In this edition of Talking Tax, we discuss the High Court’s ruling in Addy that the backpacker tax contravenes the Australia-UK Double Tax Agreement, the AAT decision of Carvell, which is a timely reminder of a taxpayer’s burden of proof in tax disputes, and the new stapled super fund regime that operates from 1 November 2021.

Case law

Reminder of the taxpayer’s burden of proof

Carvell and Commisssioner of Taxation (Taxation) [2021] AATA 3627 serves as a timely reminder that a taxpayer cannot derogate from their obligation to prove their taxable income simply by disproving elements of the Commissioner’s default assessment. The case also emphasises the importance of providing corroborating documentary evidence to discharge the burden of proof of what the assessments should have been.

The taxpayer failed to lodge tax returns for the 2015, 2016 and 2017 income years. Subsequently, following an audit, the Commissioner issued a default assessment which comprised a total of $853,000 included in the taxpayer’s assessable income in relation to unexplained deposits received in the taxpayer’s bank account. The taxpayer objected to the assessments and later appealed to the Administrative Appeals Tribunal (AAT).

The primary issue before the Tribunal was whether the taxpayer had discharged their burden of proof pursuant to section 14ZZK(b)(i) of the Tax Administration Act 1953 (Cth) with respect to the explanations offered regarding the unexplained bank deposits.

AAT decision

The Tribunal found that the taxpayer’s self-serving statements explaining the nature of the $853,000 deposits were insufficient to discharge the taxpayer’s burden of proof, especially in the absence of producing corroborating documentation and evidence. In doing so, the Tribunal held that:

The burden of proof is not discharged by simply showing that the methodology or aspects of the content of the assessment undertaken by the Commissioner was or were flawed or wrong…

The burden of proof requires the taxpayer to prove, on the balance of probabilities, what their actual taxable income was in order to justify that the Commissioner’s assessment is excessive or incorrect.

Backpacker tax – High Court appeal

The High Court has unanimously held that imposing the ‘backpacker tax‘ contravenes the non-discrimination clause set out in article 25 of the Double Tax Agreement (DTA) between Australia and the UK, in Addy v Commissioner of Taxation [2021] HCA 34.

The High Court was asked to consider whether the imposition of a 15% tax on the first $37,000 earned by working holiday visa workers imposed a more burdensome taxation requirement on the taxpayer by reason of their nationality and in contravention of article 25 of the DTA.

Article 25(1) of the DTA states that:

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.’

The primary issue was whether the burden of the ‘backpacker tax’ was connected to the taxpayer’s UK nationality.

The Commissioner argued that the backpacker tax was imposed because of the taxpayer’s type of visa and not their nationality. Given that Australian nationals could not hold a working holiday visa, they could not be in the same circumstances as the taxpayer, meaning that Article 25 did not apply.

The High Court rejected this submission and held that a relevant comparison for the purposes of Article 25, was a hypothetical Australian national in the same circumstances as the taxpayer, excluding the criterion, which the allegation of discriminatory taxation was based on.

The High Court held that the circumstances being compared must not include the factor of being or not being a working holiday visa holder, as that would depend on nationality, which is potentially discriminatory.

For a more in-depth coverage into the facts of this case, see Talking Tax – Issue 177.

Other news

Stapled Super Fund Regime started on 1 November 2021

From 1 November 2021, superannuation accounts will be ‘stapled’ to follow an employee as they change jobs, with the passing of the Treasury Laws Amendment (Your Future, Your Super) Act 2021.

Employers must now follow a three-step process with all new employees in order to comply with the choice of fund rules:

  • Ask the employee to nominate a super fund to which contributions may be made.
  • If the employee fails to nominate a fund, the employer must ask the ATO to confirm whether the employee has a stapled super fund.
  • If the employee does not have a stapled fund, the employer may set up an account for the employee with their default super fund.

Employers may incur a liability to the super guarantee charge if they make superannuation contributions in breach of the choice of fund rules.

Further details of the new Stapled Super Fund Regime requirements can be found on the ATO’s website.

This edition of Talking Tax was written with this assistance of Kevin Dorostkar, Law Graduate, and Gabrielle Terliatan, Paralegal.