Choosing to Disregard CGT Event I1: The Deferred Tax Consequences

An individual who ceases Australian tax residency can generally choose to disregard all capital gains and losses arising from CGT event I1. The choice can avoid an immediate tax liability on unsold assets, but it changes the future treatment of those assets.

The affected assets are treated as taxable Australian property until a CGT event occurs or the person becomes an Australian resident again. The decision should therefore be modelled, not treated as an automatic deferral.

The choice applies across affected assets

The choice is generally made for the relevant departure event rather than selectively for only profitable assets. The complete portfolio should be identified before comparing outcomes.

An asset with an unrealised loss can matter because disregarding I1 also defers that loss.

Future disposal

If an affected asset is sold while the individual remains a foreign resident, Australia can tax the later capital gain because the asset has been treated as taxable Australian property under the choice. The calculation generally uses the original cost base and actual later proceeds, subject to other rules.

The foreign country may also tax the disposal. Foreign tax credits and treaty relief can be complicated where the countries use different acquisition values or tax years.

CGT discount

Foreign and temporary residents are subject to restrictions on the CGT discount for gains accruing after 8 May 2012. A deferred gain realised years after departure may therefore receive less discount than an immediate departure calculation would have received.

Precise market values at relevant dates can be needed for apportionment, even where the I1 event itself was disregarded.

Return to Australian residency

If the person becomes an Australian resident again before another CGT event, the special taxable-Australian-property treatment arising from the choice can cease in accordance with the statutory rules. The asset remains held and future Australian CGT treatment continues under the applicable cost-base rules.

Re-entry should be reviewed alongside any market-value entry rules for other assets.

Decision factors

• Immediate tax and available capital losses.
• Liquidity and expected holding period.
• Expected future appreciation or decline.
• Foreign-country basis and tax treatment.
• Likely return to Australia.
• CGT discount consequences and record-keeping burden.

Practical takeaway

The I1 choice is a timing and jurisdiction decision, not a permanent exemption. Record the signed instruction, modelling assumptions, valuations and explanation of future Australian filing consequences.

Official sources and further reading

• Australian Taxation Office: How changing residency affects CGT
• Australian Taxation Office: CGT discount for foreign residents
• Australian Taxation Office: Taxable Australian property
• Australian Taxation Office: Income tax treaties

CGT