In Short
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Ceasing Australian tax residency can trigger an “exit tax” (CGT event I1): you’re treated as selling most non-Australian assets at market value on departure.
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You may pay CGT in that year or elect to defer it until you actually dispose of the assets.
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Australian real property and assets used in an Australian business are excluded from the deeming and remain taxable here.
Tips for Businesses
Confirm your residency position before leaving. Obtain market-value evidence for affected assets on the departure date. Review employee equity, trusts and main residence implications. Decide whether to elect CGT deferral and understand ongoing filing obligations. Check treaty relief and foreign tax credits. Update ATO contact details and keep comprehensive records.
When you leave Australia to live overseas, it is important to understand both Australia’s tax rules and those in your new home country. You should know how the rules will apply to the assets you own and the income they generate. When you cease to be an Australian resident for tax purposes, you may be considered to have ‘disposed’ of your assets. Subsequently, this potentially results in a capital gains tax (CGT) bill. This process is known colloquially as an ‘exit tax’. 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.
For more information about the exit tax, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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