International Tax: Australian tax implications of ceasing to be an Australian tax resident

Australian Tax Implications of Ceasing to be an Australian Tax Resident

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.

Calculating a capital gain or loss under CGT Event I1 involves determining the difference between:

• The market value of the asset at the time that the individual becomes a non-resident, and
• The asset’s cost base.

The above is known as an ‘Exit Charge’ at the time an individual ceases to be an Australian tax resident.

After settling the Exit Charge, you won’t face Australian tax on any forthcoming capital gains or losses from your non-TAP assets.

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. If you choose to defer the CGT, and there’s no relief in a relevant double tax agreement, Australia will impose CGT on any later disposal of the asset (like shares).

Australia’s Double Tax Treaties

Also, consider the stance outlined in 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

• Failing to make an election to defer the CGT exit charge could lead to an unfunded tax liability, meaning there won’t be proceeds from the asset sale to cover the tax. This situation could potentially create cash flow problems.
• The general 50% CGT discount, which helps reduce capital gain, isn’t applicable to non-residents in Australia. So, if you choose to defer Australian CGT during the non-resident period, you won’t have access to the 50% CGT discount.
• It is very important to consider the position under the applicable Double Tax Treaty (where relevant) as this may provide a better tax outcome depending on the relocation country. For example, under Article 13(5) of the Australia and UK Double Tax Agreement it states that:

“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.

So, the UK may only tax the capital gain at a potentially lower rate than Australia if the Double Tax Treaty applies. Keep in mind that, for the UK treaty exemption to kick in, they must actually consider the gain as 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.