High Court ruling that 'backpacker tax' is discriminatory invites consideration of other potentially disapplied discriminatory tax provisions

By Craig Milner, Scott Lang
Dispute Resolution Tax Tax Disputes

Judgment may have wider implications 8 min read

In the recent decision of Addy v Commissioner of Taxation, the High Court ruled that the so-called 'backpacker tax' contravened the non-discrimination article contained in the double tax agreement between Australia and the United Kingdom (UK).

The case is particularly significant because it is the first in Australia to consider the operation of such an article. While the immediate implications of the decision are restricted to a subset of foreign backpackers resident in Australia, the High Court's confirmation that non-discrimination articles are effective invites consideration by all taxpayers, including those in multinational corporate groups, of whether they are subject to other tax provisions that discriminate on a proscribed basis.

Key takeaways

  • Australia has given the force of law to non-discrimination articles contained in its double tax agreements with the UK, Norway, Finland, Japan, South Africa, New Zealand, Chile, Turkey, India, Switzerland, Germany and Israel.
  • The decision of the High Court in Addy confirms that the prohibitions contained in such non-discrimination articles have the effect of disapplying proscribed discriminatory taxation or connected requirements and instead applying the more favourable ones.
  • Depending on the terms of the relevant double tax agreement, certain nationals and residents of these jurisdictions, as well as certain Australian residents, may not be subject to Australian taxation or connected requirements that discriminate on the basis of nationality or discriminate against permanent establishments, payments to foreign residents or foreign ownership.

A brief summary of Addy v Commissioner of Taxation

A backpacker takes a gap year in Australia

Catherine Victoria Addy was a British citizen who obtained, and subsequently entered Australia on, a working holiday visa granted under the Migration Act 1958 (Cth). During the period from August 2015 to May 2017, she primarily lived in Sydney and worked as a waiter.

From 1 January 2017, the Income Tax Rates Act 1986 (Cth) provided that, because she held a working holiday visa, her income from waiting was to be taxed at a flat rate of 15% to the first $37,000. This so-called 'backpacker tax' was a concessional rate compared to the flat rate of 32.5% on the first $87,000 that applied to foreign residents, but a punitive rate compared to the tax-free threshold of $18,200 and 19% rate that applied from $18,200 to $37,000 for Australian residents.

The double tax agreement, which is a form of treaty or convention between Australia and the UK, contained the following prohibition on discriminatory taxation in article 25(1):1

Nationals of a Contracting State [ie, British citizens] shall not be subjected in the other Contracting State [ie, Australia] 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 [ie, Australian citizens] in the same circumstances, in particular with respect to residence, are or may be subjected.

The dispute between Addy and the Commissioner of Taxation was whether article 25(1) applied to confer upon Addy the more concessional tax rates that applied to Australian residents. As the minimal amounts involved would suggest, it was a test case regarding the effect of non-discrimination articles.2

A court divided on discrimination

At first instance, Justice Logan held that Addy was an Australian resident for income tax purposes and the backpacker tax rates discriminated against her on the basis of her nationality, which required her to hold a visa to enter Australia, contrary to article 25(1). Consequently, she should be taxed at the more concessional rates that applied to an Australian resident.3

On appeal, the Full Federal Court unanimously agreed that Addy was an Australian resident, but a majority held that the backpacker tax did not discriminate on the basis of nationality for two reasons.4 Firstly, because a working holiday visa was not the only visa available to a British citizen, the discrimination was on the basis of visa status not nationality. Secondly, as such a visa is not available to an Australian citizen, it is impossible for a British citizen and an Australian citizen to be in the same circumstances. Justice Davies dissented on this issue and held that Addy's nationality and visa status could not sensibly be divorced.

The backpacker tax is found to be discriminatory

With the score on the discrimination issue after two rounds in the Federal Court tied at two justices all, the High Court granted Addy special leave to appeal on the discrimination issue, but not the residence issue.5

On that further appeal, the High Court unanimously agreed with Justices Logan and Davies that the backpacker tax did not apply to Addy because it discriminated against her on the basis of her nationality:6

The question is whether that more burdensome taxation was imposed on Ms Addy owing to her nationality. The short answer is 'yes'. When the position of Ms Addy is compared with that of an Australian national, as it must be, that is the only conclusion which may be drawn. Pt III of Sch 7 to the Rates Act was applied to Ms Addy, a national of the United Kingdom. Ms Addy's circumstances in the 2017 income year including that of her residency in Australia for taxation purposes were relevantly the same as an Australian national. She did the same kind of work and earned the same amount of income from the same source: yet an Australian national was required by Pt I of Sch 7 to the Rates Act to pay less tax. In contravention of Art 25(1) of the United Kingdom convention, the more burdensome taxation was imposed on Ms Addy owning to her nationality and, for that reason, the tax rates in Pt III of Sch 7 did not apply to Ms Addy in the 2017 income year.

