The recent Full Federal Court decision of Harding v Commissioner of Taxation is an important tax case for Australian expatriates living and working overseas. The Court analysed two of the tests for when an individual will continue to be a tax resident of Australia.
What happened in Mr Harding's case?
Mr Harding permanently departed Australia in 2009. He started living in an apartment in Bahrain and commuted across the causeway to his permanent position in Saudi Arabia. The plan was that Mr Harding's wife and youngest son would join Mr Harding in Bahrain at the end of 2011, when their second son finished high school in Australia. Until then, Mr Harding's wife would continue to live in the family home on the Sunshine Coast. Mr Harding bought a car in Bahrain for his wife, enrolled his youngest son in school in Bahrain and looked for a family house in Bahrain when she visited. But Mrs Harding never moved to Bahrain, and they subsequently separated, and then divorced.
The ATO assessed Mr Harding on the basis that he was a tax resident of Australia for the 2011 income year.
Tests for Australian tax residency
Under the domestic tax law in Australia, an individual will be a tax resident if they meet any one of the following four tests
1. The person 'resides' in Australia – based on the ordinary meaning of the word 'resides'.
2. The person's domicile is in Australia, unless the Commissioner is satisfied the person's 'permanent place of abode' is outside Australia.
3. The person has actually been in Australia 183 days or more in the tax year (subject to one exception).
4. The person is either a member of the superannuation scheme established by the Superannuation Act 1990 or an eligible employee for the purpose of the Superannuation Act 1976 – or the spouse or child under 16 of that person. This test often applies to commonwealth government employees.
The decision in Harding concentrated on the first two tests.
How does the decision in Harding help Australian expatriates?
Two aspects of the decision should provide some comfort to Australians living and working overseas.
First, the ATO argued that Mr Harding did not have a 'permanent place of abode' outside Australia because his first apartment was only 'temporary' while he waited for his wife and youngest son to join him in Bahrain. The ATO also pointed out that Mr Harding could move by packing his belongings in two suitcases and moving to an apartment on a different floor.
The Full Federal Court rejected the ATO's argument, and concluded that the relevant consideration was whether Mr Harding had abandoned his residence in Australia.
This conclusion may help Australian expatriates living in serviced apartments or hotels on long‑term arrangements, where they can show they have abandoned their residence in Australia.
Second, the ATO argued that a person's subjective intention should not trump objective 'connections' with Australia. The ATO pointed to a list of objective connections Mr Harding continued to have with Australia.
The Full Federal Court concluded that the taxpayer's intention is relevant. In fact, in Mr Harding's case, some of the objective connections supported the conclusion that Mr Harding was not a resident of Australia.
What key risks remain for Australian expatriates living and working overseas?
Australian expatriates who maintain a family home in Australia will continue to be high risk and will need to review their circumstances carefully.
Mr Harding's case was described by the learned primary judge as 'unusual', and it is worth noting that the ATO did not assess the income years after Mr Harding and his wife were separated.
The number of days that a person is physically present in Australia (even if well under 183 days) will continue to be a risk indicator that the ATO will consider.
If a taxpayer is a tax resident of the country where they are living and working, there may be a double tax agreement that applies. The effect of the residency article in double tax agreements is generally to deem the individual to be solely a tax resident of one country rather than another. This is based on a series of 'tie-breaker' tests. The 'tie-breaker' tests vary between the double tax agreements. Care needs to be taken in interpreting double tax agreements, as the rules of interpretation are different to interpreting Australian domestic law.
How to substantiate being a non-resident
The taxpayer's evidence will always be critical to persuading either the ATO, or a court or tribunal, that the person has stopped 'residing' in Australia and has established a 'permanent place of abode' outside Australia.
The non-resident taxpayer must make sure they keep relevant, contemporaneous evidence so that they can support their position in any ATO audit.
Logan J gave an important reminder in the Harding decision – that the facts of a particular case should not be elevated to matters of principle. The law has to be applied to 'the overall circumstances of a given case'.
The critical task for the taxpayer is to ensure that they have sufficient evidence of their 'overall circumstances' so that the legislation can be applied to those particular circumstances.
Cooper Grace Ward is a leading Australian law firm based in Brisbane.
This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.