Leaving Australia and Ceasing to be a Resident – Capital Gains Tax and Deemed Disposals

Jane Cooper 30 December, 2015

When an Australian resident individual chooses to leave Australia to live overseas permanently – or even for several years – s/he is usually classified as a non resident for Australian tax purposes from the time of departure.

A significant Australian tax consequence can arise under what is called CGT Event I1 when that individual departs while owning investments such as a property or shares.

Under CGT event I1 a taxpayer is required to work out whether s/he has made a capital gain or loss for each CGT asset, with the exception of assets classified as “taxable Australian property.”

“Taxable Australian property” includes:

  • Australian real property – ie real estate that is located in Australia
  • An asset used at any time in carrying on a business through a permanent establishment in Australia
  • An indirect Australian real property interest: an interest in an entity (including a foreign entity), where the taxpayer and associates together hold 10% or more of the entity, and the value of the taxpayer’s interest is principally attributable to Australian real property.
  • A right or an option to acquire any of the above types of assets

Under CGT Event I1 a capital gain or loss is to be calculated based on the difference between:

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

A capital gain arising from CGT event I1 can be disregarded to the extent that it is in respect of a pre-CGT asset – ie it was acquired prior to the 20th of September, 1985 – or if it is a personal use asset, or the main residence exemption is available.

The consequence of CGT event I1 is that a departing Australian taxpayer is subject to capital gains tax on an unrealised gain when s/he is not likely to have monies available to pay the tax, as no actual sale of the asset has taken place.

A choice is therefore available, whereby the capital gain or loss which would otherwise arise can be disregarded.

However, once the choice has been made it applies to all of the taxpayer’s CGT assets (with the exception of the taxpayer’s assets which are “taxable Australian property”).

The consequence of making this choice is that each CGT asset is then deemed to be “taxable Australian property” until the earlier of:

  • A CGT event taking place when the taxpayer no longer owns the asset – ie the asset is sold, or
  • The taxpayer becomes an Australian resident again, when a future CGT event will trigger a capital gain or loss.

As a result of deeming a CGT asset to be “taxable Australian property” a disposal while non resident will be taxed in Australia even if the taxpayer is no longer a resident for tax purposes.

Importantly, a capital gain arising on the disposal of “taxable Australian property” while non resident is not capable of being discounted – ie reduced by 50% if owned for more than 12 months – and is subject to non resident rates of tax in Australia.

Significantly more tax can therefore become payable where an election is made to disregard the capital gain arising under CGT Event I1, and a subsequent disposal takes place while a non resident of Australia.

Importantly though where the individual is residing in a country that has a Tax Treaty with Australia there can be valuable provisions in the Treaty that mean a disposal while non resident is not taxable in Australia, even if the election to disregard CGT Event I1 has been made.

For example, the Tax Treaty between the United Kingdom and Australia provides in Article 13, section 5 as follows:

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 only in that other State.

For those who are leaving Australia to spend a period of time living and working in another country regard should also be had to ATO Tax Ruling IT2650, which discusses the concept of a permanent place of abode outside Australia.

As may be apparent from the above, there can be significant tax planning issues arising as a consequence of leaving Australia to spend time living and working overseas. GM Tax invites those who would like to explore their position to contact us by completing the enquiry form on this webpage.