Divorce, a new love, and a hotel-room hopping nomad. From Australia, to England, to Saudi Arabia, and on to Bahrain. The saga of Mr Harding is long and colourful, but it came to an end of sorts in court this year. And its implications mean that Australians who live and work overseas may have a whole new approach to determining whether or not they are residents in Australia for tax purposes.
The story begins in the 1990s, when Mr Harding left Australia to work in Saudi Arabia. At the same time, his wife and kids moved to England. His work seemed to go well, and in 2006 he and his family reunited in Australia. They purchased a house on the Sunshine Coast and settled there for a time.
In 2009, Mr Harding again left for Saudi Arabia. He worked there while his family continued to live in their family home on the Sunshine Coast, but the plan was for his wife and kids to join him in two years. He was committed to the move, it seems; he sold all his personal items except for his fishing gear and the family home itself. But it did not go as smoothly as planned. In 2011, he and his wife divorced.
His wife and kids continued to live on the Sunshine Coast in the family home, while Mr Harding kept working in Saudi. He decided to reside in Bahrain at the time, and found a place in an apartment block. Interestingly, the newly divorced Mr Harding did not set himself up in one flat in the apartment block. He rented different apartments, here and there, at different times, much like you would rent hotel rooms. This suited his changing work shifts. Mr Harding claimed to enjoy this new life in Bahrain. The restaurants, the bars, the go carts: the social life appealed to him, and in the same year he was divorced, Mr Harding met a new companion, Ms Gonzalez.
He also came to the attention of the ATO. In 2011, a year when he both lost his marriage but found a fresh new lifestyle, the Australian tax office claimed that Mr Harding was an Australian resident for tax purposes, and thus needed to pay tax in Australia on his Saudi Arabian earnings. Considering all his income in Saudi Arabia since the 1990s had been tax free, this threat of tax and tax penalties must have hit the new divorcee particularly hard. He countered the ATO’s claim, stating that he had been living and working in Saudi Arabia and the Middle East for a considerable amount of time. There was no way he could be considered a resident of Australia for his foreign earnings.
The ATO’s tax case against Mr Harding seemed strong. The house on the Sunshine Coast was still in his name even after his divorce. His wife and kids had been living in Australia for quite some time, and he had been living on the Sunshine Coast for a few years also. His residency in Bahrain was not fixed; jumping hotel-style from apartment to apartment while having a permanent house in his name in Australia did not lend credence to his claims of being an overseas resident.
Yet in 2019 the ATO lost the case against Mr Harding. And the reasons were both intriguing, and startling. Mr Harding won purely because he said he enjoyed his lifestyle in Bahrain.
The court decided that this proved his intention to always settle in Bahrain and Saudi Arabia. This intention was determined to be more important than his actions in determining residency.
The implications of this ruling are significant for taxpayers. Many people now have lives and jobs that that see them travel beyond Australia’s borders. For Australian expats, being taxed on foreign income can be a huge hit on their bottom line. No one wants to be surprised by double taxation or a tax audit. Following on from the Federal Government’s recent back-down to allow Australian expats to continue to access the CGT property tax exemption when selling their Australian homes, Mr Harding’s case gives expats a whole new avenue when approaching the issue of double taxation and being a resident in Australia for tax purposes. You may have assets in Australia. You may have a home here. You may travel back and forth from a foreign country and may not have a fixed home overseas. In the past, this might be enough for an Australian living overseas to be taxed in Australia on their foreign income. But now, a precedent has been set allowing you to demonstrate residency overseas not only based on your actions, but also your intentions. Crucially, Harding showed this based on his actions and intentions. So even though he had a house in Australia he was not a resident for tax purposes.
Many Australian’s living and working overseas may be relieved by this. It opens a window for arguing foreign residence that was previously obscured. Yet it does still remind expats of the obligations when facing tax scrutiny and potential tax audits. The ATO is keen to ensure that taxes owed in Australia are not hidden in foreign jurisdictions or tax-havens. So, while Mr Harding’s victory does bring your intention to live overseas into any argument against being a resident in Australia for tax purposes, you still need to discuss with your tax agent or business advisor how you can demonstrate such intent should the ATO begin to investigate your foreign income.
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