The effect of the ATO’s decision impact statement in Harding on the tests for tax residency

The Full Federal Court decision in Harding clarified two of the four tests for when an individual is a tax resident of Australia. The ATO lost the case before the Full Federal Court and was refused special leave to appeal to the High Court.

The ATO’s decision impact statement sets out how the ATO will apply the law. Individuals will need to be particularly careful about the ‘permanent place of abode’ test.

Brief overview of what happened in Harding

Mr Harding lived and worked in the Middle East from 1990 to 2006. He returned to Australia to live and work between 2006 and 2009. However, in 2009, Mr Harding secured a permanent role in Saudi Arabia and decided to return to live in the Middle East permanently. Mr Harding lived in various furnished apartments in Bahrain while his wife continued to live in the family home on the Sunshine Coast. The plan was that Mrs Harding would join him when their middle child completed his last year of high school. However, Mrs Harding never moved to Bahrain and the couple separated in October 2011 and later divorced. Mr Harding continued living and working in the Middle East.

The ATO assessed Mr Harding on the basis that he was a tax resident of Australia for the 2011 income year. The Full Federal Court held that Mr Harding was not a tax resident under any of the four tests of residency.

Please see our previous articles on the Full Federal Court decision and the High Court’s refusal of special leave to appeal that decision.

How will the ATO apply the first test of residency – the ordinary meaning of the word ‘resides’ test – following Harding?

The ATO accepts that whether a person resides in Australia under the first test – the ordinary meaning of ‘resides’ test – depends on all of the person’s circumstances. The ATO will look at the nature, duration and quality of the person’s presence in a particular place, together with their association with that place. This includes considering the person’s intention.

The ATO also accepts that comparing the residency status of different taxpayers from other cases is risky: a factor that may have been important in one case may be less important in another person’s circumstances. All of the individual’s circumstances need to be reviewed and then applied to the law.

Australian expatriates should expect the ATO to analyse their objective connections with Australia (including the location of assets, family and business ties and living arrangements), rather than accept a stated intention at face value.

Taxpayers should keep relevant evidence to support their position to prepare for any ATO review or audit.

How will the ATO apply the second test of residency – the ‘permanent place of abode’ test – following Harding?

In determining whether an Australian domiciled taxpayer has a permanent place of abode outside Australia, the ATO will consider whether the person has:

• definitely abandoned residence in Australia, and
• commenced living permanently in a specific country overseas.

The ATO will consider the circumstances surrounding the person’s departure from Australia, their arrangements in the overseas country and the nature of their presence in that country.

Although the ATO accepts that the relevant ‘place of abode’ is not limited to a specific dwelling, it maintains that the nature and use of any dwellings is a relevant factor. For example, a person who purchases or takes out a long-term lease on a dwelling in a foreign country is more likely to have established a permanent place of abode outside Australia than a person who stays in hotels or short-term holiday rentals in that country.

We set out some specific risks on the permanent place of abode test in this article.

What is the meaning of the Commissioner’s ‘satisfaction’ in the ‘permanent place of abode’ test?

The ATO’s decision impact statement notes that the second test of residency considers whether the Commissioner is satisfied that a person’s permanent place of abode is outside Australia.

Whether the Commissioner is satisfied is a different test to whether the person has a permanent place of abode outside Australia. Previous cases, including Harding, proceeded on the basis that there was no difference. However, the Full

Federal Court in Harding made it clear this was not the case.

The ATO has highlighted this in the decision impact statement, where it notes:

The significance of the discretion afforded to the Commissioner in determining whether a person’s permanent place of abode is outside Australia is that in a case where the facts are such that reasonable minds could differ, the Commissioner’s opinion, or on review, that of the Administrative Appeals Tribunal, will be determinative.

Taxpayers will need to be careful, in the event of any dispute with the ATO, that they are correctly addressing the ‘satisfaction’ part of the ‘permanent place of abode test’.

For further information on this topic, or to discuss your residency position or the residency position of your clients, please contact a member of our team.