Cooper Grace Ward Partner Fletch Heinemann, Senior Associate Murray Shume, and Senior Associate Sarah Lancaster discuss the recent Full Federal Court decision of Harding v Commissioner of Taxation, where the Court analysed two of the tests for when an individual will continue to be a tax resident of Australia. This is a significant tax case for Australian expatriates living and working overseas, they write. Cooper Grace Ward acted for the taxpayer.
On the topic of tax, Cooper Grace Ward Special Counsel Rosalie Cattermole will present on the topic, The New GST & Foreign Resident Capital Gain Withholding Regimes and the Latest Stamp Duty Developments, at the 6th Annual Conveyancing Conference on Tuesday, 19 March in Brisbane.
What happened in Mr Harding’s case?
Mr Harding permanently departed Australia in 2009. He started living in an apartment in Bahrain and commuted across the causeway to his permanent position in Saudi Arabia. The plan was that Mr Harding’s wife and youngest son would join Mr Harding in Bahrain at the end of 2011, when their second son finished high school in Australia. Until then, Mr Harding’s wife would continue to live in the family home on the Sunshine Coast. Mr Harding bought a car in Bahrain for his wife, enrolled his youngest son in school in Bahrain and looked for a family house in Bahrain when she visited. But Mrs Harding never moved to Bahrain, and they subsequently separated, and then divorced.
The ATO assessed Mr Harding on the basis that he was a tax resident of Australia for the 2011 income year.
Tests for Australian tax residency
Under the domestic tax law in Australia, an individual will be a tax resident if they meet any one of the following four tests
1. The person ‘resides’ in Australia – based on the ordinary meaning of the word ‘resides’.
2. The person’s domicile is in Australia, unless the Commissioner is satisfied the person’s ‘permanent place of abode’ is outside Australia.
3. The person has actually been in Australia 183 days or more in the tax year (subject to one exception).
4. The person is either a member of the superannuation scheme established by the Superannuation Act 1990 or an eligible employee for the purpose of the Superannuation Act 1976 – or the spouse or child under 16 of that person. This test often applies to commonwealth government employees.
The decision in Harding concentrated on the first two tests.
How does the decision in Harding help Australian expatriates?
Two aspects of the decision should provide some comfort to Australians living and working overseas.
First, the ATO argued that Mr Harding did not have a ‘permanent place of abode’ outside Australia because his first apartment was only ‘temporary’ while he waited for his wife and youngest son to join him in Bahrain. The ATO also pointed out that Mr Harding could move by packing his belongings in two suitcases and moving to an apartment on a different floor.
The Full Federal Court rejected the ATO’s argument, and concluded that the relevant consideration was whether Mr Harding had abandoned his residence in Australia.
This conclusion may help Australian expatriates living in serviced apartments or hotels on long‑term arrangements, where they can show they have abandoned their residence in Australia.
Second, the ATO argued that a person’s subjective intention should not trump objective ‘connections’ with Australia. The ATO pointed to a list of objective connections Mr Harding continued to have with Australia.
The Full Federal Court concluded that the taxpayer’s intention is relevant. In fact, in Mr Harding’s case, some of the objective connections supported the conclusion that Mr Harding was not a resident of Australia.
What key risks remain for Australian expatriates living and working overseas?
Australian expatriates who maintain a family home in Australia will continue to be high risk and will need to review their circumstances carefully.
Mr Harding’s case was described by the learned primary judge as ‘unusual’, and it is worth noting that the ATO did not assess the income years after Mr Harding and his wife were separated.
The number of days that a person is physically present in Australia (even if well under 183 days) will continue to be a risk indicator that the ATO will consider.
If a taxpayer is a tax resident of the country where they are living and working, there may be a double tax agreement that applies. The effect of the residency article in double tax agreements is generally to deem the individual to be solely a tax resident of one country rather than another. This is based on a series of ‘tie-breaker’ tests. The ‘tie-breaker’ tests vary between the double tax agreements. Care needs to be taken in interpreting double tax agreements, as the rules of interpretation are different to interpreting Australian domestic law.
