Implications of Harding Case on Tax Residency of Australians settled as expats in foreign nations

TAXATION LAW
AND PRACTICE
STUDENT ID:
[Pick the date]

In the Australian taxation system, tax residency is a pivotal concept as the tax rules applicable
for domestic and foreign residents are not the same. In accordance with ss. 6-5(2) ITAA
1997, for a domestic taxpayer, the assessable income would include all ordinary income
irrespective of the location of the income source. However, with regards to foreign tax
residents, only that income would be assessable which would be derived from Australian
sources. As a result, the income derived from sources located outside Australia would not be
taxable in Australia for foreign tax residents (Woellner, 2015). Also, there is difference in the
tax concessions which are available to domestic and foreign tax residents where the former
are given a preferable treatment. The tax rates applicable on taxable income are higher for
foreign tax residents in comparison with Australian tax residents which again highlights the
significance of tax residency (Barkoczy, 2017). Hence, any case law which seeks to alter
interpretation of any concept used in residency tests would assume significance for the
taxpayers that it seeks to impact.
In wake of the above discussion, the given essay aims to highlight the key implications of the
results and the discussion regarding two recent cases i.e. Harding v Commissioner of Taxation
[2018] FCA and Harding v Federal Commissioner of Taxation [2019] FCAFC 29. Both the
cases pertain to a common issue as in first instance the case was addressed by single judge
Federal Court and later on appeal it was decided by the Full Federal Court. Mr. Harding was
a Australian domicile holder who in 2011 was working and living in Bahrain. His family was
living in his home in Australia. Mr. Harding for the 2011 assessment year filed as a foreign
tax resident. This was disputed by the Commissioner which decided that the permanent place
of abode for Mr. Harding continued to be in Australia despite his contrary intention. Mr.
Harding disagreed with this and hence the case went to the single judge Federal Court. It
decided that the taxpayer was an Australian tax resident as the accommodation type was
temporary thereby resulting permanent place of abode being located in Australia only (Jade,
2018). Mr. Harding was not satisfied with this decision and appealed to the higher court. The
Full Federal Court allowed an appeal and eventually the verdict was given in taxpayer’s
favour as he was concluded to be a foreign tax resident primarily on account of his intention
to stay abroad on permanent basis (Jade, 2019).
(a)Influence of the court verdicts on Australians settled as expats in foreign nations
Considering that the two courts reached opposite verdict with regards to determining the tax
residency of Mr. Harding, it clearly reflects that tax residency related issues are complex and

the prevailing law has certain ambiguity. This has also been indicated by the single judge
Federal Court where it indicates how the modern arrangement of travel and communication
has complicated the scenario. Of particular significance is the lack of a precise definition of
the term “residency” owing to which the decision is clearly driven by the subjective intention
of the taxpayer concerned. In the past, the existence of this vagueness in definition did not
lead to issues as a person working abroad would typically be residing abroad also as the
communication and travel means were not advanced. However, in the current times, this is
not the case as while a taxpayer may be working outside Australia but still able to maintain
close personal ties with Australia leading to confusion. Besides, the “permanent place of
abode” concept seems to be incongruent with the statutory definition of resident as outlined
in ss. 6-1 ITAA 1936. This is because the statutory definition offers a possibility where a
taxpayer with Australian domicile would be living abroad permanently. However, if the
concerned taxpayer is residing permanently abroad, then potentially the domicile would also
be of foreign nation (Jade, 2018). This leads to a complex and troubling situation for the
Australians living as expats since the overall objectivity and predictability of residency
related decisions is observed.
In the Harding case, the single judge Federal Court ruled that Harding was still a resident of
Australia for tax purposes despite staying abroad and lacking intention to return of Australia.
The underlying argument that permanency ought to be reflected in the accommodation is a
worrying factor for the Australians living as expats in other countries as most of these use a
similar accommodation as that used by Mr. Harding. In the past, the focus has been primarily
on the taxpayer’s intention with regards to staying in the concerned foreign country with only
limited consideration of the accommodation arrangement. However, the ruling by single
judge Federal Court brought the nature of accommodation and intention of staying in the
same back at the forefront. As a result, the expats domiciled in Australia need to ensure that
their accommodation arrangement from the very beginning should be such which reflects the
permanent nature of their stay. This would also include arrangement regarding acquisition of
furniture, utilities arrangement along with mail (PWC, 2018).
The single judge Federal Court decision was overturned by the Full Federal Court which was
critical of the approach taken by the lower court in interpreting “permanent place of abode”.
The focus on accommodation being permanent was rejected as being too narrow and
inconsistent with the traditional approach adopted in this regards. The single judge Federal
Court judgement was worrying for those domicile holders who were living outside Australia