Moving from Australia to live in a new country – or to return to your original country if you migrated to Australia – can trigger unexpected tax issues under CGT Event I1 if you have investment assets.
This is because Australia treats the cessation of tax residency in Australia as a Capital Gains Tax Event, which can give rise to a deemed disposal of an investment where the sale proceeds are taken to be equal to the investment’s market value at the time that residency in Australia ends.
A not uncommon scenario where this can become an issue is where a migrant to Australia decides to return to live in the UK, having retained ownership of a property in their original home country.
When an Australian resident individual departs Australia to live overseas permanently – or even for several years – s/he will usually be a non resident for Australian tax purposes from the time of departure.
Under Australia’s tax legislation what is called CGT Event I1 occurs when an individual ceases to be a tax resident while owning investments such as a property or shares.
CGT event I1 requires that a taxpayer works 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
Note: For most individuals who depart Australia the main investment they will retain is a property in Australia.
Such a property is Taxable Australian Property, so is not affected by CGT Event I1 when the property owner ceases to be a tax resident.
Taxable Australian Property does though remain subject to Australian capital gains tax upon a future disposal, even if the property owner is not a resident of Australia.
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 if it is in respect of a pre-CGT asset – ie it was acquired prior to the 20th of September, 1985 – or it is a personal use asset.
The practical effect of CGT event I1 is that a departing Australian taxpayer is subject to capital gains tax on an unrealised gain when the taxpayer is not likely to have monies available to pay the tax, as no actual sale of the asset has taken place.
This is commonly the case with deemed disposals for capital gains tax purposes.
A choice is therefore available to the taxpayer, 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 to disregard the capital gain or loss 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 – eg the asset is sold, or
- The taxpayer becomes an Australian resident again, when a future CGT event will trigger a capital gain or loss.
The result of deeming a CGT asset to be “Taxable Australian Property” is that 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 if 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.
In other words, so long as the capital gain is taxable in the new country of residence and there is a suitable provision in the applicable Tax Treaty it is possible for a capital gain arising on the disposal to be only taxed in the new country of residence.
As is perhaps apparent, tax planning advice should be taken if you are planning to depart Australia and will be retaining ownership of an investment.
Such advice should include a consideration of tax residency, with regard had to applicable Tax Rulings in Australia, including ATO Tax Ruling IT 2650.
bdh Tax is experienced in assisting clients who are moving between countries and who have investment assets such as property interests, when capital gains tax can be a key planning issue.
If you are departing Australia – or have left Australia already – and would like a no obligation discussion about your capital gains tax position please complete the enquiry form on this webpage.
We will be pleased to have an initial free discussion about your situation, and how we might help.