CGT Event I1: What Happens to Your Capital Gains When You Stop Being an Australian Tax Resident

What happens to your investments when you leave Australia and become a foreign resident for tax purposes? You might not sell your shares, cryptocurrency or other investments before leaving. Yet, Australian tax law can still treat some of those assets as if you had sold them. This is where CGT event I1 comes in, and there is a choice that may allow you to defer the immediate tax outcome.

Leaving Australia can be exciting, but your tax position needs attention before you go. If you have built up gains in investments, ignoring your residency change could create an unexpected tax bill. The rules can also affect what happens when you eventually sell those assets overseas. If you’re weighing up a permanent move, our broader guide on the tax implications of permanently leaving Australia covers the wider picture beyond just CGT.

What Is CGT Event I1?

CGT event I1 applies when you stop being an Australian resident for tax purposes. The event happens at the time your Australian tax residency ends. Under section 104-160 of the Income Tax Assessment Act 1997, you must work out any capital gain or capital loss for certain CGT assets you own at that time.

The key point is that you do not necessarily need to sell an asset for CGT event I1 to apply.

Suppose you bought shares for $40,000 several years ago. They are worth $90,000 when you leave Australia permanently. If those shares are not taxable Australian property, CGT event I1 can treat you as having disposed of them for their market value.

That creates a potential $50,000 capital gain before you have actually sold the shares.

This is often called a deemed disposal. The tax system is effectively bringing the gain into account before the asset leaves Australia’s CGT net.

The rule exists because becoming a foreign resident changes which assets remain subject to Australian CGT. Without this rule, someone could leave Australia, sell certain assets later as a foreign resident, and potentially escape Australian CGT on gains accumulated during their Australian residency.

When Does CGT Event I1 Happen?

CGT event I1 happens when you stop being an Australian resident for tax purposes.

That date matters because it determines the market value used for the CGT calculation. It is not simply the date you sell your Australian home, close your bank account or board a flight.

Australian tax residency has its own rules. Your actual circumstances need to be considered when deciding whether you have stopped being an Australian tax resident.

For example, suppose you move from Melbourne to the United Kingdom permanently for work. You establish your home overseas and cease being an Australian resident for tax purposes.

You own a portfolio of listed shares at that point.

If those shares are not taxable Australian property, CGT event I1 may apply when your residency changes. You would generally calculate the gain or loss using the market value of the shares at that time.

Getting the residency date wrong can affect the entire calculation. It can also affect which tax return reports the capital gain.

Which Assets Are Affected by CGT Event I1?

CGT event I1 generally applies to CGT assets that are not taxable Australian property.

This can include investments such as:

• Shares in Australian or overseas companies
• Units in certain trusts
• Cryptocurrency
• Other investment assets that are subject to CGT

The rules contain important exceptions, so you should not assume every asset is automatically caught.

For example, taxable Australian property is treated differently. This category includes Australian real property, certain indirect interests in Australian real property, certain business assets connected with an Australian permanent establishment, and certain options or rights over these assets.

There are also special rules for some employee share scheme interests and assets acquired before 20 September 1985.

What Happens to the Asset’s Value?

For an asset caught by CGT event I1, you generally compare its market value at the time you stop being a resident with its cost base.

If the market value is higher, you may have a capital gain.

If it is lower than the reduced cost base, you may have a capital loss.

For example, you purchased cryptocurrency for $20,000. Its market value is $55,000 when you cease Australian tax residency.

The resulting capital gain would be $35,000 before applying any available capital losses or other relevant CGT rules.

The important point is that you may face a CGT consequence without receiving cash from an actual sale.

That can make CGT event I1 particularly important when you hold valuable investments and have limited cash available.

Can You Defer CGT Event I1?

Yes. An individual can choose to disregard the capital gains and capital losses arising from CGT event I1.

This is often referred to as the CGT event I1 deferral choice.

The choice does not permanently remove the tax. Instead, the affected assets become taxable Australian property until the earlier of a relevant CGT event happening to the asset or you becoming an Australian resident again.

This distinction is important.

Suppose you have shares worth $100,000 when you leave Australia. You originally paid $60,000 for them.

You could recognise the $40,000 gain when your residency ends. Alternatively, if eligible, you could choose to disregard that gain at that point.

If you make the choice, the Australian tax consequences are generally deferred rather than erased under Australian domestic law. However, this isn’t the end of the story. If your new country of residence has a Double Tax Agreement (DTA) with Australia, that treaty can override the domestic outcome.

Many of Australia’s DTAs give your new country of residence the exclusive right to tax gains on shares (as opposed to real property), which can mean the deferred Australian gain is never actually taxed when you eventually sell, not just delayed.

Some newer treaties (e.g. with the UK and Canada) contain a “look-back” rule letting Australia tax you anyway if you sold within five years of leaving, so the answer depends on which country you move to and which treaty applies.

So, should you make the choice?

There is no single answer that works for everyone.

What Is the CGT Event I1 Deferral Choice?

