What is a deemed disposal?

Deemed disposal is a unique facet of the Australian tax system that treats your assets as disposed at their current market value when you become a non-resident for tax purposes, whether you have sold them or not.

It occurs on the date you cease to be an Australian resident for tax purposes and triggers a tax event that may result in a capital gain or loss. Here, we answer some commonly asked questions about this tax treatment for departing Australian tax residents.

Does deemed disposal apply to all my assets?

Deemed disposal typically applies to all capital gains tax (CGT) assets, with the exception of taxable Australian property.

What tax implications does deemed disposal have?

You are considered to have disposed of the asset at its current market value on the date you cease being a tax resident and any capital gains are taxed at your marginal tax rate. Following the deemed disposal, future capital gains generated on these assets while you are a non-resident are tax-free in Australia.

What happens if I later return to being an Australian tax resident?

If you return to Australia and become a tax resident, the assets will once again be subject to CGT. You are deemed to have acquired the asset (deemed acquisition) at its current market value on the date you return to being a tax resident, with the cost base reset.

Let’s take a look at an example.

You own an applicable CGT asset you purchased for $80K. On the day you cease being a resident for tax purposes, its market value is $100K. Therefore, you are deemed to have generated a gain of $20K, despite still holding the asset. This gain is taxed at your marginal rate.

On your return to Australia, you become a tax resident again and are deemed to have acquired the asset on that day, despite holding it for the entire time. The asset now has a market value of $150K. You do not incur any tax on the $50K capital gain because it occurred while you were not an Australian tax resident.

If you sell or leave the country for tax purposes (deemed disposal) again in the future, capital gains would be calculated on a purchase price of $150K, the deemed acquisition value.

Are there any alternatives to deemed disposal?

You can opt to defer your deemed disposal capital gains tax event, and you will not be required to pay any CGT upon becoming a non-tax resident. In some specific circumstances, this can be a good strategy. However, it is an area where advice is a must as mistakes can have costly consequences. It’s also important to note that:

• A deferral must be applied to all applicable CGT assets – you cannot choose which assets you would like to defer.
• All future capital gains generated on these assets will be subject to capital gains tax in Australia, even during the period you are a non-resident.
• The CGT will be applied at non-resident tax rates.

When should you consider deferring deemed disposal?

Firstly, it’s important to note that the decision to defer or pay deemed disposal is a complex one that should not be made without expert advice from a financial planner and a tax accountant who have a deep understanding of your financial position, plans and goals.

If you are weighing up options, here are some factors to consider:

• How large is the capital gain on your investments? If the gain is considerable, it may be worth exploring a deferral, but for smaller gains or losses, continuing with the deemed disposal is usually more appropriate.
• How long do you intend to be a non-resident of Australia? If you intend to stay away for a short period, it may be beneficial to defer the CGT. If you intend to stay away for an extended period, the gains made while you were overseas may trigger a significant tax event on your return.
• Are you working with an experienced financial adviser? If you intend to defer deemed disposal, it is critical to work with an experienced adviser to manage the impact of the CGT for the period you are overseas to limit the impact on your financial position.

What should you do when considering your deemed disposal options?

Deemed disposal is a complex area and one that differs considerably based on your circumstances. Making the wrong move can be incredibly costly, so it’s important to make any decisions with the support of an experienced tax accountant and expat financial planner as soon as you are seriously considering or have made the decision to move abroad.

Need help exploring options to manage your finances as an expat? Reach out to our experienced, specialist expat team to book an initial chat.

General advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommend that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.