At the time an Australian expat relocates overseas, there are important Capital Gains Tax implications that should be considered. The article below provides an overview of the CGT implications and the options available to the individual.
Non-taxable Australian property
For Australian tax purposes, when you cease to be an Australian tax resident, there is a deemed disposal of your worldwide Capital Gains Tax (CGT) assets which are not Taxable Australian Property for their market value under CGT event I1.
Under CGT Event I1, a capital gain or loss is calculated based on the difference between:
The above is known as an ‘Exit Charge’ at the time an individual ceases to be an Australian tax resident.
Once the Exit Charge has been paid, any future capital gains (or loss) realised on your non-TAP assets should not be subject to Australian tax.
However, any future capital gains (or loss) realised on your TAP assets (for example, Australian property) would continue to be subject to Australian tax notwithstanding you are not an Australian tax resident at the relevant time.
Election to disregard the capital gain (or loss) on cessation of Australian tax residency
However, at the time of ceasing to be an Australian tax resident, an individual may elect to disregard (or defer) the Exit Charge. Where the choice is made to defer the CGT, then, in the absence of relief in any relevant double tax agreement, any subsequent disposal of the CGT asset (for example, shares) would be subject to an Australian CGT at that time.
Australia’s Double Tax Treaties
Regard must also be had to the position under Australia’s Double Tax Agreements. Some of Australia’s Double Tax Treaties, most notably the UK and United States agreements may exempt a future disposal from Australian CGT and allocate taxing rights to the country of residency. This is on the basis that the new country of residence (e.g the UK or US) would have taxing rights in respect of any subsequent capital gain.
Factors to consider
“An individual who elects, under the taxation law of a Contracting State, to defer taxation on income or gains relating to property which would otherwise be taxed in that State upon the individual ceasing to be a resident of that State for the purposes of its tax, shall, if the individual is a resident of the other State, be taxable on income or gains from the subsequent alienation of that property in that other State.
Therefore, the capital gain may be taxed only in the UK at potentially a lower rate than that of Australia if the Double Tax Treaty applies. However, note that for the UK treaty exemption to apply, such a gain must be actually be considered to be a deemed “remittance” for UK tax purposes.
Please do not hesitate to contact us for further information and we would be happy to discuss the Australian CGT implications when you relocate overseas.