Analysis of Harding v Commissioner of Taxation | Essay

Running head: ANALYSIS OF HARDING V COMMISSIONER OF TAXATION
Analysis of Harding v Commissioner of Taxation
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ANALYSIS OF HARDING V COMMISSIONER OF TAXATION1
Background
The Australian Taxation Office (ATO) is the body responsible for the charging and
collection of taxes from people who have accrued their income from Australia in a given
financial year. People who reside and earn income from Australia since their birth are
automatically liable to pay taxes in Australia. These people are considered to be ordinary
residents. However, the same cannot be said of the other people like an Australian resident for
taxation purposes, people living on a temporary visa and citizens of foreign countries. The most
controversial category of residents among the ones mentioned above is the Australian resident
for taxation purposes. Despite being contested many times in the court of law, there still has been
no particular method of determining what constitutes an Australian citizen for taxability
purposes. However, there have been a few judgements over the years that are considered to have
been of great benefit for Australians living as expats in foreign countries. Harding v Federal
Commissioner of Taxation [2019] FCAFC 29 is the most recent of them. This case was contested
after the Tax Commissioner suggested in Harding v Commissioner of Taxation [2018] FCA 837
that he was liable to pay taxes as an Australian resident for tax purposes. The decision by the
court in the 2019 case has been widely considered to be a victory for Australians living and
working in foreign countries (Bembrick, 2018).
Relief to Australian Expats
As per the guidelines of section 6(1) (a) (a) of the Income Tax Assessment Act 1936
(ITAA 1936), a person will be considered to be an Australian resident if they have established a
permanent place of residence in Australia and is living there. In case of a person not living in
Australia, they will be considered to be a resident if their domicile or permanent place of abode is
outside of Australia (Pinto & Sadiq, 2016). This will be the case unless the person convinces the

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Tax Commissioner that he has a permanent place of abode outside Australia. In the case of
Harding 2018, it was mentioned by Judge Derrington that there was a lack of precision in the
rules guiding the taxability of a person living and working outside of Australia but still retaining a
home in Australia. The Tax Commissioner’s judgement was mostly based on what he considered
to be the intention of the individual. The case of LK v Director-General, Department of
Community Services (2009) 237 CLR 582, 599 was cited to highlight the same aspect. This lack
of clarity in the rules has caused many Australian expats to pay increased taxes on the income
earned by them in a particular year ("Work out Your Tax Residency", 2019). The Australian
Taxation Office rules suggest that a person who is considered an Australian resident for taxation
purposes has to pay taxes on all the income earned by him. Even if the income was accrued in a
foreign country and the taxes were paid in the foreign country, he will have to pay his taxes in
Australia. The application of this law has made income tax a huge burden for these expats.
Implications for Australian expats
The 2018 judgement further complicated matters for these people and made it almost
impossible for these people to break their Australian Tax residency. However, the judgement
made by the honourable judges Logan, Stewart and Davies in the 2019 case overturned the
decision made in the 2018 case. They suggested that a person who has been living outside
Australia for an extended period of time and did not have any intention of returning to Australia
could not be considered to be an Australian resident for tax purposes. Hence, they suggested that
these expats were not liable to pay the taxes on the income earned by them in the foreign
countries. The 2019 judgement reduced the tax burden on these individuals and suggested that
they were liable to pay taxes only on the income earned through Australian sources. The
Australian government has also understood that the current set of rules of the Board of Tax are

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not very effective and hence they need to be reviewed (Australia: Residency case a win for the
taxpayer, 2019).
Limitations of Ordinary Concepts Test
According to the principles guiding section 6.5 of the Income Tax Assessment Act 1997
(ITAA 1997), a person’s annual income using the ordinary concepts of residency is known as the
ordinary income of that particular person. The ordinary concepts test is also known as the ‘resides
test’ (Income Tax Assessment Act 1997, 2019). It is a simple test which suggests that a person
who either resides in Australia or lives Australia but has a domicile or permanent place of abode
outside Australia can be considered to be a resident of Australia. Although the simple nature of
this test is highly useful, it cannot be applied in all situations. This is especially true in case of a
person who is working in a foreign country but has left his home behind in Australia ("Work out
Your Tax Residency", 2019). The main problems that limit the application of the ordinary
concepts test are the meaning of the word ‘resides’ and ‘permanent place of abode’. In Australia,
the word resides has not been clearly defined for tax purposes. However, Justice Latham CJ, in
the case of Commissioner of Taxation v Miller (1946) 73 CLR 93, suggested a meaning for the
word resides that is now commonly used in most of the cases related to residency status of a
person. Citing the case of Levene v Inland Revenue of Commissioners (1928) AC 217, he
suggested that a person can be said to have resided in a particular place if he has lived in that
place either on a permanent basis or for a reasonable amount of time. If he leaves his country on
a temporary basis either for business purposes or for pleasure purposes like holidays, trips and a
tour, then it cannot be suggested that he has completely left his place of residence. As stressed
upon by the court in its explanation of the judgement, this is where the concepts of intention and
permanent place of abode again come into discussion.