The High Court held that the ordinary language of article 25(1) required a comparison of the tax treatment of a UK national (ie British citizen) and Australian national (ie Australian citizen) in the same circumstances (which expressly did include residence as defined for the purposes of the double tax agreement in article 4).7 The same circumstances did not include nationality because the purpose of the comparison is to identify tax provisions that discriminate on the prohibited basis of nationality.8 That prohibited basis of nationality also includes circumstances attached or related to, or characteristics which depend on, or consequences flowing from, nationality, like visa status given that visas are sought by and issued to non-citizens.9 Otherwise, the expression 'same circumstances' requires 'substantially similar circumstances', including doing the same work and deriving the same income from the same source.10

For the purposes of the double tax agreement, Addy was an Australian resident because article 4(1)(b) defined such a resident to mean a person who was an Australian resident under Australian income tax laws, a definition the Federal Court had held Addy satisfied. Consequently, the relevant comparison was between the tax treatment of Addy and a hypothetical Australian citizen and resident who lived in Sydney, worked as a waiter and derived the same amount of income from waiting. The result of that comparison showed that Addy was subject to more burdensome taxation because the backpacker tax rates that applied to her were higher than those that applied to an Australian citizen. It followed that article 25(1) operated to disapply the more onerous tax treatment of UK nationals and instead apply the more advantageous treatment of Australian residents to Addy.11

The Australian Taxation Office appears to accept that the same result should apply for Australian resident working-holidaymakers from Chile, Finland, Japan, Norway, Turkey, the UK, Germany or Israel.12

Implications of decision for double tax agreements and non-discrimination articles

Principles for interpretation of double tax agreements

In its reasoning, the High Court emphasised that double tax agreements are incorporated into Australian domestic law by the International Tax Agreements Act 1953 (Cth), which provides for them to prevail over all other income tax laws (apart from general anti-avoidance rules).13 While this means the application of any double tax agreement is technically a question of domestic law (ie statutory interpretation), where entire articles of a treaty are incorporated, including by reference, into a domestic statute, as with the Agreements Act, those articles should have the same meaning under both the treaty and domestic law.14

For the purposes of determining that meaning in any given case, the Court expressly endorsed the principles of interpretation applicable to tax treaties most recently espoused in the High Court by Justice Gordon writing separately in the corporate tax residence case of Bywater Investments Ltd v Federal Commissioner of Taxation.15 That is, while the treaty text has primacy in determining its meaning, regard must also be had to the context, object and purpose of the treaty provisions, 'consistent with the general principle that international instruments should be interpreted in a more liberal manner than would be adopted if the court was required to construe exclusively domestic legislation.'16

The Court also endorsed Justice Gordon's reasoning in Bywater that where an article of a double tax agreement is in largely the same terms as its equivalent in the Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development (OECD), the commentary that accompanies that model at the time of the treaty can be used in construing that article.17 Whether subsequent amendments to the commentary can be taken into account remains undecided, although the Court noted in any event that those commentaries supported, or were not inconsistent with, its construction of article 25(1).18

Non-discrimination articles are effective to disapply discriminatory tax provisions

Focusing on non-discrimination articles specifically, the decision in Addy is important for several reasons.

Firstly, it confirms that the non-discrimination article in the UK double tax agreement, incorporated into domestic law by the Agreements Act, is effective and prevails over inconsistent discriminatory tax provisions. Such a conclusion was not inevitable. Only recently, Justice Steward held in Burton v Commissioner of Taxation that article 22(2) of the double tax agreement between Australia and the United States, requiring Australia to provide Australian resident taxpayers with credits for US income tax, did not have any operation independent of the domestic foreign income tax offset regime.19

In addition to holding that the non-discrimination article in the UK double tax agreement is effective, the High Court expressly noted that Australia now has binding double tax agreements with non-discrimination articles that have been incorporated into domestic law with 11 other countries: Norway, Finland, Japan, South Africa, New Zealand, Chile, Turkey, India, Switzerland, Germany and Israel.20 The recitation of these non-discrimination articles would appear to suggest that the High Court considers they should all be equally effective.

Finally, by giving effect to the non-discrimination article in Addy, the Court has arrested a trend of cases that limited the use of discrimination analysis when considering statutory prohibitions on discrimination, including in the tax context.21 Interestingly, the Court did not mention whether discriminatory tax measures could be justified under a proportionality analysis, perhaps because the text of article 25(1) does not appear to permit the justification of more burdensome taxation on the basis of nationality.

