Contributed by Andrew Henshaw, Director and Andrea Tran, Associate, Velocity Legal
A taxpayer with an Australian “domicile” is a resident of Australia for tax purposes, unless the Commissioner is satisfied that they have a “permanent place of abode” outside of Australia.
Can a permanent place of abode be a particular dwelling (eg an apartment)? Or can a permanent place of abode be something wider (eg a city, state or a country)?
The Federal Court’s decision in Harding v FC of T 2018 ATC ¶20-660 held that a permanent place of abode must be a particular dwelling. This represented a “big win” for ATO and meant that many Australian expats genuinely offshore could be Australian residents for tax purposes.
The case was appealed. The Full Federal Court (Full Court) handed down its decision on 25 February 2019 (Harding v FC of T 2019 ATC ¶20-685). In a “big win” for Australian expats, the Full Court rejected the strict interpretation of the “permanent place of abode” and held that a permanent place of abode can be something broader than a particular dwelling, such as a city or country.
We explore the reasoning of the Full Court, and the implications of the case, below.
Brief recap of the background facts
The Harding case concerned whether Mr Harding was a “resident of Australia” for tax purposes in the income year ended 30 June 2011. In February 2009, Mr Harding relocated to Bahrain. He worked in Saudi Arabia and lived in Bahrain. Mr Harding and his first wife (Mrs Harding) agreed that she (and their youngest child) would join him in Bahrain at the end of 2011. In the meantime, Mr Harding took up a lease in an apartment building called “Classic Towers”. Between 2009 and 2015, Mr Harding moved between three apartments in Classic Towers, all on a fully furnished basis.
Although Mr Harding made various plans to relocate Mrs Harding and their son to Bahrain, Mr and Mrs Harding separated in about October 2011. After their separation, Mr Harding remained in Bahrain and formed a new relationship in 2012.
Original decision of the Federal Court
The Federal Court held that Mr Harding was not a resident of Australia under the “resides” test. However, the Federal Court held that Mr Harding was nonetheless a resident of Australia. This was on the basis that Mr Harding had an Australian domicile and did not have a “permanent place of abode” outside of Australia.
The Federal Court’s view that Mr Harding did not have a permanent place of abode outside of Australia centred on the Federal Court’s view that a person’s place of abode must be a particular residential location (eg a specific apartment in Bahrain).
Once that view was established, the characteristics of Mr Harding’s accommodation in Classic Towers and his intention to find “more permanent” accommodation once Mr Harding’s family joined him in Bahrain meant that Mr Harding did not have a permanent place of abode outside of Australia. In particular:
- the Classic Towers apartment was fully furnished, which meant that Mr Harding was able to change accommodation quickly and with little notice (ie the living arrangement was temporary and transitory in nature);
- prior to the breakup of their marriage, Mr and Mrs Harding spent time looking for a house in Bahrain when Mrs Harding visited to purchase. In other words, neither Mr Harding nor Mrs Harding envisaged the apartment a permanent living arrangement;
- Mr Harding moved from a two-bedroom apartment into a one-bedroom apartment on 10 June 2011 (following the breakdown of his marriage);
- Mr Harding then moved from the one-bedroom apartment into another apartment in Classic Towers approximately 12 months later; and
- Mr Harding did not use any of his residences in Classic Towers as his mailing address.
Decision of the Full Court
The Full Court rejected the Federal Court’s construction of the phrase “permanent place of abode” as a reference to a specific permanent dwelling (eg a particular house or apartment). The Full Court found that the Federal Court’s focus on Mr Harding’s specific accommodation (ie his fully furnished apartment) was too narrow a construction of a “place” of abode. As Logan J held:
“To adapt an idiom, 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 Australia)”.
The Full Court held that the reference to “place” in the “permanent place of abode test” was not strictly a reference to a person’s specific dwelling, but could instead be the town or country in which a person is permanently residing.
The Full Court found that if a person has definitely abandoned their residence in Australia, there should be no distinction between someone who buys an apartment overseas and someone who lives in a series of temporary flats in the same country (as Mr Harding did). In other words, it is the “wider wood“ that is relevant, not the “particular tree“ (ie the specific accommodation).
Therefore, the fact that Mr Harding’s specific type of accommodation in Bahrain was somewhat “temporary” or “transitory” (because it was fully furnished and Mr Harding intended to move once his family arrived), the Full Court concluded that his “place of abode” was Bahrain.
Bahrain was Mr Harding’s permanent place of abode. Because that place was outside of Australia, Mr Harding was not a resident of Australia for tax purposes in the relevant income year under the “permanent place of abode” test.
This decision is a significant win not only for Mr Harding, but for Australian expats more broadly. The key takeaways from the Full Court’s decision are as follows:
- temporary accommodation does not preclude a taxpayer from having a permanent place of abode overseas. A “place of abode” can be a town or country, rather than a specific dwelling;
- if an Australian living or working overseas can establish that a particular town or country outside of Australia is their permanent place of abode, it may now be easier for them to establish that they are not a resident of Australia for tax purposes; and
- whether a person is a “resident” of Australia for tax purposes must be based on a holistic assessment of their circumstances, rather than based on “checklists” or facts that were found decisive in other cases. In other words, every taxpayers’ circumstances are different, and no shortcuts can be taken.
Tax residency reform
The current Australian tax residency law was introduced in 1930 and has largely remained unchanged. The Board of Taxation concluded in August 2017 that the current individual tax residency rules are “no longer appropriate and require modernisation and simplification”.
While Mr Harding ultimately won against the ATO, it took two Court cases to get to that outcome (not to mention audits, objections, position papers, etc). The case highlights the fact that reform (ie simplification and clarification) to Australian tax residency law is necessary.
Thinking of going overseas?
The Full Court’s decision expands the scope of “permanent place of abode” and is a big win for Australian expats. However, every tax residency case will continue to turn on its own facts. Further, tax residency remains a notoriously grey area, full of concepts like “resides”, “domicile”, “permanent place of abode” and “usual place of abode”.
Taxpayers considering moving offshore, remitting funds to Australia, or moving back to Australia should seek professional advice at the earliest opportunity. Private rulings should also be strongly considered, to provide comfort and certainty on a person’s tax residency status.
[This article was originally published in CCH Tax Week on 8 March 2019. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]