The recent decision of the Federal Court in Harding v Commissioner of Taxation will make it difficult for Australians living and working overseas to be non-residents for tax purposes.
Think you are a non-resident? What happens if you’re not …
Australian tax residents are taxed on their world-wide income. For taxpayers who are living and working overseas, the difference between being a non-resident and tax resident will often mean a significant tax cost.
Under the Australian tax law, a person is a tax resident of Australia if they meet any one of four tests:
- They ‘reside’ in Australia, based on the ordinary meaning of the word ‘resides’.
- They have an Australian domicile, and the Commissioner is not satisfied they have a ‘permanent place of abode’ outside Australia.
- They are in Australia for more than 183 days in an income year (subject to one exception).
- They are members of particular Commonwealth superannuation schemes, which mostly apply to members of the Commonwealth public service and armed forces.
What happened in Harding?
Mr Harding had lived and worked in the Middle East from 1990 to 2006. He returned to Australia to live and work between 2006 and 2009. However, in 2009, he and his then-wife decided to return to the Middle East permanently. Mr Harding secured a full-time permanent role. Their agreed plan was that Mr Harding’s wife would join him with their youngest child once their middle child completed his last year of high school. Mr Harding stayed in furnished apartments in the Middle East on 12-month leases.
In 2011, Mr Harding and his wife separated. His wife decided not to move to the Middle East. They later divorced. Mr Harding continued living and working in the Middle East – and is still living and working there today.
What issues did the Court consider?
There were two issues for the Court to decide:
- Did Mr Harding continue to ‘reside’ in Australia?
- Had Mr Harding established his ‘permanent place of abode’ outside Australia?
Did Mr Harding continue to ‘reside’ in Australia?
Although Mr Harding won on this issue, the Court considered his circumstances to be ‘exceptional’ and made a number of findings that Australian ex-pats should be concerned about.
Mr Harding was found to have admitted (mistakenly) that he was a resident of Australia for tax purposes by the way he completed passenger cards. Mr Harding’s evidence was that he selected ‘resident returning to Australia’ on the cards because he was traveling with his Australian passport and thought he would go through immigration faster. Ultimately, this was not crucial for Mr Harding’s case, because his other ‘exceptional’ circumstances outweighed the comments on the passenger cards.
In determining this issue, the Court endorsed the usefulness of particular checklists to identify factors that are ‘frequently relevant to the determination of the nature and quality of a person’s presence in or association with a particular location’.
These checklists had been used by the ATO and in AAT decisions before the Dempsey case in 2014. In that case, the AAT appeared to provide some relief to ex-pats by confirming that the meaning of the word ‘reside’ has its ordinary English meaning and the legislative test cannot be replaced by a checklist. Harding once again endorses the usefulness of the checklists.
Had Mr Harding established his ‘permanent place of abode’ outside Australia?
The second issue will be the greater concern for many Australian ex-pats, particularly those living in furnished accommodation.
In Harding, the Court decided that Mr Harding’s furnished accommodation was not a ‘permanent place of abode’. This was despite:
- having 12-month leases on residential apartments in the same apartment building; and
- living in the same apartment building for six years.
What does the decision mean for Australian ex-pats?
Harding effectively reverses the favourable decisions for taxpayers that came out in 2014: Dempsey, Agius and Engineering Manager.
Residency is relevant each year – Australian ex-pats should revisit their tax position, even if they have been living and working overseas for many years (as Mr Harding was).