The deferral choice is available to an individual who stops being an Australian resident.

If you make the choice, you disregard the capital gain or loss that would otherwise arise under CGT event I1.

The affected assets are then treated as taxable Australian property.

The choice applies to all CGT assets covered by CGT event I1. It is not a choice you make separately for selected assets.

The tax outcome can then arise when you dispose of the asset or become an Australian resident again.

You do not need to fill out a separate form to make this choice. It is made simply through the way you prepare your Australian tax return for the income year in which your residency ceased. If you do not report a capital gain or loss from CGT event I1 on that return, the ATO treats you as having made the deferral choice.

This can sound attractive because it may prevent an immediate tax bill. However, delaying the tax can also mean a larger amount is eventually subject to Australian CGT.

Consider an investment worth $100,000 when you leave Australia. You originally paid $50,000.

If you trigger CGT event I1, the initial capital gain is $50,000.

If you defer it and the investment later rises to $180,000 before you sell it, the eventual Australian CGT calculation can take the later increase into account.

You have gained time, but the eventual tax outcome can look very different from a simple delay.

How Do You Decide Whether to Defer CGT?

Deferring does not just delay the tax. It can significantly increase it.

Here is why. If you crystallise the gain when you leave, you generally keep the full 50% CGT discount, since your entire ownership period up to that point was as an Australian resident. Any growth in the asset after you leave is then outside Australia’s CGT net altogether.

If you defer, and Australia retains the right to tax the eventual sale, the outcome changes on two fronts. First, the 50% discount is reduced in proportion to how much of your total ownership period was spent as a foreign resident, so the longer you stay away, the smaller the discount becomes. Second, the eventual gain is taxed at foreign resident rates, which start at 30% from the first dollar with no tax-free threshold, rather than at ordinary resident marginal rates.

For example, say you buy shares for $50,000. Five years later, you leave Australia when they are worth $100,000. Five years after that, you sell them for $180,000.

If you crystallise the gain at departure, you pay tax on a $50,000 gain with the full 50% discount applied at resident rates, and the later $80,000 of growth is never taxed by Australia.

If you defer, you pay tax on the full $130,000 gain when you sell, but with only half the discount available, and at foreign resident tax rates.

If you defer and Australia still has taxing rights when you sell, you’d pay tax on the full $130,000 gain, but with only half the discount available, and at foreign resident tax rates.

But this assumes Australia retains the right to tax the sale at all. If you move to a country with a DTA that gives it exclusive taxing rights over shares, the deferred gain may never be taxed by Australia.

So deferral isn’t automatically the worse option; it depends heavily on where you’re moving to and that country’s treaty with Australia.

For some people, paying tax on the gain when they leave may be preferable. For others, deferring the tax may help with cash flow.

International tax can add another layer. Your new country of residence may also have rules affecting the same investment.

This creates a situation where a decision that looks simple from an Australian perspective can have consequences overseas.

What if Your Investment Has Lost Value?

The deferral choice is not always about avoiding tax on a gain. If an asset has fallen in value, for example cryptocurrency purchased near a market peak, crystallising the loss under CGT event I1 can work in your favour.

A capital loss recognised at this point can be carried forward indefinitely to offset future Australian capital gains, such as a future sale of Australian property. Good crypto record-keeping matters here too, since each asset is treated separately when working out your position.

This matters because the deferral choice applies to all your CGT assets together. You cannot defer the gains on assets that have grown while crystallising losses on assets that have fallen. If you make the deferral choice, any paper losses are deferred along with everything else, and you lose the opportunity to bank them now.

Does CGT Event I1 Apply to Australian Property?

Generally, CGT event I1 does not treat taxable Australian property as being disposed of when you stop being an Australian resident.

Australian real property is taxable Australian property. This includes Australian houses, apartments, commercial property and land.

That means your Australian property can remain within Australia’s CGT rules after you become a foreign resident.

For example, suppose you own an investment property in Sydney and move permanently to Canada. Becoming a Canadian tax resident does not remove the Australian CGT consequences of eventually selling that property. If you’re weighing up when to sell, our guide on tax planning before you sell an investment property covers what to check before you do.

The property remains connected with Australia’s tax system because it is Australian real property.

This is different from an ordinary share portfolio that may not qualify as taxable Australian property.

What About Your Former Australian Home?

This area requires extra care.

The main residence exemption has its own rules. There are also special restrictions for foreign residents selling Australian residential property.

The ATO states that changes introduced from 12 December 2019 can prevent a foreign resident from claiming the main residence exemption when disposing of Australian residential property, subject to limited exceptions.

So, if you move overseas and keep your former Australian home, do not assume that living in it before leaving will automatically make a future sale tax-free.

Your residency status, ownership period, use of the property and the dates involved can all matter.

What About Australian Shares?

Australian shares need to be assessed based on their circumstances.

If the shares are not taxable Australian property, CGT event I1 can apply when you cease Australian residency.

