BULAW5916: Harding v Commissioner of Taxation - Tax Residency Analysis

This essay provides a detailed analysis of the Harding v Commissioner of Taxation cases, focusing on their implications for tax residency in Australia. The essay examines the key aspects of the cases, including the ordinary concepts test and the concept of a 'permanent place of abode,' and their impact on expats. It explores how the court's rulings in the 2018 and 2019 cases have reshaped the understanding of tax residency, providing greater flexibility for expats to reduce their tax burden. The analysis highlights the evolution of the legal interpretation of residency and its impact on individuals working abroad, emphasizing the importance of considering the specific circumstances of each case. The essay also discusses the implications for Australian tax law and the ATO guidelines regarding the definition of a permanent place of abode, and their effect on individuals with temporary residences. Overall, the essay provides a comprehensive overview of the legal and practical implications of the Harding cases on tax residency for expats. This analysis is relevant for students seeking to understand the intricacies of Australian tax law and the challenges faced by expats in navigating tax regulations.

Running head: IMPLICATIONS OF HARDING V COMMISSIONER OF TAXATION
Implications of Harding v Commissioner of Taxation
Name of the Student
Name of the University
Author Note

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Overview of the cases
The tax system in Australia has historically been unfair towards people living and
working in foreign countries as expats. The same has been evident in the cases that have been
contested over the years in the court of law. A thorough analysis of the latest case in this regard
known as Harding v Federal Commissioner of Taxation [2019] FCAFC 29 further provides
evidence about the lack of clarity in the laws related to the taxation of individuals living as
expats in other countries. The tax liability of these individuals is mostly dependent on their
ability to convince the Commissioner of Taxation about having a domicile outside Australia
(Bembrick, 2018). In Harding v Commissioner of Taxation [2018] FCA 837, the taxpayer called
Mr Harding was asked to pay taxes as an Australian resident for taxation purposes as the Tax
Commissioner was not satisfied that he had a domicile outside Australia for the year 2011. The
rationale provided by the Tax Commissioner in the 2018 case was that as Mr Harding did not give
up his Australian citizenship and did not have a permanent residence outside Australia, he was a
resident of Australia for tax purposes.
Reduction in Tax Liability for the expats
The section 6 of the Income Tax Assessment Act 1936 suggests that a person will be a
considered to be liable to pay taxes in Australia if he has resided and worked there for an
indefinite period. For an Australian citizen residing and working abroad, he should be able to
convince the Tax Commissioner that he is domiciled out of the country for an indefinite period
(Pinto & Sadiq, 2016). However, the rules that are in place to determine whether a person has a
domicile outside Australia are not clear. The court cites the case of LK v Director-General,
Department of Community Services (2009) 237 CLR 582, 599 to highlight the inconsistencies
and lack of clearness in the laws. Due to the ambiguity in these regulations, the foreign expats

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are treated as Australian residents for taxation purposes in some of the cases ("Work out Your
Tax Residency", 2019). According to section 6.5 of the Income Tax Assessment Act 1997, a
person who is held as a resident for taxation purposes is liable to pay taxes on the ordinary
income accrued by him in a given year. This is the case even if the income is not directly accrued
from the sources in Australia.
Implications for expats
Due to the nature of the present guidelines combined with the judgement in 2018 case of
Harding, it became extremely difficult for the expats to break their Australian tax residency.
However, the judgement in the 2019 case of Harding comes as a key liberation to these
individuals. The respectable judges Logan, Davies and Stewart in their judgement in this case
noted that the foreign expats had to be given a broader set of rules and more freedom to prove
that they do not have a domicile in Australia. This reduces the tax burden levied on them and
they only have to pay taxes on the income accrued or earned through Australia. The Board of
Taxation is also considering changing its rules regarding the taxation of the expats as the current
set of rules are not considered to be sufficiently appropriate for taxing them (Australia:
Residency case a win for the taxpayer, 2019).
Ordinary Concepts Test
The ordinary concepts test, also known as the ‘resides test’ is a way of determining the
tax residence of a person using the ordinary concepts suggested in section 6.5 of ITAA 1997.
Using this concept, if the tax commissioner is not convinced that a person is domiciled outside
Australia, then he has to pay the taxes in Australia (Income Tax Assessment Act 1997, 2019).
This test has been criticised for being too simplistic in nature in the recent times. Its application

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is extremely limited in knowing the tax liability of an individual working outside Australia but
has left his home behind in Australia ("Work out Your Tax Residency", 2019). The chief
problem with this test is its interpretation of the words ‘resides’ and having a ‘permanent place of
abode’ outside Australia. In the Australian tax law, there is no fixed meaning for the word
resides. The most widely accepted meaning is the one defined by Judge Latham CJ in
Commissioner of Taxation v Miller (1946) 73 CLR 93. The judge stated that the word ‘resides’
should be taken as what it means in the ordinary course of its usage. It means that a person is
considered to have resided in a particular place if he has continued to live in that place for an
indefinite period of time. Situations which require the person to move out of the country on a
short-term basis such as vacations, business trips and for tourism purposes should not be taken
into consideration while determining his residency status. The main aspects to consider in
understanding the residency status are the intention of the person and having a permanent place of
abode outside Australia.
Implications for ordinary concepts test
The limits to which the ordinary concepts test can be applied has been stated clearly in the
judgement of the 2019 case of Harding. The judge has stated that if a person has lived in a foreign
country for an indefinite period and has clearly suggested that he does not intend to come back to
Australia for the foreseeable future, then the Tax Commissioner cannot suggest that he was a
resident for taxation purposes. The implications of the 2019 judgement on the ordinary concepts
test have been extremely important. The court has clearly stated that the situation of a person
should be considered on the basis of the facts of his case and the circumstances faced by him. A
common test should not be applied in all situations to determine the tax residency of a person.
Especially when he has sufficient evidence to back the fact that he will not be returning to

