealand Court of Appeal in United Dominions favoured a stricter test. In that case, McCarthy P. was of the view that the word "same" carried with it "the connotation of uniformity, of exactness in comparison." According to his Honour, the phrase "in the same circumstances" meant "substantially identical circumstances" rather than "roughly similar circumstances" (at 561). Richmond J. was of the same view. His Honour also said that what must be identical is all matters (save nationality) "which are relevant from a taxation point of view to the notional comparison" which must be made (at 566). All three judges agreed that the residence of the taxpayer was one of the matters required to be considered in the comparison which was to remain the same.
337 The Commissioner also submitted that Art. 25(1) would only ever apply where it had been shown that the taxpayer had been discriminated against solely on the grounds of nationality. This sole purpose test was said to flow from the words "in the same circumstances". The Commissioner contended that the correctness of this proposition was supported by the following observation contained in the O.E.C.D. Commentary on Art. 24:
In applying paragraph 1 [of Article 24], therefore, the underlying question is whether two persons who are residents of the same State are being treated differently solely by reason of having a different nationality.
(Emphasis added by the Commissioner.)
338 Here, the Commissioner contended that even assuming a connection between nationality and the taxpayer's visa status, it could not be said that she was subject to different rates of income tax solely because she was British. Rather, the taxpayer was subject to those rates because she chose to apply for and then hold a working holiday visa for her Australian working holiday. In contrast, if she had travelled to Australia on another type of visa, she would have been subject to the same rates applicable for either a resident or non-resident.
339 The taxpayer keenly defended the primary judge's reasons concerning Art. 25(1). Relying on United Dominions, she submitted that because the circumstances of the hypothetical taxpayer need not be identical but rather needed only to be "substantially identical", there was room to omit from the required comparison the taxpayer's status as the holder of a working holiday visa. In any event, the visa here, being the very thing that permitted a foreign person to enter and remain in Australia, was integral "to the separateness of nationality" and thus needed to be ignored.
340 The taxpayer also made the point that if a foreign national's visa were not excluded from the required comparison, the only taxpayers that would ever be able to invoke the protection of Art. 25(1) would be those who had arrived in Australia illegally without any visa. That is because in all other cases, it was said, an Australian national is not entitled to hold a visa and the holder of a permanent visa would have no need or basis for acquiring a further visa. On one view, such an outcome is absurd. That suggests that the learned primary judge was perhaps right to decide that the taxpayer's working holiday visa should not form part of the attributes of the hypothetical Australian notional taxpayer for the purposes of Art. 25(1).
341 Because of that contention, Mr. Hyde Page of Counsel, who represented the taxpayer, submitted that it would be "self-defeating" and contrary to "common-sense" to include as an attribute of the comparator taxpayer the holding of a working holiday visa. That was because the foreign national in such a case could only lawfully be in Australia and earning working holiday taxable income by holding such a visa. I have some sympathy for this complaint, but very respectfully, I am unable to accept it for the reasons that follow.
342 I make the following three observations.
343 First, it is no part of the discrimen for the application of the rates set out in Pt. III of Sch. 7 of the Rates Act that a person bear any particular nationality. The principal criterion is that the taxpayer earns a certain type of taxable income. The type of taxable income is then defined by reference to the earning of income from sources in Australia (less allowable deductions) by a working holiday maker. A working holiday maker is not defined in s. 3A by reference to a taxpayer's nationality of any particular country; indeed, the provision does not refer at all to a person's nationality. Rather, a person is a working holiday maker if that person holds one of the particular classes of visa identified in s. 3A.
344 Secondly, a British national who is a non-resident of Australia and who has earned income with a source in Australia (other than working holiday taxable income), or is otherwise liable to pay Australian income tax, would pay income tax on such income at the rates set out in Pt. II of Sch. 7 (dealing with non-residents). An Australian national, who is also a non-resident, would be liable to pay tax at those same rates if she or he had earned income from a source in Australia, or was otherwise liable to pay Australian income tax. Again, the nationality of the non-resident is neither here nor there.
345 Thirdly, a British national who is a resident of Australia would pay income tax at the rates set out in Pt. I of Sch. 7 (dealing with residents) other than in respect of the earning of working holiday taxable income. The same rates would apply to an Australian national that is a resident of Australia. Once again, the nationality of the foreign tax resident is neither here nor there.
346 The foregoing suggests that the Rates Act does not discriminate on the basis of nationality. It does provide for different rates of tax to be payable depending on the tax residence of a taxpayer, or upon a taxpayer being in Australia pursuant to particular classes of visa. But nationality is not a ground or basis for taxation at different rates. Of course, there is a form of correspondence between the concept of nationality and a person who holds a working holiday visa; the Commissioner accepted that a person who holds a working holiday visa will in all cases also be a foreign national. But this type of correspondence is of no consequence because, as noted at paragraph [223] of Derrington J.'s reasons, a foreign national can always stay in Australia using a different visa; in such a case that person would not be taxed on their Australian source income pursuant to Pt. III of Sch. 7. This observation highlights that it is the holding of a working holiday maker visa, and not nationality, which is decisive in determining the rates of tax payable.
