With the ever increasing globalisation of trade and commerce, the geographic mobility of many employees has also followed suit. It is these taxpayers that can pose a challenge when attempting to categorise them especially when they retain assets such as real property in Australia and leave family members behind while living abroad for extended periods of time.
Australia’s tax system is what we refer to as a residence or territorial based system. Australian residents for tax purposes are taxed on their worldwide income from all sources whereas non-residents are taxed by Australia on their income from Australian sources.
Of course it can be much more complex than this, however for the purposes of this article we can keep it that simple. The case we are going to discuss goes to the fundamentals of tax residency and displays exactly why there has been so much debate over the complexity found in what should be the baseline of tax residency.
On 22nd February 2019, in Harding v Commissioner of Taxation [2019] FCAFC 29 (Harding’s Case), the questions at issue related to the first two tests (of four) of what it means to be a ‘resident of Australia’ for tax purposes, s 6 of the Income Tax Assessment Act 1936:
resident or resident of Australia means:
(a) a person, other than a company, who resides in Australia and includes a person:
(i) whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia;
Residency questions always come down to the specific facts around each set of circumstances. The trouble being that there is no definitive list of the facts and circumstances to be considered nor is there any hard and fast rule of which facet will be determinative. The best we can do is follow the logic laid down in earlier judicial decisions and attempt to apply this logic to the full gamut of residency indicators.
To highlight the uncertainty, it is possible and does often occur, that both sides, the taxpayer and the Commissioner, will point to the same fact as being evidence of residency and non-residency depending on who is doing the pointing. Which makes for some tough reading.
In Harding’s Case the outcome meant the difference between tax and no tax for the 2011 income year. Saudi Arabia (where his employer was located) does not levy income tax on residents of the neighbouring Gulf state of Bahrain (where Mr Harding lived).
As stated above the facts are all important and there are often a very many of them in cases such as these; we will only provide a broad summary but for those who are interested you can find them in the case linked above.
Mr Harding and Family
Mr Harding has had a long association with the Middle-East, working variously for defence and aerospace companies as well as vocational and tertiary education businesses.
Mr and Mrs Harding lived in the Middle-East together until, due to political instability in the region post 11th September 2001, Mrs Harding and the children left to return to her native UK. She and the children briefly returned to the Middle-East in August 2003 and lived with Mr Harding. This was short lived and they then decided to build a family home in Australia in 2004. Mr Harding’s place of birth and nationality. At the time the intent of both parents appeared to be that Mrs Harding and the children would wait out the turmoil in the Middle-East, after which they would re-join Mr Harding who stayed behind in the Middle-East.
Finally, in 2006 Mr. Harding came to Australia to be with his family and worked at a significantly reduced salary on the Sunshine Coast for 3 years, however in March 2009 he once again took a position in Saudi Arabia for a better salary.
The family joined him in July 2009 to line up school enrolments and purchase a car for Mrs Harding in readiness for the family to join Mr Harding.
In 2011 Mrs Harding decided she would not go to the Middle-East to live. Mr Harding visited often to see his family and to continue to try to convince her to move back overseas with him. Each time he travelled to Australia he ticked his passenger card to say he was an Australian resident returning home.
Instead of changing her mind they ultimately got divorced.
Mr Harding had never purchased property in Bahrain and made a habit of living in temporary accommodation in the form of fully furnished serviced apartments whereby he could relocate simply by loading up a ‘couple of suitcases’. Which he did on a number of occasions within the same building. The primary reason Mr. Harding advanced for these arrangements was so he could scale his home to accommodate his family when they finally returned but in the meantime while living alone he did not need so much space.
His intent, pre-divorce, had been to purchase a family home in the Middle East once his family had joined him and settled in.
In 2012 Mr Harding commenced another relationship which ceased in 2014 upon him accepting a new offer of employment in Oman. Then in 2015 he remarried, to a third woman he met in Oman.
During all of this time Mr. Harding held a range of Australian assets including a half share in the family home up to the time of his divorce from the first Mrs Harding.
