Introduction

Australians are highly mobile, both within our vast country and across international borders.

For those contemplating a move overseas, understanding the Australian tax implications is paramount. Two critical questions arise:

• will you cease to be an Australian tax resident?
• if so, what are the tax implications of your departure – does Australia’s exit tax have an impact?

Categories of CGT assets

For exit tax purposes, CGT assets are categorised as:

• Taxable Australian Property (TAP): this category includes Australian real estate and certain indirect interests in Australian real property (Indirect Interests).
• Other Assets (Non-TAP): this encompasses assets like shares and managed fund investments, excluding Indirect Interests.

The default rule: deemed disposal of Non-TAP assets on ceasing Australian tax residence

Under Australian tax law, when an individual ceases to be an Australian tax resident, a deemed disposal of their Non-TAP assets occurs. This means these assets are treated as if they were sold at their market value on the date the individual’s tax residency changes.

It is important to note that this deemed disposal rule does not extend to TAP assets. For CGT purposes, unlike Non-TAP assets, TAP assets remain within the Australian tax net even when held by individuals who are tax residents of another country. The purpose of the deemed disposal of Non-TAP assets is to ensure that any unrealised capital gains accrued while the individual was an Australian tax resident do not escape Australian taxation simply due to a change in tax residency. In effect, the exit tax captures these gains at the point of departure from the Australian tax system.

The exit election: choosing to defer tax on Non-TAP assets

Despite the default deemed disposal of Non-TAP assets when an individual ceases to be an Australian tax resident, there is an alternative. Individuals can elect to defer the taxing point on these assets until their actual disposal.

This choice is known as the Exit Election.

To make an Exit Election, you indicate this in your Australian income tax return for the income year in which you cease to be an Australian tax resident.

It is crucial to understand that the Exit Election operates on an ‘all-or-nothing’ basis. You cannot choose to apply it to some Non-TAP assets and not others.

The mechanism by which Non-TAP assets subject to an Exit Election remain within the Australian tax net is by treating them as TAP assets going forward.

Important considerations: the potential downsides of the Exit Election

While deferring tax payment through the Exit Election might initially appear beneficial, particularly if immediate funds are limited given that the tax must be funded from sources other than the actual sale of the relevant assets, it is essential to be aware of potential disadvantages:

• loss of the CGT discount: by making the Exit Election, you will no longer be eligible for the full 50% CGT discount that might have otherwise applied had the deemed disposal occurred; and
• taxation at foreign resident rates: if you eventually sell the asset while you remain a foreign tax resident, any capital gain will be subject to Australian tax at the applicable foreign resident tax rates (in additional to any tax payable in your residence country, although an exemption or foreign tax credit may apply).

Australia does have Double Tax Agreements with certain other countries where a CGT asset subject to an Exit Election is solely taxable in the other country on actual disposal.

Conclusion: expert guidance on navigating your Exit Tax issues

The decision as to whether to accept the default deemed disposal of Non-TAP assets or to make the Exit Election when ceasing to be an Australian tax resident can be complex. Factors such as potential capital losses, eligibility for the general 50% CGT discount, and access to one or more of the small business CGT concessions can all play a significant role in this crucial decision.

If you or your clients require expert legal assistance with pre-departure tax planning to navigate the intricacies of Australia’s Exit Tax, we encourage you to get in touch with Mosaic Tax Legal for tailored advice at info@mosaictaxlegal.com.au.