By Andrew Henshaw

There are many Australian citizens and permanent residents who leave Australia to work overseas (Expats). Expats will often consider they are not a resident of Australia for tax purposes (i.e. a non-resident), and therefore that their ‘offshore’ income should not be subject to income tax in Australia.

In recent times, the ATO has taken a more aggressive approach towards Australian expats, particularly those who transfer money into Australia. On that note, the recent Federal Court case of Harding v Commissioner of Taxation [2018] FCA 837 represents a significant win for the Commissioner. The outcome of this case may mean that many Expats who consider themselves to be non-residents are in fact Australian residents for tax purposes.

Issues considered in Harding case

The Harding case concerned whether Mr Harding was a ‘resident of Australia’ for the income year ended 30 June 2011. Relevantly, Mr Harding would be a resident of Australia for that year, if either:

  • Mr Harding was a resident under the ordinary meaning of the term ‘reside’ (Ordinary Concepts); or
  • Mr Harding did not have a permanent place of abode outside Australia.

Background facts

It is important to note that the question of whether a person is a resident or not invariably involves an extremely detailed inquisition into the life of the taxpayer concerned. While I have summarised what I consider are the most important facts, interested readers should refer to the Federal Court’s decision for a full explanation of Mr Harding’s circumstances.

Mr Harding was an Australian citizen. He held both an Australian passport and a British passport. In 1990, he married his first wife (Mrs Harding). From approximately 1990 to 2006, Mr Harding lived in Saudi Arabia and worked as an aircraft engineer for BAE Systems.

Mrs Harding generally lived with Mr Harding. During this time, Mr and Mrs Harding had two children. In 2004, Mr and Mrs Harding decided to move to Australia (due to the political instability in Saudi Arabia and the Middle East more generally).

In 2004, Mr and Mrs Harding purchased land and constructed a home in Australia (Warana Property). Mrs Harding and her two children moved into the Warana Property in June 2004.

Mr Harding remained in Saudi Arabia until May 2006. From May 2006 until approximately February 2009, Mr Harding lived and worked in Australia.

Move to Bahrain / Saudi Arabia

Mr Harding was not satisfied with the work and lifestyle opportunities which were available in Australia. In February 2009, he received an offer to work in Saudi Arabia. Mr and Mrs Harding agreed that Mr Harding would accept the position, relocate permanently to the Middle East, and that Mrs Harding (and their youngest child) would move to the Middle East at the end of 2011.

From about March 2009 until about February 2015, Mr Harding worked in Saudi Arabia but lived over the border in Bahrain (for lifestyle reasons). Mr Harding took up a lease in an apartment building called ‘Classic Towers’. During the period of 2009 to 2015, Mr Harding moved between three apartments in this building. All three apartments were owned by the same person, and were leased to Mr Harding on a fully furnished basis. The apartments were not ‘serviced apartments’.

Mr Harding had made various plans to relocate his wife and youngest son to Bahrain. However, Mr and Mrs Harding separated in about October 2011 (and divorced in March 2014). Following their separation, Mr Harding formed a new relationship in 2012.

Finally, during the income year ended 30 June 2011:

  • Mr Harding transferred over $168,000 from an overseas account to a joint account held by himself and Mrs Harding in Australia (for family living expenses);
  • Mr Harding and his wife purchased an investment property at Birtinya, Queensland;
  • Mr Harding maintained his Australian private health insurance and Queensland drivers licence; and
  • Mr Harding made four trips to Australia and stayed at the Warana Property for approximately 91 days.

Was Mr Harding a resident under Ordinary Concepts?

The Federal Court made a number of interesting observations regarding the Ordinary Concepts test, particularly in the context of Expats. In particular, that:

  • a person may be resident in more than one place;
  • residency does not require a person to be physically present in a place for the majority of a year;
  • a person may be resident in a particular location even if they are absent for extended periods of time. Their ‘presence’ continues so long as they maintain a continuity of association (e.g. possessions, family etc.) with the place from which they are physically absent; and
  • ordinarily, an individual’s close personal and familial ties will outweigh their employment or business interests.

In Mr Harding’s case, there were a number of factors that indicated his intention to leave Australia for good. In other words, the evidence suggested that Mr Harding had no intention of returning to Australia to live. Further, the Federal Court noted that Mr Harding’s conduct after the 2011 financial year also supported that conclusion (i.e. not returning to Australia when his marriage began to deteriorate). For those reasons, the Federal Court held that Mr Harding was not a resident under Ordinary Concepts.

Interestingly, while there were several unfavourable ‘continuity of association’ factors (e.g. ownership of property in Australia, family in Australia, transfers of money, health insurance etc.), the fact that Mr Harding had left Australia with the intention of not living in Australia again further meant that those continuity of association factors were not enough to make him a resident under Ordinary Concepts.