How to substantiate being a non-resident
The taxpayer’s evidence will always be critical to persuading either the ATO, or a court or tribunal, that the person has stopped ‘residing’ in Australia and has established a ‘permanent place of abode’ outside Australia.
The non-resident taxpayer must make sure they keep relevant, contemporaneous evidence so that they can support their position in any ATO audit.
Logan J gave an important reminder in the Harding decision – that the facts of a particular case should not be elevated to matters of principle. The law has to be applied to ‘the overall circumstances of a given case’.
The critical task for the taxpayer is to ensure that they have sufficient evidence of their ‘overall circumstances’ so that the legislation can be applied to those particular circumstances.
Disclaimer: Cooper Grace Ward Lawyers acted for the taxpayer in this case. Please contact the authors if you have a query about this article or topic.
Partner Fletch Heinemann is in the commercial team and is responsible for managing a significant volume of tax and customs disputes, as well as providing tax advice across a range of commercial issues. Fletch’s technical specialisations include income tax (including international tax and residency issues), GST, payroll tax, land tax, stamp duty and customs duties. His experience includes drafting notices of objection, private ruling applications, AAT appeals and litigation in the Federal Court. In recent years, Fletch successfully acted for the taxpayers in Hacon v Commissioner of Taxation  FCA 659 (ATO’s obligations to give a private ruling), Shadforth Lythgo Pty Ltd v Commissioner of State Revenue GAR098-15 (a payroll tax grouping case), Dempsey v Commissioner of Taxation  AATA 335 (a residency case) and Dominic B Fishing Pty Ltd v Commissioner of Taxation  AATA 205 (an employee/contractor case), and has settled numerous disputes before the matter proceeded to hearing. Fletch has also presented sessions for Television Education Network, CPA Australia, the ATO and the Tax Institute. Before joining Cooper Grace Ward, Fletch was a tax lawyer in Baker & McKenzie’s Sydney office. Prior to that, Fletch worked for a Big 4 accounting firm in the UK and then China. Fletch has been consecutively listed in Best Lawyers Australia for customs and excise law since 2014 and in Doyle’s Guide for tax law since 2015. Fletch was one of four finalists in Australia in the Lawyers Weekly Partner of the Year 2016 and 2017 awards in the taxation category. Contact Fletch at [email protected] or connect via LinkedIn
Senior Associate Murray Shume is in the commercial group and works in resolving tax disputes as well as providing advice on a broad range of income tax and indirect tax issues. Murray specialises in income tax (including international tax, asset betterment cases and residency issues), capital gains tax (including the taxation of compensation payments in the mining and gas industry), employee share schemes, non-commercial losses, GST and payroll tax. His experience includes drafting notices of objections and private ruling applications. He regularly acts for clients in tax related AAT appeals and litigation in the Federal Court. Murray has acted for the taxpayers in Hacon Pty Ltd and Ors v Commissioner of Taxation  FCA 659, Shadforth Lythgo Pty Ltd v Commissioner of State Revenue GAR098-15, Dempsey v Commissioner of Taxation  AATA 335 (residency) and Dominic B Fishing Pty Ltd v Commissioner of Taxation  AATA 205 (superannuation guarantee charge case), and has also settled many disputes before hearing. Before joining CGW in 2012, Murray worked at the ATO specialising in CGT and international taxation. This experience has given Murray a unique perspective on dealing with the ATO during any dispute. Contact Murray at [email protected] or connect via LinkedIn
Senior Associate Sarah Lancaster provides advice and acts for clients in a variety of disputes with the Australian Tax Office and Office of State Revenue. She also acts for clients in a range of customs disputes. Sarah’s technical experience includes representing taxpayers in disputes involving, income tax, international tax, GST, payroll tax, stamp duty and customs duty. Drawing on a background in commercial litigation, Sarah brings particular experience in evidentiary issues relevant to disputes when acting for clients during the audit and objection processes and appeals to the Administrative Appeals Tribunal, Queensland Civil and Administrative Tribunal, Supreme Court of Queensland and Federal Courts. Contact Sarah at [email protected] or connect via LinkedIn