If you’re planning to relocate permanently from Australia to the United States, understanding how your assets will be taxed is crucial. Whether you own shares, rental properties, or other investments, both countries have complex tax rules that may apply. Proper planning helps ensure you’re not taxed twice on the same gain.
What Happens To Your Asset Values When You Move To The U.S.?
Important: Contrary to what many assume, the United States does not automatically reset or “step-up” the tax value (basis) of your assets when you become a U.S. tax resident. Instead, your original purchase price typically remains the basis for calculating your future U.S. taxes. This means you may face U.S. taxes on gains that occurred even before moving to America.
Example (Shares):
Say you bought shares in a major Australian bank years ago for AUD $30,000. By the time you relocate to the U.S., they are worth AUD $150,000. Later, as a U.S. tax resident, you sell them for AUD $180,000. Without special planning, the U.S. taxes you on a gain of AUD $150,000 (AUD $180,000 minus your original AUD $30,000 purchase price)—even though most of that appreciation occurred while you lived in Australia.
Australia’s Exit Tax: What Is It?
When you cease Australian tax residency, Australia imposes a tax on your worldwide capital assets, treating most as if you’ve sold them at their current market value (Income Tax Assessment Act 1997, section 104-160). This “exit tax” effectively taxes your accumulated gain up to that point.
Example (Shares Continued):
At departure, your shares valued at AUD $150,000 (original cost AUD $30,000) would trigger Australian Capital Gains Tax (CGT) on the AUD $120,000 gain immediately—even though you haven’t actually sold them.
Risk Of Double Taxation
If no special steps are taken, you face paying tax twice:
- First – Australia taxes your AUD $120,000 gain at the time you leave.
- Later – The U.S. taxes the entire AUD $150,000 gain when you sell the shares, including the AUD $120,000 already taxed by Australia.
Clearly, this is not ideal. Fortunately, the U.S.-Australia Tax Treaty provides two valuable solutions.
Solution #1: The Treaty Basis Step-Up (Paying Australian Exit Tax)
Under Article 13(5) of the U.S.-Australia tax treaty, you can elect to treat your assets as sold and immediately repurchased at their market value at the time you cease Australian residency, effectively “stepping up” your basis for U.S. tax purposes.
Example (Shares):
Using the treaty election, your U.S. tax basis for the shares is reset to AUD $150,000—the market value at your departure from Australia. Later, when you sell these shares in the U.S. for AUD $180,000, you pay U.S. tax only on the AUD $30,000 gain accrued after moving. This prevents double taxation, as the pre-move AUD $120,000 gain was already taxed by Australia.
Solution #2: Deferring Australia’s Exit Tax (Exclusive U.S. Taxation)
Australia offers an alternative: you may defer the immediate payment of the exit tax (ITAA 1997, section 104-165). Instead of paying tax upfront, you defer taxation until the actual sale of your assets. Under normal circumstances, this deferred asset would remain taxable by Australia.
However, Article 13(6) of the U.S.-Australia treaty states that if you move to the U.S. and defer Australian exit tax, Australia relinquishes its right to tax that gain, granting exclusive taxing rights to the U.S.
Example (Shares With Deferral):
You defer the Australian exit tax on your shares. Several years later, as a U.S. resident, you sell these shares for AUD $180,000. Australia no longer has the right to tax this gain. Only the U.S. will tax you, applying tax to the full AUD $150,000 gain (original AUD $30,000 cost basis to AUD $180,000 sale price).
This approach gives you cash-flow flexibility at departure (no immediate tax payable), and you may benefit if U.S. tax rates are lower.
How These Rules Impact Different Types Of Assets – Practical Examples
Example 1: Rental Property
Suppose you bought a Sydney apartment as an investment property 10 years ago for AUD $500,000. It’s now worth AUD $1,200,000. You relocate to the U.S. permanently:
- Australian Treatment At Exit
Australian real estate (like your Sydney apartment) remains taxable by Australia even after you become non-resident (classified as “Taxable Australian Property” under ITAA 1997, s.855-20). No immediate exit tax applies on departure. - U.S. Treatment Without Treaty Step-Up
Without planning, the U.S. keeps your original AUD $500,000 cost basis. If you later sell the property for AUD $1,400,000, the U.S. taxes a AUD $900,000 gain—even though much accrued before U.S. residency. Australia would also tax the full AUD $900,000 gain at sale, risking double taxation (though credits may partially help). - With Treaty Step-Up
If you elect the treaty step-up (Article 13(5)), your U.S. tax basis resets to AUD $1,200,000 (value at departure). On selling for AUD $1,400,000, the U.S. taxes only AUD $200,000 gain post-move, while Australia taxes the full AUD $900,000 gain. You claim a U.S. foreign tax credit for Australian taxes paid, largely avoiding double taxation.
Example 2: Portfolio Of International Shares
Suppose you invested AUD $100,000 into global shares now worth AUD $400,000 when you leave Australia for the U.S.:
- Australian Treatment At Exit
Australia taxes the AUD $300,000 gain immediately (shares aren’t Australian property, so they face immediate exit tax). - U.S. Without Treaty Step-Up
Later selling at AUD $450,000, U.S. taxes AUD $350,000 (AUD $450,000 sale price less original AUD $100,000 cost), again double-taxing most of the gain. - With Treaty Step-Up
By electing the treaty basis step-up, your U.S. tax basis is reset to AUD $400,000. Selling later at AUD $450,000, the U.S. only taxes AUD $50,000, preventing double taxation on pre-move gains.
Example 3: Shares In Your Australian Business
You founded a small Australian business, investing AUD $200,000 initially. By relocation time, it’s worth AUD $1,000,000.
- Australian Treatment
Australia imposes exit tax on your AUD $800,000 gain at departure, unless you defer. - U.S. Without Treaty Step-Up
Selling later at AUD $1,200,000, the U.S. taxes AUD $1,000,000 (full gain from initial AUD $200,000), causing double taxation on AUD $800,000 already taxed by Australia. - With Treaty Step-Up
Treaty election resets your U.S. basis to AUD $1,000,000. Selling later for AUD $1,200,000, you only pay U.S. tax on AUD $200,000, protecting you from double taxation.
How To Make A Treaty Election?
To claim this valuable treaty-based step-up, you’ll typically file IRS Form 8833 (Treaty-Based Return Position Disclosure) with your first U.S. tax return as a resident, clearly electing the treaty basis step-up under Article 13(5).
Key Points To Remember
- The U.S. generally does not reset your tax basis on relocation.
- Australia’s exit tax rules may cause double taxation if ignored.
- The U.S.-Australia tax treaty offers a treaty-based step-up or exclusive taxing right to the U.S., protecting you from double tax.
- Proper planning is essential. Evaluate your choices carefully, ideally with professional advice, to choose the best strategy for your situation.
Understanding these tax implications early helps you confidently and efficiently transition your financial life from Australia to the U.S.
