Why is the ‘Backpacker Tax’ a Big Deal?

There has been a huge amount of debate recently about the ‘backpacker tax’, but why is a tax on travellers’ income important for the average Australian?

First of all, here’s why the backpacker tax is even a ‘thing’. Back in March 2015, there was a ruling that backpackers would no longer be classified as ‘residents’ while earning income during a working holiday. This is a pretty important ruling because the tax rates for non-residents and residents vary dramatically, especially for relatively low levels of income – which is what most backpackers would earn from sporadic labouring jobs.

If you are classified as an Australian resident, you have a tax-free threshold of $18,200. This means that for the first $18,200 of taxable income that you earn in a particular financial year, you will pay absolutely no tax. However, if you are classified as a ‘non-resident’, you currently pay 32.5 percent tax from the very first dollar that you earn. So, if you’re a backpacker who earns $10,000 while travelling around Australia, you would go from keeping $10,000 to only keeping $6,750. If you’re living in $50-a-night accommodation, that’s 135 nights worth of accommodation you just lost!

Having belatedly realised the impact of this ruling on backpackers, the Federal Government has attempted to create a reduced ‘backpacker tax’ rate. Initially they wanted 19%, then they thought they had a deal done at 15%, then the Labor Party attempted to reduce that to 10.5% in the Senate before the Coalition did a deal with the Greens to keep it at 15% in return for reducing the amount of superannuation backpackers lose in tax from 95% to 65%.

Why not just charge backpackers the full 32.5%?

Well, if you were suddenly going to lose a third of your income while travelling and working in Australia, you may decide to travel somewhere else for your working holiday.

That will mean more jobs for Australians right?

Technically yes, but the kinds of jobs that backpackers do are generally the kinds of jobs that no-one else really wants to do – low-paid manual labour with long hours and often lousy conditions. One of the benefits for an itinerant worker is that the job usually includes (pretty basic) accommodation and (if they have a good employer) meals as well. Perfect if you have no other living arrangements in Australia and aren’t really looking for a long-term career opportunity.

So, if backpackers stop choosing Australia for their working holidays, will unemployed Australians fill those roles?

Possibly, but the incentive of accommodation really isn’t that great if you can simply stay home with mum and dad instead. Consider the fly-in-fly-out mining industry as an example. To encourage workers to take roles in isolated locations, companies have had to offer well-above industry average wages. This is not a sustainable model, as can be seen with the many mine closures and lay-offs as a result of the downturn in the mining sector. And agricultural produce tends to be far less profitable, less automated and more labour-intensive than mining – particularly the picking and packing roles that backpackers are hired for.

Should Australia lose such an affordable labour force, using local labour will almost certainly lead to increased production costs for farmers. Is this a big deal?

In a word – yes. According to the Australian Bureau of Statistics, Australian Agricultural production was worth $54 billion in 2014/2015[1]. Obviously not all of those areas involve backpacker labour, but in 2012/2013, horticulture accounted for $8.6 billion[2].

What are the options if farmers suddenly need to pay their employees more? Either they increase their prices, which will then be passed along the production chain to you – the consumer, or the producer will need to absorb the cost into an already tight profit margin. In an industry that is largely driven by the prices and conditions set by the major supermarket chains, there is little likelihood that those chains will agree to pay high prices to primary producers, which leaves farmers footing the bill.

In light of the much-publicised price war that impacted the dairy industry recently, there is the possibility that the supermarkets may bow to public pressure and offer locally-grown produce at a higher price, but it’s much harder to ‘brand’ a pile of potatoes or onions than it is a bottle of milk. And eventually, the Australian public will lose its enthusiasm for the plight of the ‘little Aussie battler’ in the face of ever increasing grocery bills.

So, while 15% is better than 32.5% for backpackers, chances are that less travellers will accept those roles. And as the government tries to squeeze as much money as possible out of Australian visitors, Australian consumers can look forward to either increasing prices at the checkout, or the loss of another portion of our country’s economy as local farmers go out of business and are replaced by imported produce.

[1] http://www.abs.gov.au/ausstats/abs@.nsf/lookup/7503.0Media%20Release12014-15

[2] https://www.austrade.gov.au/ArticleDocuments/2814/Fruit-Vegetables-ICR.pdf.aspx