When you leave Australia to live overseas, it is important to understand both Australia’s tax rules and the rules in your new home country. You should be aware of 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 what the exit tax is and the ways that Australia’s exit tax system interacts with the tax that you have to 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 be liable to pay on certain CGT assets when you cease to be an Australian tax resident. If you stop being an Australian tax resident, the Australian Taxation Office (ATO) may deem that you have disposed of the assets you own. This means you may be liable to pay CGT on those disposals.

You may be an Australian tax resident and a foreign tax resident at the same time. However, this will not trigger exit tax obligations. Exit tax only applies when you cease to be an Australian tax resident, even if you are also a foreign tax resident.

Why Does an Exit Tax Exist?

As outlined above, 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:

  1. cease to be an Australian tax resident and the CGT rules apply as if you have disposed of your assets at market value; or
  2. 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 until 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 that 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.

Normally, individuals are eligible for a 50% discount on their capital gain if they hold it for over one year. However, foreign residents do not qualify for this discount and, if you become a foreign resident for tax purposes, you will also not be eligible. Therefore, you may end up paying tax at higher foreign resident tax rates.

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 that Sarah held her shares, she was only an Australian tax resident for half that time. This means that her 50% CGT discount diminishes and 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, it is likely that you will receive foreign tax credits for the Australian tax you pay. You can then use those credits against your foreign tax bill. Then, you will only have to pay the difference between the Australian tax you pay and your foreign tax bill.

Foreign tax credits are useful to reduce full double taxation. However, because Australia is a high taxing country in comparison to many others, you may experience foreign tax credit wastage.

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 sale of the 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.

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 will not be able to access the full concessions otherwise available to Australian tax residents. If you have any questions about the exit tax, contact LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

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