If you choose to disregard the gain under the relevant deferral provision, those shares become taxable Australian property for the relevant period.

This can have a major effect on a future sale.

For example, you own Australian shares worth $120,000 when you leave Australia. You paid $70,000 for them.

You may need to consider a $50,000 capital gain under CGT event I1. If you make the deferral choice, the gain is not immediately recognised under I1.

If you later sell the shares while living overseas, the deferred CGT consequences can become relevant.

This is why selling or retaining investments before leaving Australia should not be treated as a simple investment decision. There may also be tax consequences.

Are There Exceptions to CGT Event I1?

Yes. CGT event I1 has specific exceptions and special rules.

For example, capital gains and losses from CGT event I1 can be disregarded for certain pre-CGT assets acquired before 20 September 1985. There are also special rules for certain employee share scheme interests.

Temporary residents can also have different outcomes when they cease Australian residency. The ATO states that a temporary resident who ceases Australian residency is not treated as having disposed of their assets under this rule.

This is one reason you should not calculate CGT event I1 based only on a general checklist.

Your residency category and the type of asset can change the result.

What Should You Do Before Leaving Australia?

If you are planning to move overseas, deal with your CGT position before your departure date rather than after it.

Start by identifying every CGT asset you own. Include shares, cryptocurrency, managed investments and other investments.

Next, establish the cost base for each relevant asset. You also need a reasonable market value at the time your Australian tax residency ends.

Then check whether each asset is taxable Australian property.

After that, compare the two main outcomes. One option may involve recognising the gain under CGT event I1. The other may involve making the deferral choice.

If you are considering the deferral choice, also think ahead to whether you might return to Australia one day. Assets that stay deferred under CGT event I1 do not get the usual cost base reset that other returning residents receive, so you could retain your original, lower cost base rather than a reset market-value cost base.

You should also check whether you have capital losses available. These may affect the amount of capital gain that ultimately becomes taxable. It’s also worth reviewing our list of common CGT errors before you lodge, since several of them show up specifically around residency changes.

Finally, consider the tax rules in your new country of residence.

Leaving Australia can change your tax position in several ways at once. CGT event I1 is one part of that picture, but it can be a significant one.

The Key Takeaway

CGT event I1 can create a capital gains tax liability when you stop being an Australian tax resident, even if you have not sold your investments.

The rule generally applies to CGT assets that are not taxable Australian property. The asset’s market value at the time you cease residency is used to calculate a gain or loss.

For individuals, a choice is available to disregard the immediate gain or loss. However, that choice generally defers the tax rather than eliminating it, and in many cases it increases the overall Australian tax due to a reduced CGT discount and foreign resident tax rates.

If you are leaving Australia with shares, investments or other valuable assets, do not leave the CGT question until your tax return is due. The residency date, asset values, cost bases and deferral decision can all affect your final tax position.

Getting the numbers right before you leave can help you avoid an unpleasant surprise later.

FAQs

What is CGT event I1 and when does it apply?

CGT event I1 applies when an individual or company stops being an Australian resident for tax purposes. For certain CGT assets that are not taxable Australian property, you calculate a capital gain or loss using the asset’s market value when residency ends.

Which assets are affected by CGT event I1?

CGT event I1 generally affects CGT assets that are not taxable Australian property. Examples can include certain shares, investment interests and cryptocurrency. Australian real property is generally taxable Australian property and is not subject to the deemed disposal under CGT event I1.

Can I avoid paying tax under CGT event I1?

You cannot simply ignore CGT event I1 if it applies. However, an individual can choose to disregard the capital gain or loss arising from the event. This choice generally defers the tax under Australian domestic law, and if Australia still has taxing rights when you eventually sell, the tax can be higher due to a reduced CGT discount and foreign resident tax rates. However, if you move to a country with a Double Tax Agreement that gives it exclusive taxing rights over shares, the deferred Australian tax can be extinguished entirely rather than just delayed.

What is the deferral choice and how do I make it?

The deferral choice allows an individual to disregard capital gains and losses from CGT event I1. It is made through the way you prepare and lodge your Australian tax return for the year residency ceased, with no separate form required. The choice applies to all CGT assets covered by the event. The deferred tax can become relevant when a CGT event later happens to the asset, or you become an Australian resident again.

Does CGT event I1 apply to my Australian property?

Generally, no. Australian real property is taxable Australian property, so it is not treated as disposed of under CGT event I1 when you cease residency. However, Australian property can remain subject to Australian CGT after you become a foreign resident.

Get Help Before You Go

CGT event I1 is not something to work out on your own at tax time. The residency date, asset values, the deferral choice and the rules in your new country can all interact, and getting any one of them wrong can be costly.

If you are planning to leave Australia, or have already left and are unsure whether CGT event I1 applies to you, get in touch with Clear Tax Accountants. We can review your assets, walk you through the crystallise-or-defer decision, and help you get your position right before it becomes a problem.

Reach out to Clear Tax Accountants today to talk through your situation.

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