The Commissioner has applied to the High Court for special leave to appeal the Full Federal Court’s decision in Harding v Commissioner of Taxation [2019] FCAFC 29. The Full Federal Court decision is discussed below.

20 March 2019

The Full Federal Court has unanimously allowed the appeal in Harding v Federal Commissioner of Taxation [2019] FCAFC 29. Harding is an important Australian tax residency decision for Australian expatriates who work overseas but maintain family or financial ties with Australia.

The case is striking because the taxpayer had lived outside Australia for 17 of the previous 20 years, and yet the ATO argued he was still a resident of Australia under our rules, which nicely demonstrates that the tax residency rules for individuals leaving Australia are complex and can result in uncertainty. Individuals who work overseas whilst maintaining a connection with Australia must navigate complex statutory and common law principles of tax residency such as ‘resides’, ‘domicile’, ‘permanent place of abode’ and ‘usual place of abode’ each year to determine whether they are a resident of Australia for tax purposes. The existing law on tax residency is the subject of review by the Board of Tax, as discussed in our previous Riposte.

The Harding case concerned an individual born in Australia who moved to Bahrain indefinitely to work in Saudi Arabia. Harding appealed the Federal Court’s decision where the primary judge held that although Harding intended to permanently depart Australia to work and reside in the Middle East, and that he was not a ‘resident’ under the common law, the Commissioner could not be satisfied that his permanent place of abode was outside Australia. The Federal Court decision was discussed in our prior publication on 27 July 2018.

At first instance, the Federal Court primarily decided that Harding was a ‘resident’ for tax purposes on the basis that ‘permanent place of abode’ was interpreted to refer to the specific house, apartment or address. At first instance, the Federal Court decided that without having a permanent house or apartment, regardless of an intention to permanently depart Australia, an individual is a ‘resident’ and will be taxed in Australia on their income for that year. So he was in a curious position: he could establish he had abandoned Australia but he could not also demonstrate he had acquired another ‘permanent place of abode’ in Bahrain.

Helpfully, in overturning the decision, the Full Federal Court held that the word ‘place’ in ‘permanent place of abode’ invites consideration of the town or country in which an individual physically lives in ‘permanently’. Provided the individual has permanently left Australia, it is not a requirement that a particular house or apartment in that foreign country is lived in. That is, the use of rented accommodation which is short term will not definitively subject Australian expatriates to the Australian tax net.

Other factors that were informative that Harding was not a ‘resident’ of Australia included:

  • since his departure, he did not intend to return to Australia;
  • his visits to Australia were for the purpose of visiting his family and not to return ‘home’;
  • he leased his apartment in Bahrain long-term (albeit different apartments in the same building complex); and
  • even though he retained substantial financial connections to Australia (the family home, an investment property, bank accounts, investments in Australia funds) ‘where a person maintains investments may, in these days, have little bearing on where a person resides.’