Potential application of non-discrimination articles in other contexts

Non-discrimination articles limit taxing rights

Double tax agreements allocate taxing rights over different categories of income between countries. Non-discrimination articles go a step further and limit how those taxing rights can be exercised by way of domestic tax laws. Taxpayers should be aware that even if Australia is entitled to tax certain income under a double tax agreement, it may still be restricted in the manner it does so by a non-discrimination article. The non-discrimination articles contained in Australia's double tax treaties generally proscribe four kinds of discrimination.

Before considering each of these briefly, it is worth noting that these proscriptions may apply not only in the context of federal income tax, but also to other federal or state and territory taxes. However, non-discrimination articles may also specifically permit discrimination in the form of anti-avoidance rules, transfer pricing rules, thin capitalisation rules, controlled foreign company rules, consolidation rules, research and development incentives and personal allowances to resident individuals.22

Discrimination on the basis of nationality

The first proscription is that nationals of the other country must not be subjected in Australia to any tax or connected requirement that is other or more burdensome than those of Australian nationals in the same circumstances (in particular, with respect to residence).

Importantly, the High Court in Addy accepted that this provision permits tax measures that discriminate against non-residents and does not provide relief from the imposition of higher tax other than on the basis of nationality.23 Even in circumstances where corporate tax residence is defined partially by reference to place of incorporation, as it is in Australia,24 appellate courts in both Canada and New Zealand have accepted that more burdensome tax is imposed upon the basis of residence rather than nationality.25

Given this is a prohibition on nationality discrimination, it seems most likely to apply where the tax laws refer to specific countries, citizenships or visas. While the controlled foreign company and transferor trust attribution regimes both contain concessions for expressly listed countries,26 those regimes only apply to include attributable income in the assessable income of Australian residents.27 Similarly, while only US limited liability companies and UK limited liability partnerships can be foreign hybrid companies,28 the partnership treatment conferred on them is arguably more favourable. Finally, while concessional rates of managed investment trust withholding tax apply to certain fund payments, these are for residents (not nationals) of listed information exchange countries.29

Discrimination against permanent establishments

The second proscription is that a permanent establishment in Australia must not be taxed less favourably than an Australian enterprise that carries on the same activities. The OECD commentary states that this prohibition must be read in the context of the business profits article of the relevant double tax agreement, which generally provides for the permanent establishment to be attributed profits as if it was a separate entity.30 Australian permanent establishments of foreign residents will generally be taxed on their Australian sourced income and capital gains from disposal of taxable Australian property (including business assets of the permanent establishment).31 This appears no less favourable than the tax treatment of an Australian resident.

The OECD commentary accepts that the prohibition does not require a permanent establishment to have the benefit of consolidation or loss transfer rules or be exempt from transfer pricing rules.32 Consistent with this approach, the Canadian Federal Court of Appeal has held that this prohibition does not require that a permanent establishment be entitled to obtain the benefit of deductible losses of another entity under loss transfer provisions, because the protection only extends to the activities of the permanent establishment itself and not those of related entities.33 This suggests that the restriction of membership of consolidated groups to Australian residents and imposition of transfer pricing rules on permanent establishments is valid.34

Discrimination against payments to foreign residents

The third proscription is that disbursements paid by an Australian enterprise to a resident of the other country must be deductible under the same conditions as if they had been paid to an Australian resident. The OECD commentary accepts that this prohibition does not preclude the operation of thin capitalisation rules, provided they are compatible with the associated enterprises and interest articles of the relevant double tax agreement.35 Presumably the Australian thin capitalisation rules are so compatible.36 Even if they were not, many of the non-discrimination articles expressly permit discriminatory thin capitalisation rules and measures to ensure the collection of tax. Such provisions might support the denial of deductions for amounts of interest and royalties where the payer has failed to withhold withholding tax.37

Discrimination against foreign ownership

The final proscription is that Australian enterprises that are owned or controlled by residents of the other country must not be subjected in Australia to tax or any connected requirement that is other or more burdensome than that of similar Australian enterprises. The OECD accepts that this prohibition focuses on the taxation of the Australian enterprise, not its owner or controller, so does not require the extension of consolidation benefits or preclude the imposition of dividend withholding taxes on non-resident shareholders.38 In the UK, the Court of Appeal has held that this provision requires UK resident subsidiaries of a corporate group to be able to transfer tax losses regardless of whether the head company is a UK resident.39 The provision under the Australian consolidation rules for multiple entry consolidated groups should preclude similar litigation here.40


  1. Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains, signed 21 August 2003, [2003] ATS 22 (entered into force 17 December 2003).

