Generally, the assessable income of an Australian tax resident includes income from all sources, whether in or out of Australia. When you leave Australia, you need to work out if you remain an Australian resident overseas (foreign resident) or permanently dropping your Australian tax residency. This article will provide insights about the tax implication when an individual or company ceases to be an Australian resident.
What is Exit Tax and when it is applicable?
It is important to note that Australian Exit tax is ONLY triggered by the ceasing of Australian residence, hence, not applicable if you are a foreign tax resident.
If you stop being an Australian tax resident, the Australian Taxation Office (ATO) may deem that you have disposed of the assets you own. This means you may be liable to pay CGT on those disposals.
This will normally occur when you no longer satisfy any of the four residency tests – the resides test, the domicile test, the 183-day test and the superannuation test. Read about Australian residency guidelines and the 4 tests here.
What properties are taxable under Exit Tax?
Exit Tax requires that an individual ceasing its Australian residency works out whether s/he has made a capital gain or loss for each CGT asset, except for assets classified as “Taxable Australian Property.”
“Taxable Australian Property” includes:
• Australian real property – i.e., real estate that is 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
How is tax being calculated for Exit Tax?
As this is considered a Capital Gains Tax event, capital gain or loss is to be calculated based on the difference between:
• The market value of the asset at the time that you become a non- resident, and
• The asset’s cost base.
You make a capital gain if the market value is more than the asset cost base and a capital loss if the market value is less than the reduced cost base.
If you make a capital gain, then you are required to pay tax at your marginal tax rates on the unrealized capital gain.
When is the obligation to pay exit tax arises?
Two options are:
• You may choose to pay the exit tax at the time you cease to be an Australian resident. Or,
• You can defer tax liability until you sell the assets.
Are there any consequences for deferring tax liability until actual sale of assets?
Paying tax on unrealized capital gain may create a cash flow concern since there is no actual sale and no proceeds received. An individual can choose to defer payment of exit tax obligation and pay the liability until actual disposal. However, if you choose this timing of payment:
• ATO will consider your non-TAP assets to be TAP assets. Effectively, the assets are kept within the Australian tax system.
The result of deeming a CGT asset to be TAP is that a disposal while non- resident will be taxed in Australia even if you are no longer a resident for tax purposes.
• When you dispose of TAP while you are a non-resident, you are no longer entitled to receive the full CGT discount (50%) for a capital gain even if the asset is owned for more than 12 months.
• You are subject to a higher non-resident rate of tax in Australia.
Does deferring CGT liability attract double taxation?
You may be tax in two countries (In Australia and your new home country) if you make this election. However, you will probably receive foreign tax credits for Australian tax you pay hence you can use those credits to lessen your tax bill.
Please note further that on the event that you are residing in a country that has a Double Tax Agreement (DTA) with Australia, there can be valuable provisions in the DTA that may mean that a disposal while non- resident is not taxable in Australia and may be only taxed in the new country of residence, even if the election to disregard the deemed disposal rule has been made.
Exit tax comes in when you cease to be an Australian resident. As this is considered a CGT event, tax is computed on unrealized capital gain from the difference of asset cost base and market value at the time you become non-resident. Deferring of tax liability until actual disposal of assets is possible but will have a significant effect on how the tax obligation will be calculated.