The CGT trap on departure: deemed disposal when an Australian retiree becomes non-resident

For most Australian retirees, residency is settled. They've lived here their working lives, plan to retire here, and have no intention to relocate. The tax framework operates around them.

For a smaller cohort — retirees moving overseas to retire in NZ, the UK, Italy, Greece, the US, or elsewhere — residency becomes an active question. The tests in section 6(1) of the ITAA 1936 determine whether someone is Australian resident for tax purposes: the resides test, the domicile test, the 183-day test, and the Commonwealth superannuation test. A person who genuinely emigrates — establishing a permanent place of abode overseas, severing substantial Australian ties — typically becomes non-resident on or shortly after departure.

Becoming non-resident triggers a specific CGT consequence that catches many emigrating retirees by surprise: a deemed disposal of certain assets on the day of departure, with capital gains tax applying on the unrealised gains.

What is the deemed disposal mechanic?

The deemed disposal mechanic. Under section 104-160 of the ITAA 1997 (CGT event I1), when a person ceases to be an Australian tax resident, each CGT asset that is not Taxable Australian Property (TAP) is treated as if disposed of at its market value on the day before they ceased to be resident. Capital gains tax applies on any unrealised gain — as if the assets had been actually sold — and the asset is taken to have been re-acquired at the market value, fixing a new cost base for any subsequent gain.

The catch is that no actual sale occurs. No cash is received. The retiree is liable for tax on a gain that exists only on paper. For a portfolio with material unrealised gains, the deemed disposal produces a real tax bill that has to be paid from other sources.

What counts as Taxable Australian Property?

What is "Taxable Australian Property"? Section 855-15 of the ITAA 1997 defines TAP. The main categories:

• Real property situated in Australia — direct holdings of land or buildings in Australia.
• Indirect Australian real property interests — shares in companies whose value is principally derived from Australian real property (more than 50%).
• Business assets of a permanent establishment in Australia.
• Options or rights over the above.

TAP assets are exempt from the deemed disposal — they remain in the Australian CGT net regardless of residency. An emigrating retiree's Australian residential investment property does not trigger CGT on departure; CGT applies on actual disposal whenever that occurs.

For most retirees, the practical TAP holdings are direct holdings of Australian real estate. Almost everything else — listed Australian shares (where the company is not principally Australian real property), managed funds, ETFs, foreign assets, cryptocurrency — is non-TAP and subject to deemed disposal.

What is the deferral election?

The deferral election. Section 104-165 provides an election: the departing resident can elect, asset by asset, to treat the non-TAP asset as TAP for CGT purposes until they actually dispose of it. The effect:

• The deemed disposal does not apply to elected assets — no immediate CGT.
• The asset remains in the Australian CGT net — when actually sold (whether the holder is then resident or not), Australian CGT applies on the gain.
• The deferral preserves the asset rather than crystallising it on departure.

The election must be made in the Australian tax return for the year of becoming non-resident. It is asset-specific — defer some, accept deemed disposal on others. Once the election is made (or not), the position cannot be reset.

For assets the retiree intends to hold long-term (a long-tenure share portfolio paying dividends to fund retirement income), the deferral preserves the position. The Australian CGT continues to attach until eventual sale. For assets the retiree was planning to liquidate anyway, accepting the deemed disposal can be acceptable — particularly if the liquidation can be timed to a year of low Australian income before departure.

How does the 50% CGT discount interact with this?

The 50% CGT discount and the 2012 reform. Capital gains on assets held more than 12 months by individuals attract the 50% CGT discount. The deemed disposal is calculated as if a normal sale, so the discount applies on qualifying assets at departure.

A 2012 reform changed the treatment of the 50% CGT discount for non-residents. For TAP held by non-residents, the discount may no longer be available — or may be limited under transitional rules for assets held before the reform. For long-tenure Australian property held by an emigrating retiree, this is consequential. The retiree retains the property under TAP rules, but on eventual disposal the discount may be lost.

What are the cross-border tax interactions?

Cross-border tax interactions. When the retiree becomes non-resident in a country with its own CGT regime — the UK, US, Germany, etc. — the eventual disposal of an asset may attract tax in both jurisdictions. Double tax agreements (DTAs) typically resolve this through foreign tax credits — Australian tax paid is credited against the new country's tax, or vice versa, with the higher-tax jurisdiction effectively determining the net cost.

For DTA-covered countries, the planning involves understanding both jurisdictions' rules. New Zealand has limited general CGT; the deemed disposal at Australian departure is the primary tax event. The UK has full CGT; the eventual disposal triggers UK tax, with Australian tax (under deferral election) interacting through the DTA.

What strategic considerations apply before departure?

Strategic considerations before departure. For a retiree planning permanent overseas relocation, the planning window — typically 12+ months before departure — has real value:

Identify the assets and exposures. Map all CGT-exposed assets with current cost base and market value. Identify TAP vs non-TAP. Project the unrealised gain on each.

Project the tax position under multiple scenarios. Pre-departure realisation, deemed disposal at departure, deferral election. Each has a different aggregate tax outcome over time.

Choose strategy per asset. Realise low-gain assets pre-departure (or take deemed disposal with low CGT cost). Defer high-gain assets the retiree intends to keep. Accept deemed disposal on assets to be liquidated anyway.

Time the departure. Where there is flexibility, departing in a year of low Australian income — before commencing employment in the new country, or after major deductions in Australia — reduces the tax impact of any deemed disposals.

Coordinate with foreign tax adviser. The arrival country has its own tax events. The new country's cost base for assets is typically the value at arrival. Coordination with a tax adviser in the destination country prevents missed opportunities and double taxation.

What do the specific scenarios look like?

Specific scenarios.

Retiree relocating to NZ permanently. NZ has limited general CGT. Deemed disposal applies to non-TAP assets at Australian departure. Election to defer for assets the retiree intends to hold. Accept deemed disposal on assets the retiree plans to liquidate.

Retiree relocating to the UK permanently. UK has full CGT. Australian deemed disposal (or deferral) at departure; eventual UK CGT on actual disposal, with foreign tax credits resolving the double-tax interaction.

Retiree splitting time between Australia and an overseas country (snowbird). If Australian residency is maintained, no deemed disposal. The position depends on whether the retiree genuinely becomes non-resident under the four tests.

Australian expat returning after years overseas. The reverse position — re-establishing residency. Foreign assets typically have an Australian cost base equal to their value at re-arrival. Specific rules apply to assets held while non-resident.

The practical message. Permanent overseas relocation is one of the more consequential financial decisions a retiree makes. The CGT consequences are substantial, technical, and not optional — they apply by operation of law on the day of becoming non-resident. The planning is real-money, real-time, and requires both Australian tax expertise and destination-country coordination.

For retirees seriously contemplating overseas retirement, the conversation should start at least 12 months before any planned departure. The deferral election is the principal lever for preserving long-held positions. The realisation timing is the principal lever for managing the immediate tax impact. Both decisions, made deliberately and on documented advice, can substantially reduce the cost of the move. The cost of not planning — discovering the deemed disposal at the post-departure tax return — is typically a meaningful, irreversible tax event.

Sources

• ATO — How changing residency affects CGT
• ATO — Taxable Australian property (s 855-15 ITAA 1997)
• ATO — CGT discount for foreign residents
• ATO — Your residency status and CGT
• ATO — Residency tests
• ATO Legal database — ITAA 1997 s 104-165