If an Australian expat buys direct listed Australian shares while they are overseas, there is no capital gains tax in Australia on any capital gains generated while the expat is overseas.
Australia has aligned itself with the US and UK by not taxing foreign residents on capital gains earned from holding direct shares.
However, whilst the expat investor in Aussie shares might not pay any capital gains tax in Australia, they may have to pay capital gains tax on any gains in the jurisdiction where they are based.
When the Aussie expat returns to Australia and becomes tax resident, the shares will become subject to CGT from the date of residence.The ‘cost base’ of the asset is determined by reference to the market price of the shares on the date the person becomes tax resident.
What about shares purchased by an expat before they go overseas?
If the investor thinks they will be better off outside the Australian CGT regime, they can make a ‘deemed sale’ of the shares as at the date they become a foreign resident and pay any accumulated CGT that is applicable in respect of those shares – even though the shares have not been sold.
If you are going to work in a jurisdiction such as Hong Kong or Singapore which doesn’t tax investors on their worldwide income or to a country where there is no personal income tax, it may be to your advantage to pay out the accumulated tax liability on your share portfolio and then enjoy a CGT free period while you are overseas.
If you go to a country such as the UK or the US where you will be taxed on your worldwide income, the potential tax savings are likely to be a lot lower.
You have to weigh up (a) the cost of paying tax earlier than otherwise would have been the case versus (b) the likely after-tax gains you could earn while you are overseas.
What if I don’t make a deemed sale and sell the shares when I’m back in Australia?
If you don’t make a deemed sale of shares you owned while you were tax resident of Australia, you will have to pay capital gains tax on the increase in value of the shares during the period of ownership irrespective of whether some of the period of ownership was while you were a foreign resident.