One test down, one to go.

The Permanent Place of Abode Test

If a person is not a resident under Ordinary Concepts, there are three additional tests that could apply (in Mr Harding’s situation, the 183-day test and the Public Sector Superannuation test were not relevant). Thus, Mr Harding would also be a resident of Australia, if:

  • Mr Harding had an Australian domicile; and
  • Mr Harding did not have a permanent place of abode outside Australia.

In respect of the domicile condition, Mr Harding conceded that he retained his Australian domicile in the relevant income year. For that reason, this article does not discuss the domicile condition further.

The Federal Court discussed the meaning of the term ‘permanent place of abode’ at length. In particular, the Court observed that there are relatively few Australian authorities dealing with the meaning of the expression ‘permanent place of abode is outside of Australia’, and that “the principles which might be derived from those authorities remain unclear”.

Mr Harding’s legal team submitted that a person can have a ‘place of abode’ in a particular country (e.g. Bahrain) rather than at a particular residential location there (e.g. a specific apartment in Bahrain). The Federal Court rejected this argument. The Federal Court then held that a person’s place of abode must be their intended permanent place of abode, at least while they remain in a particular locality. This meant that:

  • if Mr Harding lived in Bahrain but moved from accommodation to accommodation on a regular basis, he would not have a ‘permanent place of abode’ in Bahrain; and
  • on the other hand, if Mr Harding purchased a house and intended to live in it until he left Bahrain at some indeterminate time in the future, he would have a ‘permanent place of abode’ in Bahrain.

Did Mr Harding have a Permanent Place of Abode outside Australia?

Unfortunately for Mr Harding, the evidence suggested that the two bedroom apartment in the Classic Towers apartment complex was merely a temporary place of abode, and was not a permanent place of abode. This was for a number of reasons:

  • Mr Harding was living in rented, fully furnished accommodation which he was able to change quickly and at relatively short notice;
  • prior to the break-up of his marriage, when Mrs Harding did visit Bahrain, she spent time looking for a house to purchase. Thus, neither Mr Harding nor Mrs Harding envisaged the apartment would be the family home when she relocated;
  • Mr Harding changed from a two bedroom apartment to a single bedroom apartment on 10 June 2011 (following the breakup of his marriage);
  • Mr Harding then moved from that single bedroom apartment to another apartment approximately 12 months later (with his new partner); and
  • Mr Harding did not use any of his residences in the Classic Towers complex as an address for correspondence.

For these reasons, the Federal Court concluded that Mr Harding’s presence in the apartments in the relevant income year was ‘temporary’ or ‘transitory’. Thus, Mr Harding had not established a permanent place of abode outside Australia.

Summary of the case

The Federal Court held that Mr Harding was not a resident of Australia under Ordinary Concepts. This was due to his absence from Australia and his formed intention not to return to Australia. However, despite living in the same apartment complex for six years (2009 to 2015), the Federal Court held that Mr Harding did not have a ‘permanent place of abode’ for the income year ended 30 June 2011. This meant that Mr Harding was a resident of Australia for the income year ended 30 June 2011, and subject to income tax on his worldwide income.

Take away points

The takeaway points from this Federal Court decision are as follows:

  • the case is a significant win for the Commissioner (notwithstanding the decision regarding the Ordinary Concepts test). Some Expats who consider themselves as non-residents, may in fact be Australian residents because they do not have a permanent place of abode outside Australia;
  • while everyone’s circumstances differ, accommodation that is fully furnished is generally unlikely to constitute a ‘permanent place of abode’. Australian Expats who wish to ensure they are not an Australian resident should consider more permanent arrangements;
  • in some years, a taxpayer may have a permanent place of abode outside Australia, and not in other years. For example, in Mr Harding’s case from 2012 to 2015, Mr Harding formed a new relationship and his new partner lived with him. Mr Harding may have had a permanent place of abode outside Australia during those years;
  • generally, strong ‘continuity of association’ factors will mean that an Australian Expat will continue to be a resident under Ordinary Concepts. However, this will not be the case if the Australian Expat has no intention of returning to Australia in the future (and this can be evidenced!); and
  • the Federal Court’s analysis of both the Ordinary Concepts and the Permanent Place of Abode tests demonstrates that the application of both tests can be both extremely difficult to apply where a taxpayer maintains a home in one place but works in another.

Ultimately, every residency case turns on its own facts. 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.

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Managing Director

Andrew acts for a diverse range of private businesses, high net-wealth individuals and family groups. He specialises in business structuring, tax disputes and complex tax issues. He is passionate about leading by example, getting wins for his clients, solving difficult legal issues and … snowboarding!


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