At the appeal The Full Federal Court discussed two aspects of Australian tax residency:
- The ordinary meaning of the word "resides"
And
- The phrase " a permanent place of abode outside of Australia”
Ordinary meaning of "Resides”
The ordinary meaning for the word resides means:
"to dwell permanently for considerable time, to have one’s settled or usual abode, to live in or at a particular place”.
Both the single judge Federal Court and then the Full Federal Court held that Mr Harding did not reside in Australia as per the ordinary meaning of the word. They reaffirmed the long tradition of opinion that much weight needs to be given to a taxpayer’s intention. It was clear to both courts that Mr Harding’s primary priority at all times was his employment, with his relationships a secondary concern as evidenced by his subsequent conduct.
The Commissioner tried to argue that the objective connections with Australia should be evidence that Mr Harding was a resident of Australia.
Some of these objective connections raised were that Mr Harding:
- Had a family home in Queensland
- Worked in the Middle East under a contract which:
- Was for limited time periods and could be terminated without notice
- Required his employers approval to extend
- Gave the employer the right to make him leave Saudi Arabia or move to a different location at the end of the contract
- Had investment properties in Australia
- Had Bank accounts in Australia and sent money home to the family
- Stayed in the family home while visiting for substantial periods of time, including 4 trips to Australia during the year totalling 91 days
- Declared he was an Australia resident returning home on his passenger cards
The court concluded that the objective connections advanced by the Commissioner either, actually reinforced that Mr Harding did not reside in Australia, or were insufficient to overcome the significance of Mr Harding’s subjective intention to leave indefinitely.
"Permanent place of abode”
Where the appeal differed from the lower court and how Mr Harding was ultimately successful was due to a different characterisation and significance of his use of temporary accommodation. The Full Federal court disagreed with the earlier decision that the leased apartments lived in by Mr Harding were inadequate to be a "permanent place of abode”.
The court held that when interpreting the legislative meaning of "permanent place of abode” in this context it can also refer to a town or country. The judges discussed that the word "place” should be read as including reference to a country:
"That rationale is that a person domiciled in Australia is not to be made subject to federal income tax when they have abandoned in a permanent way their Australian residence. For the promotion of that rationale, it is unnecessary for the taxpayer to live outside of Australia in any particular way. It follows that the word "place” should accordingly be read as including a reference to a country or state.”
The court also affirmed the argument of Sheppard J in Applegate v Commissioner of Taxation [1978] NSWLR 126:
"The question is whether the taxpayer in a given case has satisfied the Commissioner that he has a permanent place of abode outside Australia. (…) I do agree – "place of abode”’ may mean the house in which a person lives or the country, city or town in which he is for the time being to be found. I am of the view that the latter is the meaning of the expression used in s. 6(1.) of the Act. Thus a person might be correctly said to have a permanent place of abode in, say, Vila, notwithstanding that during a given period he lived in a number of different establishments occupying each for only a relatively short period. His case is no different from one where a person, such as the appellant here, lives, for a substantial period, in the same house. Leaving aside for the moment the effect to be given to the word "permanent”, it is correct, in the present case, to say that the appellant’s place of abode as from 8th November, 1971, until the end of the income year in question and beyond, was Vila, not overlooking the fact that the first two weeks of this period were spent, not in a house, but in temporary quarters in an hotel. During the whole of that period his place of abode was outside Australia and at Vila in the New Hebrides.”
The court found that living in the serviced apartment in 2011 instead of permanent housing is not determinative of residency even when the accommodation was temporary, Mr Harding’s intention was to purchase a family home at that time and therefore strengthened the view that Mr Harding’s permanent place of abode was outside of Australia.
Australia’s tax residency rules are currently undergoing a consultation process with the hoped for outcome being a bright line test that makes it much clearer to taxpayers as to exactly what set of facts render you a resident of Australia for tax purposes.
If you are contemplating a change to your living arrangements that could affect your residency for tax purposes I encourage you to contact us as soon as possible so we can assist.
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