Australian Capital Gains Tax (CGT) for Expats - An Introduction and FAQ's
Australia has had a comprehensive capital gains tax (CGT) regime since September 20, 1985. Individuals planning to move to Australia or leave Australia, or likely to be overseas when in receipt of an inheritance, should understand the framework of these rules so they do not to trigger any "avoidable", adverse Australian CGT consequences.
Some general information is provided below, but we strongly recommends that you seek advice from a qualified Australian taxation advisor before any relocation, as the rules are complex.
There is no "rate of Australian CGT" - the net capital gain is included in a taxpayer’s assessable income and taxed along with their other assessable income at their marginal rate of tax. The top marginal rate of tax is effectively 47%, inclusive of the 2% Medicare levy - although the levy does not apply to non-residents. If you hold an asset for at least 12 months before you dispose of it, you will be entitled to the 50% CGT discount - so that only one-half of your net capital gain will be assessable.
However, effective May 8, 2012 this discount ceased to apply to non-residents and temporary residents. Eligibility in relation to existing assets is based on a formula which takes into account the number of days a taxpayer was resident or non-resident from that date, on a pro-rated basis. These changes, the enabling legislation for which was passed in June 2013, also applied to trusts holding these assets, raising the possibility that in some circumstances it may now be preferable to hold real estate assets in a corporate structure than directly.
Expat Australian have been severely disadvantaged by changes made to how CGT is calculated over the last decade - particularly in relation to main residences, where a sale could result in 1) no main residence CGT exemption; 2) no 50% CGT discount for assets held over 12 months and 3) the capital gain taxed at (higher) non-resident rates of tax. Tax advice is absolutely recommended in advance of initiating any sale of a major Australian asset whilst non-resident.
On the date of your departure you will be deemed to have disposed of all your CGT assets that are not "taxable Australian property" (TAP) for their market value on that date. You have two choices, you can :
- Choose to pay tax on any existing capital gains or claim for any overall capital loss in the tax year you become non-resident for tax purposes. This is known as making an "I1 election" (named after the applicable CGT event) and can only be made in relation to assets which are not considered TAP, such as listed shares and managed funds, or
- You can disregard the CGT event on ceasing to be a resident by effectively choosing to treat your assets as TAP. The consequence of the assets being regarded as TAP - which largely includes Australian real property - is that Australia will always be able to tax you on any subsequent disposal of these assets going forward (despite your no longer being a tax resident).
In a nutshell this means that when you are becoming non-resident you should examine your portfolio and determine the extent of any capital gains. If they are modest and you expect significant growth while overseas then it may be appropriate - particularly if moving to a low tax regime - to pay out any existing CGT so there is no future Australian liability on the portfolio. Note that your choice in this regard is made at the time you lodge your departure year tax return and in hindsight the markets should be clearer - particularly if you use a tax agent/advisor since returns have a later due date.
It depends on the type of investments. Non-residents will only be subject to Australian CGT on assets that fall within the definition of "Australian taxable property". Broadly, these are confined to Australian real property and certain business assets located in Australia. However, in some cases, interests in entities that in turn hold these types of assets can also be considered taxable Australian property (referred to as indirect property interests). Specific tax advice is almost always recommended in advance of any acquisition of business assets.
Yes. Individuals emigrating to Australia will normally be deemed to be residents of Australia for taxation purposes from the date of their arrival in Australia. Australia’s CGT rules will then deem you to acquire all your CGT assets that are not already Australian taxable property on the day of your arrival for their market value at that date. You will then be subject to Australian CGT - calculated in terms of AUD - on any subsequent increase in the value of those assets on disposal.
Where individuals have been overseas and non-resident for Australian tax purposes while holding Australian property it will normally be the case that some prorating of their entitlement to the CGT discount and/or CGT main residence exemption will form part of the calculation of what proportion of any capital gain is exposed to CGT. This can be relatively complex, and we provide an example below of how it works in principle, but just in relation to the 50% CGT discount for simplicity.
Example - Non-Residence and Calculation of CGT ExposureUsing the following example we consider how the CGT exposure is calculated. "We left Australia in 2010 for Australia for a "three year assignment" and bought an investment property just before we left, so that we would have a foothold in the market while away, completing the purchase on October 1, 2009 for $450,000 - renting out the property until we returned to Australia permanently on February 1, 2021. We bought a main residence in a new capital city on our return and are now looking to sell the investment property - how would capital gains tax be calculated if we sold it on October 1, 2023?" In terms of the CGT calculation, and note that these calculations are normally done more precisely through a spreadsheet, the main points are:
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