Summary
- Australia’s exit tax applies when you cease to be an Australian tax resident, with the ATO treating you as having disposed of non-taxable Australian property (non-TAP) assets at market value, triggering a potential capital gains tax liability at that point.
- Individuals can either pay the exit tax upon ceasing Australian residency or elect to defer payment until actual asset disposal, though the deferral election applies to all non-TAP assets collectively and cannot be made on an asset-by-asset basis.
- A pro-rata CGT discount may apply based on the proportion of time held as an Australian tax resident after 8 May 2012, and foreign tax credits or double taxation agreements may reduce or eliminate double taxation depending on your new country of residence.
- This article is a guide to Australia’s exit tax for individuals leaving Australia, explaining capital gains tax obligations, deferral options, and interactions with foreign tax systems.
- LegalVision is a commercial law firm that specialises in advising clients on taxation law and cross-border tax obligations.
Tips for Businesses
Seek local tax advice in both Australia and your new country of residence before departing, as tax obligations vary significantly between jurisdictions. Review whether a double taxation agreement applies to your situation. Consider the timing of asset disposals carefully, as deferring exit tax may result in non-resident tax rates and reduced CGT discount entitlements.
When you stop being an Australian tax resident, Australia’s tax rules may treat you as having sold your assets, triggering a capital gains tax liability known as an “exit tax.” Understanding how this works and how it interacts with tax obligations in your new home country is essential before you leave. This article explains the exit tax and how Australia’s exit tax system interacts with the tax you must pay in your new home country.
When Does an Exit Tax Apply?
The exit tax applies to CGT assets other than ‘taxable Australian property’ (TAP). It is the tax you may need to pay on certain CGT assets when you stop being an Australian tax resident. If so, the Australian Taxation Office (ATO) may deem that you have disposed of the assets you own. Accordingly, you may be liable to pay CGT on those disposals.
If you are a temporary resident when you stop being an Australian resident, you are not taken to have disposed of any of your assets.
Why Does an Exit Tax Exist?
Australia does not tax foreign residents on Australian-sourced capital gains other than in relation to TAP assets. For example, if a foreign resident made a gain on the sale of shares in Oz Co (an Australian tech company), they would not be subject to tax in Australia.
It aims to ensure that Australians with unrealised capital gains cannot exploit the system by:
- ceasing to be Australian residents;
- immediately selling those assets; and
- falling entirely outside the Australian CGT net.
When Do I Have to Pay the Exit Tax?
For individuals, you can pay the exit tax either when you:
- cease to be an Australian tax resident and the CGT rules apply as if you have disposed of your assets at market value; or
- elect to defer paying exit tax until you sell the assets.
Where you choose to defer paying the exit tax and take on CGT liability at actual disposal, the government deems your non-TAP assets to be TAP assets. Therefore, they remain within the Australian tax net despite you being a foreign tax resident going forward. The deferral election is ‘all-or-nothing’. This means you must make a blanket election on all TAP assets or no election at all. You cannot make an election on an asset-by-asset basis.
CGT Discount
If you had a period of Australian residency after 8 May 2012, you may utilise a CGT discount on a pro-rata basis. This depends on the number of days you were an Australian resident after 8 May 2012.
To set the scene, normally, individuals are eligible to access a 50% discount on their capital gain if they hold it for over one year and are an Australian tax resident. For example, if you:
- buy shares on 1 January 2021 for $1,000;
- sell them on 1 January 2023 for $2,000; and
- are an Australian tax resident;
you must pay capital gains tax on the $1,000 capital gain. However, with the CGT discount you only have to pay capital gains tax on $500 worth of the capital gain.
Where you are an Australian tax resident and become a foreign tax resident, you can pro-rata the CGT discount based on time. For example, Sarah purchased shares in 2018, ceased being an Australian tax resident in 2020 and chose the exit election. She then sold her shares in 2022. Of the four years Sarah held her shares, she was only an Australian tax resident for half that time. This means that her 50% CGT discount diminishes. Consequently, she will only be able to access a 25% CGT discount.
Being Taxed in Australia and Overseas
If you make an exit election, you may be a foreign tax resident at the time of the sale of the assets. This means that you may be taxed in two countries;
- Australia; and
- your new home country.
However, you will likely receive foreign tax credits for the Australian tax you pay. You can then use those credits against your foreign tax bill. Later, you will only have to pay the difference between your Australian tax and your foreign tax bill.
Foreign tax credits are useful to reduce full double taxation. However, because Australia is a high taxing country compared to many others, you may experience foreign tax credit wastage.
This Board Reporting Toolkit can help you meet your compliance needs, by explaining your obligations as a director and providing you with a series of tools and templates to ensure you can correctly undertake your key obligations.
Exceptions to Double Taxation
Australia has double taxation agreements (DTA) with many countries. This means that your Australian and foreign tax liability will vary between countries. Furthermore, there may be certain exceptions which apply.
For example, you may be taxed solely in the US and the UK in circumstances where you:
- elect to defer tax liability until actual disposal;
- become a tax resident of the US or the UK; and
- remain a resident of the US and UK at the time of selling your assets.
National and cross-border taxation rules are complicated. It is important to get local tax advice on the relevant foreign country’s laws to ensure that you understand your responsibilities. You will also need to understand any exceptions and exemptions available to you.
An Example
On 1 January 2018, Fred arrived in Sydney to work with an Australian company. For the first 3 years, Fred was a temporary Australian resident, expecting to return home to the USA.
On 15 March 2023, Fred was granted permanent residency in Australia.
For assets disposed of between 1 January 2018 and 14 March 2023, Fred was a temporary resident. He was only subject to CGT in Australia on any assets that were taxable Australian property.
For assets disposed of on or after 15 March 2023, Fred is an Australian resident and is now subject to tax in Australia on his worldwide income and capital gains. Any CGT Fred has on the assets held in the USA will be subject to CGT in Australia. The cost base (amount spent acquiring and maintaining the assets) for these assets will be set according to the market value of the assets on 15 March 2023. Fred will receive a foreign tax credit for any tax paid in the USA on these gains. This means he will not be fully taxed in both the USA and Australia.
Key Takeaways
When you leave Australia and are no longer an Australian tax resident, you do not automatically cease to have Australian tax obligations. Rather, you will be treated as having disposed of your Australian assets. Subsequently, an ‘exit tax’ will apply to you. You may choose to pay the exit tax at the time you cease to be an Australian resident. Or, you can defer tax liability until you sell the assets.
However, if you defer tax liability, you should be aware that you will be taxed at non-resident rates and cannot access the full concessions otherwise available to Australian tax residents.
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Frequently Asked Questions
No, temporary residents are not deemed to have disposed of their assets when they stop being Australian residents. The exit tax only applies to individuals who were Australian tax residents.
Individuals can access a pro-rata 50% CGT discount based on the number of days they were an Australian tax resident after 8 May 2012. Fewer residency days means a proportionally smaller discount applies.
No, the deferral election is all-or-nothing. You must apply it to all non-TAP assets or none at all, meaning you cannot selectively defer exit tax on individual assets.
Australia’s double taxation agreements vary by country. For example, if you become a US or UK tax resident and defer your exit tax, you may only pay tax in your new home country, avoiding Australian tax liability entirely.
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