The Full Federal Court of Australia has ruled in favor of the taxpayer (Mr. Harding), finding he was a non-resident of Australia while working and living overseas for several years, despite retaining a home in Australia where his family resided.
The Full Federal Court decision provides a welcome update on interpreting of the definition of residence. It highlights a checklist-type approach cannot be used, with a determination of substance being crucial. It also reinforces the importance of the taxpayer’s intention when leaving Australia as well as their presence overseas.
The Board of Taxation has been undertaking consultation on proposed changes to the tax residency rules in Australia which, if given effect, would introduce ‘bright-line’ tests to overcome the need for interpretation of some of the matters that were influential in this case.
The Harding case
Mr Harding had lived and worked in the Middle East for many years before temporarily returning to Australia with his family. He left Australia to work in Saudi Arabia while his wife and family remained in the family home. At the time he left Australia, it was on the understanding that his family would join him at a later stage.
On this basis, Mr Harding rented a serviced apartment as temporary accommodation in anticipation of moving into more permanent accommodation once his wife and children moved over. When he separated from his wife in 2011, he moved into another serviced apartment within the same apartment complex. The apartments were fully serviced meaning that Mr Harding did not need to personally supply many household items or accoutrements and so when he moved apartments, he only needed to pack and relocate his clothes and personal belongings.
The ATO audited Mr Harding and assessed his 2011 tax return as a resident return and included the foreign source employment income on this basis. The taxpayer appealed but the Federal Court originally found that while not ‘residing’ in Australia according to ordinary concepts, he remained domiciled in Australia and failed to establish a permanent place of abode outside Australia. This was despite the court accepting that he had no intention of returning to Australia. Significant to this finding was the assertion that Mr Harding’s accommodation overseas was only ever temporary as all the furniture and fittings of the apartment were supplied under the lease agreement.
On appeal, it was held that the original judgement adopted too narrow a conception of ‘permanent place of abode’. While Mr. Harding was living in somewhat temporary accommodation, it was entirely consistent with that settled purpose and a conclusion that his permanent place of abode was in Bahrain. The Court ruled that the ‘place’ of abode, in the specific legislative context, refers to a town or country and that Bahrain would be considered the ‘place’ to satisfy the permanent place of abode test.
The unchallenged finding of fact in this case that Mr Harding left Australia in 2009 intending to leave permanently confirmed the original verdict that Mr Harding was not residing in Australia according to ordinary concepts, despite his family living in Australia in the family home, and Mr Harding continuing to send funds back to Australia. The decision is a clear rejection of the ATO’s practice of assessing an individual’s residency based on that of their family.
EY’s submission to the Board of Taxation
In September 2018 the Board of Taxation released its Consultation Guide to canvass views on the key recommendations from its residency review, with the objective to focus on certainty, simplicity and integrity.
While supportive of reform and greater certainty for taxpayers, their employers and advisers, we strongly endorse a principles-based approach. To balance the fairness and revenue-neutrality would require considerable additional work on a legislative solution. As an immediate interim measure, many of the existing difficulties can be addressed through updated rulings and a revised approach to source. This is likely to be more cost-effective and avoid significant disruption and uncertainty through clarification of numerous new definitions and tests.
There is evidence that modernized and practical guidance released by authorities can provide more certain, simple and predictable outcomes for taxpayers and tax offices alike. HMRC6 was practical and objective guidance issued in the UK prior to the introduction of the Statutory Residence Test, which based on our UK experience, provided a more practical guide to easily defining an individual's tax residency.
Mr. Harding’s case demonstrates the need for detailed analysis when working through the current residency rules. The case is an important precedent, with the most detailed discussion to date of key aspects of interpreting the residence tests by the Full Federal Court. The finding in favour of the taxpayer is reassuring in the context of the ATO taking a very broad approach.
With more to come regarding the Board’s residency reforms, we will continue to actively engage in discussions with the Government and Board in this regard.
Should you have any questions, please contact your EY representative or any of the contacts below.
EYG no. 001043-19Gbl
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