  2. Addy v Commissioner of Taxation [2021] HCA 34 (3 November 2021) [27].

  3. Addy v Commissioner of Taxation [2019] FCA 1768 (30 October 2019).

  4. Commissioner of Taxation v Addy [2020] FCAFC 135 (6 August 2020).

  5. Addy v Commissioner of Taxation [2021] HCATrans 17 (11 February 2021) 4.

  6. Addy v Commissioner of Taxation [2021] HCA 34 (3 November 2021) [8].

  7. Ibid [24].

  8. Ibid [28].

  9. Ibid [29]-[31].

  10. Ibid [31], [33]-[34].

  11. Ibid [16].

  12. Australian Taxation Office, High Court decision in the matter of Addy v Commissioner of Taxation (QC 67247, 3 November 2021).

  13. Ibid [3]-[4], [13]-[14].

  14. Ibid [6].

  15. Ibid [23]; (2016) 260 CLR 169, 227-8.

  16. Ibid [23].

  17. Ibid [32]; (2016) 260 CLR 169, 228-9.

  18. Ibid [35].

  19. Burton v Commissioner of Taxation [2019] FCAFC 141 (22 August 2019) [145]; cf [76]-[79] (Logan J), [173] (Jackson J). See also Australian Taxation Office, Decision impact statement: Burton v Commissioner of Taxation.

  20. Addy v Commissioner of Taxation [2021] HCA 34 (3 November 2021) [14]. Note the double tax agreement with the US also contains a non-discrimination article, but it has not been incorporated into domestic law: International Tax Agreements Act 1953 (Cth) s5(2).

  21. See, eg, Fortescue Metals Group Ltd v Commonwealth (2013) 250 CLR 548, 604 (Hayne, Bell and Keane JJ); Maloney v The Queen (2013) 252 CLR 168, 204-5 (Hayne J), 213 (Crennan J); Purvis v New South Wales (2003) 217 CLR 92, 101 (Gleeson CJ), 160-1 (Gummow, Hayne and Heydon JJ), 174-5 (Callinan J).

  22. See generally, Scott Lang, 'Potential grounds for challenging the validity or application of taxes' (2018) 47 Australian Tax Review 211, 222-7.

  23. Addy v Commissioner of Taxation [2021] HCA 34 (3 November 2021) [27], [33].

  24. Income Tax Assessment Act 1936 (Cth) s6(1)(definition of 'resident')(b).

  25. Commissioner of Inland Revenue v United Dominions Trust Ltd [1973] 2 NZLR 555, 562, 566, 574; Saipem UK Ltd v The Queen [2011] TCC 25 (14 January 2011) [51]-[54], affd [2011] FCA 243 (6 September 2011) [2].

  26. Income Tax Assessment Act 1936 (Cth) ss102AAU(1), 385; Income Tax Assessment (1936 Act) Regulation 2015 (Cth) s19.

  27. See also Russell v Federal Commissioner of Taxation (2009) 74 ATR 466, 492-5, affd (2011) 190 FCR 449, 457-8 (Dowsett J), 467 (Edmonds J), 468 (Gordon J).

  28. Income Tax Assessment Act 1997 (Cth) s830-15(2)(b); Income Tax Assessment (1997 Act) Regulations 2021 (Cth) s830-15.01.

  29. Income Tax (Managed Investment Trust Withholding Tax) Act 2008 (Cth) s4(1)(a); Taxation Administration Regulations 2017 (Cth) s34. In any event, MIT withholding tax is concessional and all countries with non-discrimination articles in their double tax agreement with Australia are listed.

  30. OECD, Model Tax Convention on Income and on Capital 2017 (Full Version) C(24)-10.

  31. Income Tax Assessment Act 1997 (Cth) ss6-5(3), 6-10(5), 855-15(item 3).

  32. OECD, Model Tax Convention on Income and on Capital 2017 (Full Version) C(24)-13-14.

  33. Saipem UK Ltd v The Queen [2011] TCC 25 (14 January 2011) [68]-[70], affd [2011] FCA 243 (6 September 2011) [2].

  34. Income Tax Assessment Act 1997 (Cth) ss703-15(2)(b)(column 3), 719-10(1)(b)(column 2), 719-20(1)(b)(column 3), 815-215.

  35. OECD, Model Tax Convention on Income and on Capital 2017 (Full Version) C(24)-24.

  36. Income Tax Assessment Act 1997 (Cth) Div820.

  37. Income Tax Assessment Act 1997 (Cth) s26-25.

  38. OECD, Model Tax Convention on Income and on Capital 2017 (Full Version) C(24)-25.

  39. FCE Bank Plc v Revenue and Customs Commissioners [2013] STC 14, 29-30.

  40. Income Tax Assessment Act 1997 (Cth) Div719.