The government said it would defer for six months an increase on the tax to a flat 32.5 per cent rate that was due to start on July 1.

The increase was announced in last year’s federal budget but has sparked an ongoing headache for the Coalition after the National Farmers Federation (NFF) launched a ferocious public campaign in January, backed by tourism groups, to soften the increase.

The review into the tax arrangements and supply for working holiday makers will be led by Federal Agriculture and Water Resources Minister Barnaby Joyce.

She said the review would look at making sure Australia is internationally competitive with its visa arrangements and issues are also addressed concerning the taxation and supply of working holiday makers and the broader impacts for the farm and tourism sectors.

She said any outcomes of the review would be considered by cabinet in October or November this year and any changes would commence from January  1.

Ms O’Dwyer said the deferral and review had shown the government had “listened” to rural and regional communities and in the tourism sector and Coalition members who had warned about negative impacts of the tax increase.

She played down suggestions the government had not done its homework ahead of the increase in last year’s budget, saying she was announcing a much broader review to look closer at the issues.

The deferral will have a budget impact of about $40 million, she said.

“It affects all of Australia which is why we are absolutely committed that this needs to be a whole of government review.”

Ms O’Dwyer said the announcement of the deferral provided backpackers with confidence they could come to Australia and work and travel and make a contribution to regional communities either in jobs like working picking grapes or working in the tourism industry.

“They can enjoy their time in Australia and at the same time make a wonderful contribution,” she said.

“The government has announced that they will not be treated as non-residents for tax purposes for the next six months – I can say that with absolute certainty.

“I can tell you with great certainty that this is very good news for rural and regional communities; it’s good news for our tourism sector; and it’s good news for working holiday makers.”

Anxious rural MPs have lobbied Treasurer Scott Morrison and Mr Joyce intensely amid fears the tax hike will reduce seasonal farm workforces and other fragile labour supplies, in rural and remote communities.

Most Coalition MPs have agreed with Mr Morrison’s view that working holiday makers should pay some form of taxation but have pushed back on the 32.5pc.

Concerns have been raised that the increase was announced without proper consultation or consideration of impacts.