Understanding Deemed Disposal: Australia’s Exit Capital Gains Tax

The Australian tax system is known for its intricacies, and within those intricacies, there are policies that can work in your favor. One such policy is the deemed disposal rule, commonly referred to as the exit tax. In this blog post, we will explore what deemed disposal means, its implications on capital gains tax (CGT), and how it affects individuals ceasing their Australian tax residency. We’ll also discuss the pros and cons of deemed disposal and offer guidance on navigating this complex area of taxation. Please watch our video on this topic to learn more.   

What is Deemed Disposal? 

When you cease your Australian tax residency, you have the option to elect whether or not you want to access the deemed disposal. Deemed disposal, in tax terms, refers to a capital gains tax event (CGT event I1). It involves calculating the capital gains on assets as of the date of ceasing tax residency, using the market value at that time. This rule primarily applies to individuals who hold assets, such as shares, ETFs, cryptocurrencies, bullion or businesses, when they leave Australia. This is not applicable to Taxable Australian Properties.  

Example Scenario:  

To simplify things, let’s consider Jeremy, who purchased one Bitcoin for $20,000 in 2018 and intends to hold onto it for an extended period. If Jeremy doesn’t partake in the deemed disposal, he would need to pay tax on the eventual sale of the Bitcoin. However, if he chooses the deemed disposal route, let’s say the market value at the time of ceasing residency is $30,000. This results in an effective gain of $10,000. If Jeremy held the asset for more than 12 months, he would qualify for a 50% CGT discount, meaning the taxable gain would be $5,000, which is then taxed at his marginal tax rates.  

If Jeremy returns to Australia in 10 years, he will need to consider the potential future value of his assets. If the Bitcoin’s market value at the time of recommencing his Australian tax residency is $100,000, by not electing for deemed disposal, the cost base of his asset would remain $20,000. This means any future gains would be taxed based on that cost base. However, by choosing deemed disposal, the asset’s new cost base becomes $100,000, potentially saving him a significant amount of money when he eventually sells or disposes of it. 

Pros and Cons of Deemed Disposal 

As with any taxation rule, deemed disposal comes with its pros and cons. Let’s take a closer look: 

Pros: 

Access to CGT Discount: By electing for deemed disposal, individuals can access the 50% CGT discount, resulting in potential tax savings. 

Taxed at Resident Rates: Choosing deemed disposal allows individuals to be taxed at resident rates, which are often more favorable compared to non-resident rates. 

Ability to Reset Cost Base: Electing for deemed disposal allows for a reset of the asset’s cost base at the market value at the time of recommencing Australian tax residency. 

Cons: 

Immediate Tax Payment: The biggest challenge with deemed disposal is the requirement to pay tax without actually disposing of the assets, which can strain cash flow. 

Ineligibility for 50% CGT Discount: Non-residents who dispose of assets are generally unable to access the 50% CGT discount. 

Inability to Reacquire Assets at New Market Value: If an asset is disposed of as a non-resident, individuals cannot reacquire the asset at its new market value upon recommencing their Australian tax residency. 

Seek Professional Help 

Given the complexity of deemed disposal and its potential impact on your tax obligations and finances, it is highly recommended to seek professional assistance. Tax professionals, like ourselves, can provide tailored advice, helping to determine the viability of the options available, and even assist with financial modeling. 

In conclusion, Australia does have an exit tax in the form of deemed disposal. While not obligatory, deemed disposal offers opportunities to potentially reduce your tax liability, access the 50% CGT discount, and reset the cost base of your assets. However, it’s essential to carefully evaluate your own circumstances and consider seeking professional guidance to make informed decisions that align with your long-term financial goals. By understanding the intricacies of deemed disposal, you can navigate the complexities of Australia’s tax system more effectively and potentially optimise your tax position. 

Please watch our video to gain a better insight into this. If you want to learn about how you can utilise the deemed disposal/exit tax in your favour, please contact us or book an appointment to chat.