347 It follows that, with very great respect, I am unable to agree with the conclusion of the learned primary judge that this is a case of disguised discrimination. That is so for two essential reasons. First, the O.E.C.D. Commentary, in the passage set out above, warns against "unduly" extending the reach of Art. 24 of the Model Tax Convention (here Art. 25 of the Treaty) to "cover so-called "indirect" discrimination." Secondly, care must be taken to ensure that it is a person's nationality which is the reason for differential treatment. For the reasons set out above, it was not the taxpayer's nationality that caused her to be taxed in accordance with Pt. III of Sch. 7 of the Rates Act, but rather her derivation of working holiday taxable income. Her income was of this kind because she chose to apply for and then hold a working holiday visa. Her nationality did not compel her to apply for this class of visa in order to enter Australia.
348 Moreover, I respectfully agree with the Commissioner's submission that the circumstances that must be the "same" are only those which go to, or affect, the tax liability of the foreign national. Here, Australia has enacted legislation which makes the holding of certain types of visa determinative of the rates of tax that have to be paid. It follows, that where the foreign national is a working holiday maker, the circumstances of the hypothetical taxpayer which must be the "same" need to include the holding of the same working holiday maker visa. Depending on the terms of the legislation in question, there may be cases where the holding of a different visa is not relevant to a person's taxation liability. In such a case it may be appropriate to ignore the existence of such a visa when applying Art. 25(1) of the Treaty.
349 As for Mr. Hyde Page's contention, with great respect, I must apply the words of the Treaty. Those words focus in Art. 25(1) on the concept of "nationality." They preclude discrimination because of a person's nationality but not for other reasons. Critically, both Australia and the United Kingdom are free to discriminate on the basis of tax residency. This may be seen more clearly from the terms of Art. 25(5) set out above. For the reasons I have already given, Pt. III of Sch. 7 does not discriminate against the taxpayer because she is a citizen of the United Kingdom.
350 The Explanatory Memorandum to the Bill which, when enacted, became the 2016 Amending Act supports my conclusion. By enacting Pt. III of Sch. 7, Parliament was not intending to discriminate against foreigners by reason of their nationality. To the contrary, Parliament was intending to confer a benefit on foreign nationals who wish to have an extended working holiday in Australia. Such nationals, being present in Australia whilst on a holiday, are most unlikely to be residents of Australia for tax purposes. Rather, they are more likely to remain non-residents. The need to confer a benefit on such "backpackers" was explained at paras. [3.16]-[3.18] and at [3.21]-[3.22] in the Explanatory Memorandum as follows (the references to "WHMs" are to working holiday makers):
3.16 Recent AAT decisions have established that, under the existing law, most WHMs are non-residents for tax purposes and therefore required to pay 32.5 per cent tax from the first dollar of income. However, not all WHMs are classified as non-residents for tax purposes. Those who stay in the one place and establish ties to the community may be classified as residents. This disadvantages WHMs that are transient compared to WHMs that stay in one place. In addition, WHMs tend to incorrectly self-assess as residents.
3.17 Taxing WHMs at the 32.5 per cent tax rate has led to concerns, particularly in the agriculture and tourism industries, for which WHMs are a vital source of labour, that WHMs will choose to visit other countries over Australia.
3.18 Australia seeks to remain an attractive destination for WHMs, but the current tax treatment of WHMs threatens this goal.
….
3.21 Without legislative change, the AAT decisions, which imply that the majority of WHMs would be treated as non-residents for tax purposes and required to pay 32.5 per cent tax from the first dollar of income, will apply as the default position for administering the current tax law.
351 3.22 Legislation is required to ensure that all WHMs are taxed on a consistent basis, at a rate that ensures that Australia is an attractive destination for WHMs, given their role in providing seasonal labour.I finally note that the Commissioner made a further submission which he submitted had been presented to the primary judge, but had not been dealt with. It is unnecessary to deal with that submission as the Commissioner has succeeded in his appeal for other reasons.
352 This case has had an unfortunate history. For the reasons given by Derrington J., the Commissioner was mistaken to have treated the taxpayer as a resident in ordinary concepts. The Commissioner was also mistaken in submitting that the taxpayer was nonetheless not a resident because the further amended assessment was supported by the required state of satisfaction under the 183 day test. It follows that the taxpayer was a resident by reason of her physical presence in Australia for more than half of the 2017 year of income. However, the Commissioner was correct to assess the taxpayer in accordance with the rates set out in Pt. III of Sch. 7 of the Rates Act. His application of the Treaty was correct.
353 The appeal should be allowed.
I certify that the preceding one hundred and one (101) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Steward.