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Australia in the future for an indefinite period ("Harding v Commissioner of Taxation [2019]
FCAFC 29", 2019).
The ‘permanent place of abode’
As per the Australian Taxation Office (ATO) guidelines, a permanent place of abode is
the place which can be used to trace a particular person. This means the place acts as a way of
identifying a particular person. However, the current set of ATO guidelines are extremely narrow
in determining what exactly constitutes a permanent place of abode. The guidelines of ITAA
1936 state that if a person has lived outside Australia for more than half a year and if he can
convince the Tax Commissioner of having a place of abode outside Australia, then he does not
have to pay taxes in Australia. Section 10 of Domicile Act 1982 suggests that a person will be
considered to have a domicile outside Australia if he wants to make that country his home for an
indefinite period of time ("Domicile Act 1982", 2019). Some of the activities which indicate that
a person has changed his domicile from Australia are giving up the Australian citizenship and
not undertaking the privileges given by the federal government. However, if there are no direct
activities from a person which suggest that he is not giving up his Australian citizenship,
determining the tax residence becomes much more complicated. Mr Harding was not considered
to have a permanent place of abode as he did not establish a permanent residence outside
Australia. In the 2019 case, this argument was rejected by the court. It suggested that the place of
abode is not an artistic term which can be defined and identified by a fixed set of boundaries. As
mentioned by Judge Selby SJ in Terrassin v Terrassin (1968) 14 FLR 151, a person who claims
to have changed his domicile should have proper backup evidence to suggest the same. Citing his
own judgement from the case Dempsey and FCT [2014] AATA 335; 2014 ATC 10-363, the
judge suggested that the tax authorities should have a checklist of factors within the legal

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limitations which are useful in determining the tax residency of an individual. In this case,
temporary visits by the person to other places for various purposes should not be taken into
consideration. When suggesting that every case should be dealt with on the basis of the facts
provided by the client, the court implied that the reasons for the person not having a permanent
residence in the foreign country should also be considered. There were suggestions about having
a broader meaning for the permanent place of abode (Kenny, Blissenden & Villios, 2015). This
meant that the definition of the word should also consist of the village, city or state in which the
person is residing and not just a singular place like a home.
Implications for permanent place of abode
The court judgement suggested that tax authorities should adopt a broader meaning for
the word place of abode. This is to accommodate the expats whose job requires them to travel
from place to place in a particular country on a regular basis. The implications of this judgement
are expected to be long lasting. Australians working abroad will not be liable to be held for
taxation purposes based on the fact that they only have temporary residences in the country.
Other benefit provided to them is that if they have to return to Australia due to an unforeseen
incident, then they cannot be considered to be Australian residents for the years for which they
lived in the foreign country on the basis that they failed to establish a permanent home in the
foreign country. The same was suggested in the case of Applegate v Commissioner of Taxation
[1978] 1 NSWLR 126.
Summary
On an overall basis, the expats are the most likely parties to benefit from the judgement
in the Harding case of 2019. While previously they were required to pay huge amounts of taxes

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on the income earned by them, the new judgement provides them with more flexibility to reduce
their tax burden and pay taxes only on the amounts accrued from Australia. Previously, the
ordinary concepts test was considered to be highly efficient and applied on a regular basis to
determine the tax liability of the expats. However, the judgement suggests that its application be
limited in situations where a person has lived in the foreign country for more than half a year and
does not want to return to Australia indefinitely. In these situations, the test is irrelevant and the
opinion of the tax commissioner on the matter remains irrelevant. The final implication of the
judgement is that it expands the meaning of the word place of abode. This is because of the
nature of jobs of some of the expats who keep travelling from place to place in a particular
country. More emphasis should be laid on why the person failed to establish a permanent
residence outside the country and there are no fixed rules that can be applied in every case
without considering the situation.

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References
"Work Out Your Tax Residency". (2019). Ato.Gov.Au.
https://www.ato.gov.au/Individuals/international-tax-for-individuals/work-out-your-tax-
residency/.
Bembrick, P. (2018). Taxing times for Australian expats overseas. Taxation in Australia, 53(5),
238.
Domicile Act 1982. (2019). Retrieved 26 August 2019, from
https://www.legislation.gov.au/Details/C2008C00386
Harding v Commissioner of Taxation [2019] FCAFC 29. (2019). Retrieved 26 August 2019,
from https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/full/
2019/2019fcafc0029
Kenny, P., Blissenden, M., & Villios, S. (2015). Residency and Australians working overseas:
can be an expensive lesson in tax Law.
Office of Legislative Drafting and Publishing, Attorney-General’s Department. (2019). Income
Tax Assessment Act 1997 [Ebook]. Canberra. Retrieved from
http://file:///C:/Users/LAPTOP_MP0290/Downloads/C2006C00472VOL01%20 (1).pdf
Pinto, D., & Sadiq, K. (2016). From Switzerland to New Zealand: Around the world in 13
cases. Australian Tax Review, 45(2), 133-144.
PWC. (2019). Australia: Residency case a win for the taxpayer [Ebook]. Australia.
Steen, A., & Peel, V. (2015). Economic and social consequences of changing taxation
arrangements to working holiday makers. J. Austl. Tax'n, 17, 225.

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