When is a person living overseas no longer a resident for tax purposes? A recent decision of the Full Federal Court provides an interesting perspective but will the Tax Office accept the determination or apply for special leave to appeal the High Court for reconsideration – Watch this space.
In Harding v Commissioner of Taxation [2019] FCAFC 29, the Full Federal Court allowed an appeal by a taxpayer after he disputed the Court’s earlier determination that he was an Australian tax resident.
Mr Harding was an Australian citizen who had worked in the Middle East for over 15 years. In 2006, he returned to Australia to live with his wife and children, but later relocated to Bahrain in 2009 to pursue a work opportunity in Saudi Arabia.
The ATO sought to have Mr Harding pay Australian income tax in respect of the salary paid to him for the 2011 financial year. In doing so, the ATO asserted that despite being employed in Saudi Arabia, Mr Harding was an Australian tax resident pursuant to section 6 of the Income Tax Assessment Act 1936 (Cth).
Relevantly, section 6 provides that a ‘resident of Australia’ is a person who ‘resides in Australia’ (the resides test) and includes persons ‘whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside of Australia’ (the permanent place test).
In assessing his taxpayer status, the court heard that in Bahrain, Mr Harding leased a fully furnished 2-bedroom apartment. During that time Mr Harding’s wife and children remained in Australia and he regularly returned to visit them. It was his intention that his family would later relocate to join him, upon which he would purchase a larger property to serve as the family home. However, in 2011 his marriage broke down and so Mr Harding instead moved to a smaller apartment in the same building.
The resides test
At both instances the court was satisfied that Mr Harding did not reside in Australia, noting that Mr Harding did not intend to return to Australia after his departure in 2009 and that despite having a place to stay in Australia, Mr Harding did not treat this place as his home.
In doing so, the court rejected the Commissioner’s contention that Mr Harding’s Australian citizenship, bank accounts and his family’s retention of his Australian property, were sufficient to establish a finding that he considered Australia to be his home.
The permanent place test
At first instance the primary judge found in favour of the ATO, ruling that Mr Harding did not satisfy the ‘permanent place of abode test’ as the rented Bahrain apartment was only temporary.
However, on appeal the full court was satisfied that the primary judge had applied a ‘too narrow conception’ of what constituted a ‘permanent place of abode outside of Australia’.
In doing so, the court held that the temporary nature of the accommodation did not render it incapable of proving ‘permanent’. That is, the court held that this test should not be determined by reference to whether a person is permanently located at a specific house, flat or dwelling, but rather ‘permanent place’ requires the identification of a country or state in which the person is living permanently.
Here, Justice Logan noted that “… to focus on whether a particular tree (temporary accommodation) is present runs the risk of losing sight of the fact that this tree forms part of a wider wood (permanent place of abode outside of Australia).”
Ultimately, the court was satisfied that Mr Harding lived in Bahrain in 2011, because, among other factors, he had:
- Enrolled his youngest son in a Bahrain school for the 2011 year;
- Purchased a second car for his wife to drive upon relocating to Bahrain;
- Attempted on several occasions to convince his wife to join him in Bahrain as originally planned; and
- Expressed no intention of leaving his Saudi Arabian based employment.
This decision comes in the wake of the Government’s impending consideration of the Board of Taxation’s review of Australian residency rules for individuals. It signals a positive outcome for all Australian’s living and working abroad, namely that they will not automatically be treated as Australian tax residents. However, it will be interesting to see if the ATO seeks special leave to appeal this decision to the High Court.
