Escaping CGT is not simple, says partner

“Timing and structure matter more than simply relocating. Moving overseas just before a sale rarely improves the outcome, as non-residents may lose access to the full CGT discount and still face Australian tax exposure,” Hoban said.

“While there is an option to defer that taxing point, deferral typically results in the asset remaining within the Australian CGT net, meaning Australia will still seek to tax the gain when it is ultimately realised,” he noted.

“[When Australian residency is broken], non-residents are generally not entitled to the full 50 per cent CGT discount. Instead, the discount is apportioned based on the period of Australian residency, which often increases the effective tax rate. In that context, relocating immediately before a sale will not usually eliminate Australian CGT exposure and, in some cases, can produce a less favourable outcome,” he added.

However, for business owners who relocate to the US and hold shares that are not taxable Australian property, Article 13(6) of the Australia-US treaty can alter their tax outcome.

“In those circumstances, the gain is not treated as having a sufficient connection to Australia, and Australia’s ability to tax the disposal is effectively nullified. The practical result is that the gain is taxed only in the United States, and Australia does not tax the gain at the point of sale.”

“That said, the outcome does not arise simply by moving. The exit tax position still needs to be managed, including whether a deemed disposal is triggered or deferred, and the classification of the assets must be carefully considered.”

“Timing is also critical as the change in residency must occur prior to the transaction and be supportable on a factual basis, and Australia’s Part IVA anti-avoidance provisions must also be considered. Given the subjective nature of tax residency, obtaining a private binding ruling from the ATO can be prudent.”

In addition to the net investment income tax, CGT in the US results in a maximum effective federal rate of 23.8 per cent; however, many taxpayers will fall below that top bracket, Hoban said.

“It should be noted that the outcomes will be materially different where assets are held through an Australian discretionary trust. In those cases, the trust itself may continue to be treated as an Australian tax resident, with the result that Australian tax can still apply to gains realised within the structure,” he added.

Becoming a US tax resident, Hoban said, may bring exposure to taxation on worldwide income, with Australian superannuation giving rise to adverse US tax consequences, adding that state and local taxes in the US vary by jurisdiction.

“High-tax locations such as California (up to 13.3 per cent) and New York City (up to 14.8 per cent when state and city taxes are combined) can materially increase the overall burden. By contrast, a number of states – including Texas, Florida and Nevada – do not impose state income tax, making them much more attractive,” he said.

Under the Australia-US tax treaty, certain taxpayers can have gains taxed only at US tax rates, which requires careful planning, accurate asset classification, and compliance with strict residency and timing conditions, Hoban said.