Australia’s individual tax residency rules have been a subject of debate for many years, with numerous calls for change.
Most Australian expats who move overseas will be deemed as residing in Australia and unless they can show they have established a permanent ‘place of abode’ overseas, will remain fully taxable in Australia.
So, the critical question is ‘what is regarded as a permanent place of abode?’
Recently, the Commissioner of Taxation applied for special leave to appeal to the High Court against a decision of the Full Federal Court in Harding v FCT  FCAFC 29. The refusal of this request may finally give clarity to the meaning of ‘permanent place of abode’.
The case examined whether Mr. Glenn Gerald Harding was a ‘resident of Australia’ for tax purposes in the income year ended 30 June 2011.
Prior to 2006, Mr. Harding worked in the Middle East for approximately 16 years. In 2006, he returned to Australia with his wife and children to live in the family home in Queensland, leaving again in 2009 permanently to live in Bahrain.
Mr. Harding’s wife and children would remain in Australia and join him following the schooling of his middle child. During this time, Mr. Harding rented a furnished apartment with the intent to buy a larger property once his wife and children joined him.
In 2011 his wife chose to remain in Australia after which time they separated; between 2009 and 2015 Mr. Harding moved between three fully furnished apartments in the same building, while his wife remained in the family home in Australia.
The ATO argued that Mr. Harding did not have a ‘permanent place of abode’ outside Australia because his apartment was viewed as ‘temporary’ while he waited for his wife and children to join him in Bahrain.
Australian income tax residency rules
As an Australian tax resident, you are assessed on your worldwide income, while as a foreign resident you are only assessed on income derived in Australia. To be deemed a tax resident, an individual needs to meet anyone of four tests.
The two tests relevant to this case are the ‘primary test’ – if you reside in Australia you are considered an Australian resident for tax purposes; and the ‘domicile test’ - a person who was born in Australia is domiciled in Australia, unless the Commissioner is satisfied the person’s ‘permanent place of abode’ is outside Australia.
A third test, the ‘183-day test’, while not impacting the final outcome has relevance as a risk factor when considering residency for tax purposes. The ‘183-day test’ states that a person who has been in Australia 183 days or more in the tax year is a resident unless they have a usual place of abode outside Australia and have no intention to take up residency.
The decision of Federal Court
In 2011, Mr. Harding lost the Federal Court appeal against the ATO. It was ruled that Mr. Harding's accommodation in the apartment "was of a temporary nature and type".
Justice Derringtton stated that:
"It was of a kind where he did not put down his permanent roots in the sense of establishing his own home or dwelling”.
Although not deemed a resident of Australia under the ‘primary test’, Mr Harding was found to be a resident under the 'domicile test' as his apartment in Bahrain was viewed as ‘temporary’ and not a 'permanent place of abode'.
Decision of the Full Federal Court
The Full Court went on to reject that decision and concluded that the more pertinent consideration was whether the taxpayer had abandoned his residence in Australia. On the concept of ‘permanent place of abode’ the court decided that it was not the type of dwelling someone lives in that is relevant, but the place or country they reside in.
Justice Logan stated that in this case, Mr Harding's ‘permanent place of abode’ was Bahrain and therefore outside of Australia.
Application for special leave to appeal to the High Court
The Tax Commissioner’s application for special leave was refused on 13 September 2019, with Justice Gordon stating that “requiring a specific permanent dwelling seems impractical given the way we currently live”.
There are no further avenues of appeal for the ATO.
Plan to live and work overseas?
The Harding decision is a significant win for the taxpayer as it expands the scope of ‘permanent place of abode’. The main points to take away are:
- a ‘place of abode’ can be a town or country, rather than a specific dwelling – with the relevant consideration being whether a taxpayer has abandoned their residence in Australia.
- it should be easier for a taxpayer to establish that they are not a resident of Australia for tax purposes if they can demonstrate that they have made a life outside Australia; and
- for tax purposes, an individual’s intention is relevant to whether he or she is deemed to be a ‘resident’ of Australia rather than any ‘connections’ with Australia or facts that were found decisive in other cases. Basically, every taxpayers’ circumstances are different.
Risks for Australian expatriates living and working overseas
Despite the positive outcome in Harding, a few key risks remain for Australian expats when it comes to their tax residency status as those who maintain family or financial ties in Australia continue to be viewed as high risk. The ATO will consider a number of factors to determine residency, not just ‘permanent place of abode’.
The number of days a taxpayer is physically present in Australia (even if under 183 days) will continue to be a risk indicator, the ATO will consider factors such as length, frequency and purpose of visits.
How to substantiate being a non-resident?
The Harding case demonstrates issues taxpayers face with an 80-year-old legislative test in operation that no longer fits with modern-day living.
The Government acknowledges the difficulty in this area and has asked for the Board of Taxation to review Australia’s residency rules for individuals with a view to providing changes to accommodate modern ways of living. The outcome of the Harding case bodes well for future changes in this area; we eagerly await the Government’s response to the Board of Taxation’s review.
The taxpayer’s evidence will always be crucial to convincing the ATO that an individual no longer ‘resides’ in Australia and has established a ‘permanent place of abode’ outside Australia. It is important that this evidence is sufficient to demonstrate that position in an ATO audit and covers both the establishment of a permanent place of abode outside Australia and that they have stopped residing in Australia. A taxpayer may also consider a private ruling to provide certainty on their tax residency status.
Despite the Harding outcome, tax residency remains a complex area and taxpayers considering moving overseas or moving back to Australia should seek professional tax advice as soon as possible.
If you have any questions regarding the Harding Case or tax residency rules, please contact your local RSM office.