Question: What Are the Tax Implications for Australian Individuals Relocating Overseas?Answer:
Australians love living and working overseas. For Australian founders, it may be necessary to relocate overseas to access investment and/or bigger markets. This usually happens in one of two ways:
- a ‘flip-up’ to a startup-friendly jurisdiction like the United States or Singapore; or
- a personal relocation overseas to expand the business ‘on the ground’.
Below, we look at two key tax consequences that can arise for Australian individuals relocating overseas.
1. Capital Gains Tax (CGT)
When an Australian tax resident ceases to be so, they dispose certain CGT assets. As a result, they would have to declare this ‘disposal’ in their tax return as a capital income or loss. CGT assets include:
- shares in a company;
- units in a unit trust; or
- foreign assets.
Individuals can elect to defer the taxing point until they actually dispose of the asset. However, it is important to weigh up the advantages and disadvantages of making the election in each individual’s particular circumstances.
For example, say Rosa (an individual) is eligible for:
- the general 50% CGT discount; and
- one or more of the small business CGT concessions on the deemed disposal.
She may choose to trigger the disposal and pay the tax. This could be in her best interests if she believes the property will be worth more in the future. The deemed disposal now saves her from paying more tax down the track.
When conducting this exercise, be aware that foreign resident individuals are not eligible for the 50% CGT discount while they are a foreign resident over the ownership period.
Note: The deemed disposal rule does not apply to a class of assets known as ‘taxable Australian property’ (TAP). TAP includes includes direct (and certain indirect) interests in Australian real property.
2. Double Taxation Agreements (DTAs)
Every country has a different taxation system. It would be a harsh outcome for an emigrating individual to pay exit tax in Australia only to be met by additional tax obligations in their new residency. As such, Australia has bilateral agreements called DTAs with more than 40 countries that aim to prevent double taxation and other tax consequences.
So if an outgoing Australian resident chose to defer the tax until actual disposal of a CGT asset, a DTA may operate to reduce the tax payable on exit. This would be desirable since the former Australian resident would otherwise not be eligible for the full 50% CGT discount and would have to pay higher foreign resident tax rates.