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Australian court reverses Harding residence judgment, in victory for expat taxpayers

Monday, 11 March, 2019

Australia's Full Federal Court has decided that a Mr Harding was not domiciled in Australia while working and living overseas for several years, though he had retained a property in Australia where his family resided.

Harding lived and worked in the Middle East for years before temporarily returning to Australia with his family. He then left Australia again to work in Saudi Arabia while his wife and family remained in the family home, on the understanding that they would join him later. 

However, in 2011, he and his wife decided to separate. At that point, Harding had been living in rented serviced apartments in Saudi Arabia, as temporary accommodation while looking around for a home for his family. When the marriage broke down, this plan stalled. In the same year, the Australian Tax Office (ATO) assessed him as Australian-resident and taxed him on his foreign source employment income. Harding challenged this, but last year he lost, in Harding vCommissioner of Taxation [2018] FCA 837, in the federal court on the basis that he had not established a permanent place of abode outside Australia, even though it accepted he had no intention of returning to Australia.

He appealed again, and now the Federal Court of Australia has reversed its June 2018 ruling and accepted his non-residence. The original judgment, it said, was wrong to consider that his home in Saudi, being a furnished service apartment, could not be a 'permanent place of abode' under the legislation. It was entirely consistent with a conclusion that his permanent place of abode was in Bahrain. His departure from Australia in 2009, intending to leave permanently, confirmed that he was not residing in Australia according to any ordinary concepts other than the ATO's use of checklists to interpret the word 'reside' instead of using its ordinary English meaning.

The ruling is highly significant for Australian migrant workers, setting an important precedent, say tax advisors EY. 'The finding in favour of the taxpayer is reassuring in the context of the ATO taking a very broad approach', said EY. The verdict also reaffirms the favourable outcomes of three cases in 2014 - Dempsey, Agius and Engineering Manager - which assisted expat Australians' attempts to escape Australian tax residency.

It is also very topical, as the country's board of taxation is currently engaged in a consultation on changes to the tax residency rules. The board is seeking a 'bright-line' test to overcome the need for interpretation of some of the matters that were influential in the Harding case.

Sources