A tax law win for Aussie expats: Full Federal Court clarifies tax residency rules
Assisted by Nicole Monteiro.
When a person maintains a home in Australia but lives and works in another country, it can often complicate the assessment of their status as a tax payer.
A recent decision by the Full Federal Court has now made it easier for Australians living and working overseas to prove they are no longer tax residents of Australia.
In helping to provide some clarity on Australia's current tax residency rules, the Full Federal Court of Australia recently held that:
- When assessing residency of an individual for tax purposes, the phrase 'permanent place of abode' should not be interpreted by reference to the permanence of a person's specific house or dwelling;
- The phrase should be interpreted more broadly in order to consider whether a person is living permanently in a particular 'country or state'; and that
- "There is no incongruity in a person physically living permanently in another country whilst retaining at all times an Australian domicile. For that purpose and critically, what has to be abandoned for the purpose of subparagraph (i) of the definition of 'resident' or 'resident of Australia' under the Income Tax Assessment Act 1936, is not 'Australia' but 'residence' in Australia".
Being a tax resident in Australia means that you are taxed not only on your Australian income, but on all sources of income world-wide. Australian tax residents are also required to pay a Medicare levy and are entitled to a tax-free threshold. By contrast, a non-resident is only taxed on Australian income and is not eligible for the tax-free threshold.
It is important to keep in mind that living and/or working overseas does not necessarily exclude a person from being a tax resident in Australia.
An individual is considered an Australian tax resident if they satisfy one of the following tests:
- The Ordinary Concept Test: the person ordinarily resides in Australia;
- The Domicile Test: the person's domicile is in Australia (a domicile being a place considered by law to be permanent, not temporary);
- The person has been in Australia for at least 183 days within an Australian financial year. A person is classified as being a resident if they are in Australia for half of the financial year, regardless of whether the period was continuous or had been broken up; or
- The person is either a member of an Australian superannuation scheme or an eligible employee for the purpose of the Superannuation Act 1976 - or the spouse or child under 16 of that person.
In the recent Full Federal Court decision of Harding v Commissioner of Taxation  FCAFC 29, which involved an Australian citizen living and working overseas, the Court overturned both the ATO's objection decision (which had determined that Mr Harding was a tax resident of Australia during the relevant tax year of 2011), and the decision of the Judge, who had agreed with the ATO. The Full Court decision primarily focused on the interpretation and application of both the Ordinary Concept Test and the Domicile Test, providing much needed guidance on the requirements of both.
Federal Court decision
Initially, the Federal Court held that Mr Harding had remained a tax resident of Australia in 2011, despite having moved to Bahrain in 2009 to work indefinitely. The Court's primary considerations in finding Mr Harding to be a resident of Australia for tax purposes in 2011, despite having no intention to return to Australia, were:
- the ongoing connection Mr Harding maintained with Australia, including multiple visits to Australia and his local financial affairs; and
- The nature of Mr Harding's accommodation in Bahrain, which was deemed not to be a 'permanent place of abode', despite evidence that Mr Harding's apartment in Bahrain was fully furnished and subject to a long-term lease.
The Federal Court's decision relied on the definition of 'a permanent place of abode' as being either a permanent dwelling or a permanent type of accommodation. The taxpayer's intention to live in his rented apartment only until he could buy a larger house, combined with the fact he was not required to make any substantial acquisitions to live in it, was seen as a significant factor for the Court.
The Court considered these points as having demonstrated that the taxpayer's presence in the apartment complex was for a temporary period of time, as opposed to 'permanent'.
Full Federal Court appeal decision
On appeal to the Full Federal Court, Mr Harding succeeded in proving that he had not been a tax-resident of Australia in 2011. The Full Federal Court analysed the requirements of 'permanency' and determined that both the ATO and the Judge at first instance had erroneously interpreted and applied the definition of 'resident' or 'resident of Australia' in section 6 of the Income Tax Assessment Act 1936.
In determining whether Mr Harding had a 'permanent place of abode' outside of Australia, the Full Court shifted focus away from the type of accommodation that Mr Harding had been living in and instead applied a broader application of the definition. The Full Court took into consideration Mr Harding's permanent living arrangements in a specific state or country, along with his overall circumstances.
The Full Court also rejected the Commissioner's argument that having connections to Australia determined Mr Harding's tax residency status and that it outweighed any other considerations. It was accepted that Mr Harding's intention to leave Australia outweighed his remaining connections to Australia.
The Full Court decision is a win for Australians living and working overseas, as it broadens the interpretation of the taxation residency tests. The Full Court decision in Harding v Commissioner of Taxation  FCAFC 29 now makes it easier for Australians to prove that they are no longer tax residents of Australia when living overseas on a permanent basis. This decision has also brought Australia's tax residency tests into line with the increasingly popular global nature of work practices.
If you would like to discuss any aspect of this article, or you require advice in dealing with an adverse ATO decision, please don't hesitate to get in touch today: