Australia: Federal Court decision highlights the urgent need for change to income tax residency rules for individuals

Last Updated: 24 August 2018
Article by Anthony Pointon and Robert Gordon

In the recent decision of the Federal Court in Harding v Commissioner of Taxation [2018] FCA 837, it was found that Mr Harding, an Australian citizen who lived and worked abroad for various periods, but focusing on March 2009 to February 2015, was a resident of Australia under the expanded definition of resident in s 6 of the Income Tax Assessment Act 1936 (ITAA 36), in the year under consideration (2011).

Subsequent to the handing down of the decision in June 2018, the Government released the Board of Taxation's (BOT) self-initiated review into the topic, which they were given in August 2017.

The case provides a shining example of why the rules on tax residency for individuals in Australia need to change, as the BOT has recommended.


Mr Harding, an aircraft engineer, lived with his first wife for about 7 years in Saudi Arabia while working for BAE Systems. Mr Harding and his wife had 2 children during this period.

Due to escalating geo-political instability across Saudi Arabia and the region, Mr and Mrs Harding relocated to Australia, where they built a house and had a third child.

Mr Harding spent three years in Australia but, dissatisfied with his reduced salary and, as a result, more modest lifestyle, returned to the Middle East in March 2009 to live in Bahrain, leaving his family behind in Australia. While living in Bahrain, Mr Harding continued to commute daily to work in Saudi Arabia, across the causeway.

Mr Harding made return trips to Australia each year to visit his family, including one trip of 91 days where he tried, unsuccessfully, to persuade his wife to re-join him overseas. They subsequently separated and divorced. He then formed a relationship with a Ms Gonzales in Bahrain, but when he went to work in Oman in 2014, she would not go, and subsequently he married another woman who he met in Oman.

In December 2015, the Commissioner of Taxation issued Mr Harding a Notice of Amended Assessment, stating that he was a resident of Australia and therefore required to pay tax on his overseas sourced income. Mr Harding's objection to the Amended Assessment was disallowed in an Objection Decision made by the Commissioner in 2017, and the matter then came before Justice Derrington of the Federal Court.


"Ordinary Concepts test"

Justice Derrington held that Mr Harding did not reside in Australia under the "Ordinary Concepts test" in the relevant income year.

While Justice Derrington agreed with the Commissioner that there were many factors that indicated Mr Harding was a resident of Australia under this test, including the fact that he made return trips to Australia to visit his family, his financial affairs remained substantially located in Australia, including his continued ownership of the family home, and he stated on passenger cards that he was an "Australian resident departing temporarily", he was satisfied that on balance, the evidence established that Mr Harding's actual intention was to permanently or at least indefinitely leave Australia and resume living and working in the Middle East.

Mr Harding was therefore not a resident of Australia based on the "Ordinary Concepts test".

"Domicile test"

Ultimately, however, Justice Derrington found that Mr Harding was a resident of Australia. This was based on the expanded definition of "resident" in s 6(1)(a)(i) of the ITAA 36 (the "Domicile test), which provides that a person is a resident if their domicile is in Australia, unless the Commissioner is satisfied that the person's "permanent place of abode" is outside Australia.

Note that the taxpayer conceded that his domicile was in Australia. His evidence was that he did not intend to stay indefinitely in any particular Middle Eastern country and that ultimately he may return to Australia1. Therefore, the Court was only required to consider the "permanent place of abode" limb of the "Domicile test".

After deliberating extensively on the proper construction of the test2, Derrington J decided that the test is concerned with the "enduring quality" of the person's living arrangements in a foreign country.

In this case, Derrington J paid special consideration to Mr Harding's living arrangements, including the fact that Mr Harding lived in a serviced apartment in Bahrain, but was able to quickly relocate to one of the two other apartments leased from the same landlord in the building on a number of occasions, and appeared not to use his Bahrain residence as an address for important correspondence. These types of factors indicated, according to the Judge, that Mr Harding's accommodation was of a temporary nature, and lacked many of the accoutrements that demonstrate a permanent abode.

Accordingly, the Court held that Mr Harding failed the "permanent place of abode" limb of the "Domicile test".

This result is rather odd after the finding that he had a lease which governed his accommodation throughout the period1. It also seems to have made a value judgement on Mr Harding's lifestyle.

Our view

The decision in Harding is a prime example of why the law on tax residency of individuals needs to change in Australia. It illustrates how uncertain the law is in this area, with its overlapping, broad multi-tiered tests, as acknowledged by Derrington J himself, stating that, as with the "Ordinary Concepts test", the application of the "Domicile test" "is far from easy or straightforward", "lacks precision in a number of respects", and "reasonable persons may differ as to the correct interpretation".

The decision in this case, with respect, places undue stress on the nature of an individual's living arrangements, rather than his intention to remain abroad indefinitely, and the fact of him being in Bahrain for 6 years. This in our view, places too high a hurdle for individuals living or moving abroad to obtain non-resident status.

The BOT concluded that the existing residency rules for individuals are "no longer appropriate", and suggests separate rules for outbound and inbound residence, with the issue usually determined by "bright line" day count tests. For example, an outbound person going overseas to work full time will be a non-resident if they spend less than 31 days working, or 61 days total in Australia in a year of income, and for inbound, a person who has not previously been a resident, will not become a resident if they spend less than 46 days in Australia in a year of income. Such bright line tests are to be welcomed, however, it remains to be seen what changes, if any, will be made by the Government after it considers the Board's further recommendations. The Minister in charge said she welcomed the report, but has asked the Board to consult further on key recommendations "before the Government takes any position on these matters".


1See ¶23 of the decision. Such a finding will be important in a case that invokes the "tie-breaker" of a double tax agreement, as the OECD commentary on the model DTA says that a "permanent home" can even be a "rented room", but not if presence there is of a transitory nature.

1 Whilst His Honour did not say so, Mr Harding would not have adopted a domicile of choice outside Australia, as Buckley LJ said in IRC v Bullock [1997] STC 409 at 415: "In my judgment the true test is whether he intends to make his home in the new country until the end of his days unless and until something happens to make him change his mind. ... the question was whether the person whose domicile was in question had "determined" to make, and had in fact made, the alleged domicile of choice "his home with the intention of establishing himself and his family there and ending his days in that country." (underlining added). A domicile of origin is not lost easily, compared to a change of residency, and is more often a once in a lifetime event, whereas residency may change several times in a lifetime. Many Australian expats might intend, and in fact do, return to Australia in retirement after their international career ends. The ability to adopt a domicile of choice in another country invariably must be tested against whether it would in fact be practically possible for a foreigner to live for the rest of their life in, for example, a Middle Eastern country that will only allow them to stay to work.

2Referring to the concept of "permanent" in the test of domicile as "incongruous" on the ordinary meaning of the word in the expression "permanent place of abode", but without discussing the many UK cases on domicile, which reveal HM Revenue and Customs (HMRC) dogged testing of assertions by UK Expats, that they have adopted a domicile of choice outside the UK, to avoid UK inheritance tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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