The Federal Government has responded to backbench and industry pressure and dumped the budget plan to impose a 32.5 per cent tax on backpacker workers.

Key points: Backpacker tax first proposed in 2015 budget, faced backlash from industry and backbench

Backpacker tax first proposed in 2015 budget, faced backlash from industry and backbench Passenger departure tax will be increased by $5 to offset lower tax rate

Passenger departure tax will be increased by $5 to offset lower tax rate Government announced $10 million fund for tourism sector to market backpacker jobs

Under a compromise deal, working holidaymakers will be taxed at 19 per cent from their first dollar earned instead.

Treasurer Scott Morrison announced the deal after it was signed off by Cabinet on Tuesday, saying the backbench committee pushing for the changes was also satisfied.

"As one said, they were a pig in mud when it came to the changes that I'm about to announce now," Mr Morrison told reporters in Canberra.



The move comes within weeks of the Government's backtrack on superannuation, again following intense backbench pressure.

Queensland Coalition backbencher George Christensen was one of the main protagonists in pushing for both policy changes, but is not claiming total responsibility.

"I'm one of many, we all have a say, I'm having my say all the time, and other people are having their say too."

"This is not something that I'm going to go out saying that I scored a win on, it was a collective win."

Opposition leader Bill Shorten said Mr Christensen’s influence was broader than he was letting on.

“We've just seen this latest backflip from the government on this backpacker tax, there's no doubt that George Christensen and the right wing of that party are spelling out the song that Mr Turnbull has to sing,” Mr Shorten said.

Tourism lobby fears 'cash cow' treatment

While many farming and industry lobby groups expressed satisfaction with the deal, the Tourism and Transport Forum said it was furious the lower tax would be offset by an increase in the Passenger Movement Charge (PMC).

The Government's original tax plan was expected to recoup $500 million from the backpacker tax. To offset the lower tax rate it will increase the passenger departure tax by $5.

The PMC was first introduced in 1995 and is currently set at $55. It is usually bundled into the cost of transport for passengers departing Australia.

Tourism and Transport Forum chief executive Margy Osmond said the lower backpacker tax rate was "some improvement" but the PMC increase showed the tourism industry was being treated as a "cash cow".

"This is a long way from fixing the problem, effectively its a blatant grab for cash by the Government," she said.

The Government has announced a $10 million fund for the tourism sector to market jobs to backpackers.

Government says deal is fair

Mr Morrison said the package protected the integrity of the budget, and addressed concerns from the sector.

Scott Morrison said the backbench committee was like a "pig in the mud". ( ABC News: Matt Roberts )

It is understood legislation will be required to enact the new tax arrangements.

Regional Coalition backbenchers had become increasingly confident Prime Minister Malcolm Turnbull and Mr Morrison would give ground on the issue.

Earlier this year, Nationals backbencher Andrew Broad first proposed a 19 per cent tax rate.

Labor has refused to say what it would do if legislation came to Parliament.

The Greens are opposed to any change in backpacker taxes, and have committed to vote against any increase.

It is a significant backdown for the Government, which first proposed the change in the 2015 budget, after the tax commission ruled backpackers should not be eligible for the tax-free threshold.

The issue split the Government, with National and Liberal backbenchers calling for a rethink, while Mr Morrison and Agriculture Minister Barnaby Joyce said any unintended negative consequences would be dealt with if and when they arose.

Increasingly dismayed farmers, tourism operators and regional communities said a 32.5 per cent tax on backpacker labour would be a "disaster" at harvest time.

Backpackers make up 25 per cent of the farm workforce each year.

In the Northern Territory, they represent 85 per cent of farm labourers.