How to Leave the Australian Tax System: CGT Event I1 and Beyond

Australia's tax system is designed to ensure that residents pay tax on worldwide income and that departing residents do not escape with untaxed gains. CGT Event I1 -- the deemed disposal that occurs when an individual ceases being an Australian tax resident -- is the centrepiece of the departure tax framework. Combined with Australia's broad definition of tax residency and its aggressive enforcement posture, leaving the Australian tax system requires methodical planning.

Australian Tax Residency: The Four Tests

Australia determines tax residency under four alternative tests. Meeting any one of them makes you an Australian tax resident:

1. The Resides Test -- The primary test, based on ordinary concepts. Factors include physical presence, dwelling, family connections, economic ties, and social ties in Australia.

2. The Domicile Test -- If your domicile is in Australia, you are tax resident unless you can establish that your permanent place of abode is outside Australia.

3. The 183-Day Test -- If you are present in Australia for 183 days or more in a tax year (1 July to 30 June), you are tax resident unless you can show your usual place of abode is outside Australia and you do not intend to take up residence.

4. The Superannuation Test -- Members of certain Australian government superannuation schemes are deemed tax resident regardless of physical presence.

The domicile test is particularly problematic for departing residents. Australian-born individuals retain an Australian domicile of origin unless they acquire a new domicile of choice by establishing a permanent home in another country with the intention of residing there indefinitely.

CGT Event I1: The Deemed Disposal

When you cease being an Australian tax resident, CGT Event I1 is triggered under Section 104-160 of the Income Tax Assessment Act 1997.

What happens:

• You are deemed to have disposed of all CGT assets (with certain exceptions) at their market value on the day you cease residency
• Any gain or loss is calculated as the difference between market value and the cost base
• The 50% CGT discount applies if the asset was held for at least 12 months before the deemed disposal
• The gain is included in your assessable income for the tax year in which you cease residency

Assets caught:

• Listed and unlisted shares
• Partnership interests
• Trust interests
• Intellectual property
• Cryptocurrency
• Foreign real estate
• Personal use assets with a market value exceeding AUD 10,000
• Collectibles with market value exceeding AUD 500

Assets excluded:

• Taxable Australian property (TAP) -- primarily Australian real estate, mining rights, and assets used in an Australian permanent establishment. These remain within the Australian CGT net even after departure.
• Pre-CGT assets (acquired before 20 September 1985)

The Choice: Deemed Disposal vs Deferral Election

Departing residents face a critical election under Section 104-165:

Option 1: Accept the deemed disposal (no election)

• Pay CGT on all unrealised gains at departure
• After departure, only Australian real property and assets of an Australian PE remain subject to Australian CGT
• Clean separation from the Australian tax system for all non-Australian assets
• Foreign assets disposed of after departure are not subject to Australian CGT

Option 2: Elect to defer CGT Event I1

• No immediate tax charge on departure
• All assets remain within the Australian CGT net until actual disposal
• Every future disposal of those assets triggers Australian CGT, regardless of where you live
• You remain within the Australian CGT system indefinitely on deferred assets
• No 50% CGT discount for non-residents on assets acquired after 8 May 2012 that are not TAP

Most advisers recommend Option 1 (accepting the deemed disposal) for individuals making a permanent departure, particularly if the 50% CGT discount significantly reduces the effective rate. The deferral election creates an indefinite connection to the Australian tax system that can be more costly over time.

The Effective Tax Rate on Departure

For an individual in the top marginal tax bracket (45% on income above AUD 190,000), with the 2% Medicare levy:

• Short-term gains (held less than 12 months): 47% effective rate
• Long-term gains (held 12+ months, 50% discount): 23.5% effective rate

The 50% discount makes a material difference. Timing asset acquisitions to ensure a 12-month holding period before departure is a straightforward planning measure.

Superannuation Considerations

Australian superannuation cannot be accessed before preservation age (currently 60 for those born after 1 July 1964) regardless of residency. On ceasing Australian residency:

• Superannuation remains in Australia and continues to earn income within the super fund
• No deemed disposal applies to superannuation interests
• On reaching preservation age, lump sum withdrawals may be subject to withholding tax for non-residents
• Departing Australia Superannuation Payment (DASP) is available for temporary visa holders to withdraw super, but does not apply to permanent residents or citizens
• Tax on DASP ranges from 35% to 65% depending on the component

Medicare and Private Health Insurance

Ceasing Australian tax residency eliminates the Medicare levy (2%) and Medicare levy surcharge (up to 1.5%). However:

• Medicare coverage ends when you leave Australia permanently
• Reciprocal healthcare agreements with certain countries (UK, Ireland, New Zealand, Netherlands, Belgium, and others) provide limited coverage
• Private health insurance should be arranged in the new jurisdiction before departure

Ongoing Australian Obligations After Departure

After ceasing residency, non-residents remain subject to Australian tax on:

• Australian-source employment income
• Australian rental income
• Capital gains on Taxable Australian Property (including real estate)
• Dividends from Australian companies (subject to withholding tax, typically 30% or reduced under applicable DTA)
• Interest from Australian sources (10% withholding under most DTAs)
• Royalties from Australian sources

Non-residents do not receive the tax-free threshold (AUD 18,200) on Australian-source income.

The Practical Departure Process

6-12 months before departure:

• Obtain valuations for all non-listed assets (private company shares, real estate, trust interests)
• Calculate the CGT liability under both the deemed disposal and deferral scenarios
• Consider crystallising losses on underperforming assets to offset against deemed disposal gains
• Review superannuation strategy
• Consider pre-departure distributions from family trusts (trust distributions to non-residents are subject to withholding tax)

On departure:

• Establish residency in the new jurisdiction immediately (residential lease, utility connections, bank account, social ties)
• Notify the ATO of the change in residency status
• Update residency details with all Australian banks and financial institutions for CRS purposes

After departure:

• File the final Australian tax return for the period of residency (1 July to date of departure)
• Include CGT Event I1 gains (or lodge the deferral election) in the return
• Continue filing Australian tax returns for any Australian-source income
• Obtain a Tax Residency Certificate from the new jurisdiction as evidence

Double Tax Treaty Considerations

Australia has over 45 DTAs. Key treaty provisions for departing residents:

• Article 13 (Capital Gains): Most Australian DTAs preserve Australia's right to tax gains on real property and PE assets. Gains on other assets are generally taxable only in the jurisdiction of residence.
• Article 4 (Residency Tie-Breaker): Permanent home, centre of vital interests, habitual abode, nationality -- in that order.
• Article 10/11/12 (Dividends/Interest/Royalties): Reduced withholding rates under treaty, typically 5-15% for dividends, 10% for interest, 5-10% for royalties.

Key Takeaways

• CGT Event I1 deems all non-TAP assets disposed of at market value when you cease Australian tax residency.
• The choice between accepting the deemed disposal or electing deferral is critical -- most permanent departees benefit from accepting the immediate charge.
• The 50% CGT discount for assets held over 12 months reduces the effective tax rate from 47% to 23.5%.
• Superannuation cannot be withdrawn early and remains subject to Australian rules regardless of residency.
• Non-residents continue to pay Australian tax on Australian real property gains, dividends, interest, and rental income.
• Pre-departure planning should begin 6-12 months before the intended date of departure to allow time for valuations and strategic disposals.