Moving Overseas? Australia’s New CGT Rules Have Changed the Deemed Disposal Decision
For Australians moving overseas, one of the biggest tax decisions is whether to trigger deemed disposal before becoming a foreign resident for Australian tax purposes. Historically, that decision has involved balancing the immediate Australian tax cost against the future tax consequences of retaining Australian taxing rights over overseas investments.
The Government’s new Capital Gains Tax (CGT) reforms add another important consideration. For Australians who choose not to trigger deemed disposal, Australia’s new indexation regime may produce a significantly different outcome than under the previous law.
For many expatriates, the decision whether to trigger deemed disposal may now be more important than ever.
What is deemed disposal?
When an Australian ceases to be an Australian tax resident, they are generally treated as having disposed of most CGT assets at their market value immediately before becoming a foreign resident.
This is commonly referred to as the deemed disposal rules.
The policy is straightforward. Australia taxes the capital gains that accrued while the taxpayer was an Australian resident before Australia loses its taxing rights over those assets.
The election many expatriates make
The law provides an important choice.
Rather than recognising the deemed capital gain when leaving Australia, an individual may elect to disregard deemed disposal. The consequence is that the relevant assets continue to be treated as Taxable Australian Property (TAP). Australia therefore retains taxing rights over those assets until they are eventually sold.
Historically, this election has often been attractive where taxpayers expected to return to Australia or wished to defer Australian tax. The new legislation may now change that analysis. Read more about these changes in part one of this series.
Why the new indexation rules matter
From 1 July 2027, Australia replaces the CGT discount with an inflation-based indexation regime. However, the new regime contains a strict residency requirement. Individuals must not be foreign residents or temporary residents during the testing period. That creates a new issue for taxpayers who elected disregard deemed disposal. Because those assets continue to be treated as TAP, they remain within Australia’s CGT system.
If the taxpayer becomes a non-resident during the testing period, those assets may no longer qualify for indexation.
Examples of Changing Deemed Disposal Decisions
A tale of two expatriates
Consider two Australians, Sarah and David who each own identical international share portfolios worth $2 million. Both leave Australia in 2028.
Sarah
- Sarah chooses to deem dispose.
- She pays Australian tax on the unrealised gain when she departs.
- Future growth occurs outside the Australian CGT system.
- Australia no longer taxes the future disposal of those shares.
The new indexation rules never become relevant because Australia has ceased taxing the asset.
David
- David chooses to disregard deemed disposal.
- His portfolio continues to be treated as TAP.
- Australia continues to tax the portfolio when it is eventually sold.
However, David has been a non-resident during some of the ownership period (after 1 July 2027), so the new indexation regime is unavailable.
Two taxpayers. Identical portfolios. Very different long-term tax outcomes.
The long-term investor example
- Emma owns a diversified international share portfolio.
- She moves to Dubai in 2028.
- Rather than triggering deemed disposal, she elects to disregard.
- She returns in 2038.
- She sells her portfolio in 2045.
Before the new legislation, the primary consideration may have been whether deferring Australian tax was worthwhile.
Today, another question must also be asked…
Would triggering deemed disposal have produced a better long-term outcome by removing the portfolio from Australia’s CGT system before the new indexation rules became relevant?
For some taxpayers, the answer may now be yes.
A planning decision that has changed
The introduction of Australia’s new CGT indexation regime does not mean taxpayers should automatically trigger deemed disposal.
Far from it.
The decision still depends on many factors, including:
- unrealised gains;
- expected future growth;
- the country of destination;
- foreign tax outcomes;
- cash flow;
- and future residency intentions.
However, the legislation has introduced a factor that simply did not exist before. The decision is no longer just about paying tax now versus paying tax later. It is also about whether continuing to treat an overseas investment portfolio as Taxable Australian Property could affect access to Australia’s new indexation regime.
Final thoughts on changing deemed disposal decisions
Deemed disposal has always been one of the most important tax decisions Australians make when moving overseas. The new CGT reforms have made that decision even more significant.
For Australians who own substantial overseas investment portfolios, the choice to disregard the deemed disposal may now have consequences extending well beyond the immediate tax payable on departure.
Before deciding whether to trigger deemed disposal, expatriates should carefully consider not only today’s tax consequences, but also how Australia’s new indexation regime may affect the taxation of those assets many years into the future.
Contact Us
Managing your financial affairs across borders is a complex space, and having the right support can make all the difference. We specialise in supporting Australian expats with cross-border tax planning, mortgage solutions, superannuation, and wealth management. Contact us to arrange a consultation with a qualified adviser who specialises in Australian expat financial planning to get personalised guidance tailored to your circumstances.
Refer to Part 1: Australian Expats Could Lose the New CGT Indexation Benefit by Working Overseas.
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Disclaimer: This article is intended for informational purposes only and does not constitute legal or financial advice. Individuals should consult licensed professionals when seeking guidance regarding their financial circumstances.