Court ruling makes Australian non-residency much harder to maintain

Australian workers are some of the most mobile in the world, often working abroad for years at a time. If judged to be Australian tax-resident, they are taxed on their worldwide income, so the difference between being a non-resident and tax resident will often mean a significant tax cost.

This has led to a series of disputes over the criteria for tax residency, even though Australian tax law lays down four specific tests. The three most important are whether the individual 'resides' in Australia, based on the ordinary meaning of the word 'resides'; whether they have an Australian domicile, and do not have a ‘permanent place of abode’ outside Australia; and whether they are in Australia for more than 183 days in an income year. Satisfying any one of these will confer tax residency.

In 2014, three cases came before the courts that assisted expat Australians' attempts to escape Australian tax residency. These were Dempsey, Agius and Engineering Manager, all of which produced favourable results for the taxpayer. However, the recent Harding ruling has now seriously undermined these cases.

Harding lived and worked in a Middle Eastern country from 1990 to 2006, returning to Australia to live and work between 2006 and 2009. In 2009, he and his wife decided to return to the Middle East permanently, where he had been offered a full-time permanent role. They agreed that Mrs Harding would join him with their youngest child once their middle child finished high school, until which time Harding would continue to stay abroad in furnished apartments close to his work.

However, this plan was dropped when the couple separated and Mrs Harding decided not to join him in the Middle East. Harding, however, continued living and working there, and still does today.

Despite this, the Australian Tax Office (ATO) taxed him as a permanent Australian resident. He objected, claiming that he had not continued to reside in Australia, and that he had established a permanent place of abode in the Middle East.

The case has now been considered by the Federal Court. It ruled that Harding's furnished accommodation in the Middle Eastern country where he worked was not a permanent place of abode, though he had lived in various apartments in the same building for six years on a series of 12-month leases.

This decision is of 'great concern' for many Australian expats, particularly those living in furnished accommodation, said law firm CGW. It effectively reverses the 2014 decisions in Dempsey, Agius and Engineering Manager, and, moreover, partly endorses the ATO's use of checklists to interpret the word 'reside', instead of using its ordinary English meaning.

'Australian expats should revisit their tax position, even if they have been living and working overseas for many years as Mr Harding was', said CGW partner Fletch Heinemann.

Sources

• Cooper Grace Ward
• STEP International News 15 October 2015: Australia pursues non-resident expats
• AUSTLII (Dempsey case)