Harding and tax residency – High Court dismisses residency appeal

The High Court has refused Special Leave for the ATO to appeal the decision of the Full Federal Court in Harding v Commissioner of Tax [2019] FCAFC 29.

This creates legal certainty that a “permanent place of abode” outside of Australia is by reference to the wider location of a country, and is not narrowly limited to a single unit of accommodation.

For the first time, long-term residents in other countries can organise their accommodation within a country without fear that the ATO will consider successive homes to be an indicator of inpermanence when applying the test of a permanent abode.

As this test is only one of four tests of tax residency, living long-term in another country does not guarantee a person has broken tax residency of Australia. However, the decision in Harding provides clarity for this particular test.

Loss of the main residence exemption for foreign-resident owners? Or not?

The 2017 Australian Federal Budget announced that the exemption from tax on capital gains on a person’s main residence would no longer be available for residences sold after the owner had become a foreign resident. This change, as drafted in Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018, would apply to the whole ownership, without pro-rating an exemption for the period of occupancy. Given the large increases in much Australian residential property, large taxable gains are likely for many.

Under the bill, the exemption remains in place if an expat resumes tax residency prior sale of the property and provides transitional provisions to enable existing foreign-resident owners to sell before 30 June 2019 without losing the exemption. However, whether this change will become law is unknown as the bill has remained before the Senate since March 2018.

Progress of this bill would be welcomed to provide certainty for those currently non-resident who may wish to sell their former homes before mid-2019 but would not do so if this bill does not proceed.