Here and there: Residency for tax purposes
Determination of residency in Australian taxation law is a complex collection of four separate tests any one of which may deem a person to be a tax resident. A recent decision of the Federal Court1 will not only surprise but concern many tax professionals; particularly comments on Taxation Office Checklists and standard passenger cards.
Mr Harding is an Australian national who spent over 15 years living and working in the Middle East prior to 2006. For much of that time his wife and children lived in the Middle East with him but, consequent upon some social and political upheaval his family moved to Australia in 2004. In 2006 Mr Harding joined them and he did not like the change. Less than three years later he sold his car and his boat and packed up all his personal belongings and moved to Bahrain with no intention of returning to live in Australia in the foreseeable future.
They planned for Mrs Harding to follow with their youngest son when his older brother completed year 12. Mr Harding took a two bedroom apartment and his wife visited several times. They looked at houses to buy and enrolled the younger boy in the British School. Then the relationship broke down and Mrs Harding decided not to move to Bahrain.
As she had stopped visiting Mr Harding moved to a single bedroom apartment in the same building. He continued to support his wife and family in Australia and maintained the house they lived in. He also visited occasionally to see his children although most of his holidays were taken in other jurisdictions. Mr Harding never returned to live in Australia after leaving in 2009 and did not intend to do so.
The Commissioner assessed him for tax as a tax resident of Australia for the year ended 30 June 2011. Mr Harding objected and the Commissioner disallowed the objection. Mr Harding applied to the Federal Court to determine the matter.
The court considered two of the four tests of residency as applicable to Mr Harding and found that he was not a resident under the ‘Ordinary Concepts’ test. That is, he was not actually present in Australia and he had no intention to live in Australia. In reaching this conclusion Derrington J considered various factors.
His Honour did not concur with comments of the AATA in Re Dempsey2 indicating checklists provided by the Australian Taxation Office could be relied upon as an evaluative tool which assists in ascertaining whether a person has a connection with a particular location as a resident. Another departure from a previous decision of the tribunal3 was the emphasis his Honour put on copies of outgoing and incoming passenger cards signed by Mr Harding in the relevant year. These had been filled in by Mr Harding ticking the box for resident of Australia which was described as an ‘admission’ of his residency during the relevant year.
The other test to be considered was the ‘Domicile’ test. That is an expansion of the concept of resident to include a person whose domicile is Australia unless he or she has established a permanent place of abode elsewhere. Mr Harding conceded that he had Australian domicile but said that he had established a permanent place of abode in Bahrain.
His Honour noted that there is no straightforward answer to the question of domicile and that reasonable persons may differ as to the correct interpretation. Taking into account the objective facts of habitation and actual intention his honour concluded that Mr Harding had not established a permanent place of abode outside Australia.
Key facts in reaching this conclusion were that some of Mr Harding’s correspondence was still sent to the Australian address and when Mrs Harding visited him in Bahrain prior to the break up of the marriage they looked for a house to buy indicating that the apartment was a temporary not a permanent place of abode.
This is a significant departure from earlier decisions particularly those of the AATA in Re Dempsey and Engineering Manager and should be carefully considered by anyone advising Australian ex patriates.
1 Harding v Commissioner of Taxation [2018] FCA 837.
2 Re Dempsey and Federal commissioner of Taxation (2014) 98 ATR 698.
3 The Engineering Manager and FCT [2014] AATA 969.