The Australian Taxation Office has suffered a major setback in its interpretation of the residency rules in the recent decision of Harding v Commissioner of Taxation [2019] FCAFC 29 in the full Federal Court of Australia.
Under the Australian Tax system, a Taxpayer who is not a resident of Australia for Tax purposes is only Taxed on their Australian sourced income. They are not subject to Tax on any income sourced from outside of Australia. However, if the Taxpayer is a resident for Tax purposes then they are Taxed on their worldwide income.
Historically the ATO has interpreted the residency rules to cast the net as wide as possible to capture the utmost Taxpayers as residents of Australia.
The statutory definition of 'resident of Australia' under section 6 of the Income Tax Assessment Act 1936 is expanded to include a person 'whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia'.
The ATO have interpreted the phrase 'place of abode' narrowly as meaning the physical structure that the Taxpayer lives in. Consequently, if the Taxpayer does not have permanent accommodation which they live in outside of Australia then they would continue to be a resident of Australia.
It is quite common for Taxpayers to only have temporary accommodation while working in an overseas country despite not returning to Australia for many years.
The full Federal Court held that the ATO interpretation was wrong as the legislation refers to a 'permanent place of abode' and not a 'permanent abode'. The term 'place' in the phrase changes the context from being a person's specific house, flat or other dwelling to that of a country.
The facts in Harding's case were:
- Harding was born in Australia in 1965. He is an Australian citizen with Australian and British passports.
- He moved overseas at a relatively young age and married his first wife, a British woman, in the UK in 1990.
- In 1990 they moved to Saudia Arabia and lived and worked there for 7 years.
- After the September 2001 attacks, Mrs Harding and the children relocated to the safety of the UK for two years and then returned to Saudia Arabia. Mr Harding remained in Saudia Arabia during this time.
- In 2004 Mrs Harding and the children moved to Australia. Mr Harding joined them in 2006.
- In 2009 Mr Harding permanently left Australia and returned to work in Saudia Arabia. The intention was for Mrs Harding and the children to join him. He took up temporary residence in an apartment in a building tower in Bahrain and intended to obtain larger premises when they joined him.
- In 2011 his marriage broke down and so he moved to a smaller apartment in the building tower.
- In 2012 he commenced a relationship with Ms Gonzalez and they took up a larger apartment in the building tower.
- In 2014 Mr Harding moved to Oman. Ms Gonzalez did not want to move and their relationship came to an end.
- Mr Harding married again in 2015 and continues to live in Oman.
The issue before the court was whether Mr Harding was a resident of Australia for Tax purposes for the year ended 30 June 2011. In that year he lived in a two bedroom apartment in Bahrain while awaiting his wife and children to join him. Mr Harding acknowledged that his domicile was still Australia for that year.
The ATO argued that he was a resident of Australia for Tax purposes as his abode outside of Australia was not permanent. He had moved between apartments in the building tower to match his circumstances.
The full Federal Court held that it was the permanency of his place of abode that needed to be considered not his actual abode (being the apartments). They were satisfied that his place of abode was Bahrain. Furthermore, his place of abode was permanent because that was where he lived for six years. It did not matter that his actual abode (being the apartments) were not permanent.
The court said it was not necessary for a person to continue to live in a particular town, suburb or village in a country to be considered to be permanent. The reference to "place" is a country or state.
However, the court said that it did not support the proposition that it did not matter if the person moved between different foreign countries. They needed to identify the specific country in which they were living in permanently.
The decision is good news for Australian expatriates that are still domiciled in Australia but are permanently living abroad in a foreign country. Under the decision, they should be non-residents of Australia for Tax purposes and should not be Taxed on their foreign sourced income.
However, the decision doesn't extend to Australian itinerants that are still domiciled in Australia but move around from country to country. They are still likely to be residents of Australia for Tax purposes and consequently Taxed on their worldwide income.
