High Court confirms Full Federal Court’s Harding tax residency ruling

The ATO’s application for special leave in the residency matter of Harding v Commissioner of Taxation has been refused by Australia’s High Court. This means the decision of the Full Federal Court (FFC) holds, which essentially provides a wider interpretation of the meaning of “permanent place of abode” than had previously been the case.

It also means it is going to make it easier for expatriates to prove that they are non-residents for tax purposes. The FFC concluded, and now appears to establish the principle, that a permanent place of abode need not be the same particular dwelling (that is, the same apartment, unit or house) in a foreign country.

To re-cap, in February the FFC overturned a Federal Court decision that had ruled a taxpayer was a resident. The Federal Court decision held that the taxpayer, who had lived and worked in the largely tax-free Arabian Peninsula, was a resident for tax purposes on the basis that the home he had established there (a rented fully-furnished apartment) was not sufficiently permanent.

The FFC disagreed with this prior decision, which held that the taxpayer was a non-resident and should therefore only have to declare his Australian sourced income, not his worldwide income.

The facts behind the case
From 1990 until 2006, Glenn Harding had worked in Saudi Arabia. His wife and small children relocated to Australia in 2004 and Harding joined them two years later. He stayed and worked in Australia until 2009 but then returned to Saudi Arabia after taking up a new position on a substantially increased and tax-free salary.

Harding deposed that when he left Australia in March 2009 he did so with an intention to live and work in the Middle East permanently or, at least, indefinitely.  He said he had no fixed intention of when or if he would return to Australia.  He also claimed that he expected that his wife and their youngest son would join him towards the end of 2011 and that they would live with him.  He further said that when he left in March 2009 he did not expect to ever live in his Australian property again.  For that reason he took his clothes, suits and other personal belongings with him to the Middle East. He sold all of his significant personal possessions in Australia including his boat and his car. 

Although he worked in Saudi Arabia, he lived in neighbouring Bahrain. In Bahrain, he rented fully furnished two-bedroom apartments. During the course of living there, he did not make any substantial domestic acquisitions to use in these apartments. The plan was that his wife and children would join him in 2011 when one of his children was due to finish middle school at which point he would purchase a larger Bahrain property in which to live. However, in 2011, his wife decided to remain in Australia and the couple separated shortly after.

The initial Federal Court decision held that Harding’s fully furnished apartment in Bahrain did not demonstrate that his permanent place of abode was outside Australia because it was not sufficiently permanent in nature. In the five or six years during which Harding lived in Bahrain, he resided in an apartment building called “Classic Towers”.  He always rented and moved from apartment to apartment but remained located in the same unit block. As the apartments were fully furnished, he did not make any substantial domestic acquisitions to use in the apartments. Initially, he rented a two-bedroom apartment because he believed that his wife and children would visit him from time-to-time.  He remained in that apartment from 10 June 2009 until 9 June 2011 (that is, right up until the end of the relevant income year).

While the single judge focused on the specific type of accommodation (a rented apartment, rather than any permanent ownership interest or long-term lease of a residence) and deemed it not to be sufficiently permanent, the FFC considered that this interpretation was too narrow. Instead, the FFC ruled that the permanent place of abode test should not be determined by reference to whether a person is located at a specific place and whether they rent or own that place, but rather whether they are living in an overseas country permanently. That Harding had lived in Bahrain for a number of years (including five or six in the same unit block), and was looking to purchase a larger property once his family arrived, was consistent with his permanent place of abode being in Bahrain. He was, according to the FFC, living in Bahrain with sufficient permanence.

Board of Taxation’s residency recommendations
The decision in Harding comes at the same time as the Board of Taxation continues with its review of the income tax residency rules for individuals. Note also that the above reasoning has already been applied in an Administrative Appeals Tribunal matter, Handsley and Commissioner of Taxation [2019] AATA 917 (see more here).

Post a comment