A sleeper budget change means Australians who become non-residents could lose the entire CGT discount on their investment property for good. Here is what you need to know, and why the time to plan is now, not when you are packing your bags.
Working abroad for a few years is a well-worn path for Australian executives. A posting in London, a role in Singapore, a few years in New York or Hong Kong. It builds careers, expands networks and, for many, it is simply part of the journey.
But a change to the capital gains tax rules means that decision now appears to carry a tax consequence most people will not see coming. And if you own an investment property in Australia, the cost could be significant.
What CGT rules are actually changing
This one arrived quietly. It was a sleeper measure buried in the recent federal budget, and it has caused real upheaval across Australia's CGT regime. Most people, and plenty of advisers, missed it. But it is now law, and it changes the calculus for anyone who owns an investment property and spends time overseas.
From 1 July 2027, a new indexation-based CGT discount regime applies to investment properties. To access it, there is a residency requirement. The indexation-based CGT discount will not be available to individuals who are foreign or temporary residents at any point during the testing period. The testing period runs from 1 July 2027, or the day the asset was purchased (whichever is later) and the date the asset was sold.
That single line does a lot of work. If you become a non-resident for tax purposes at any point after 1 July 2027, you lose the discount. Not for the years you were away, it appears to be for the entire ownership period.
Compare that to how the rules work today. Right now, if you head overseas and become a non-resident, you only lose the discount proportionally, based on the time you were away. Own a property for 30 years, spend three of them as a non-resident, and you still keep the discount for the other 27. It is a fair, apportioned outcome.
As it currently stands, under the new law, it would appear that same person might walk away with no discount at all. Any time abroad after 1 July 2027 could wipe out the concession across three decades of ownership. We note however, that the Commissioner has pointed to this part of the legislation regarding the effects of residency changes might be subject to amendments after future reviews. This appears to be the effect of legislation rolled out quickly, however, thankfully the government has acknowledged this complexity and hopefully follow through for further assessment.
Why this catches good planners off guard
The people most exposed here are not aggressive tax minimisers. They are Australians who have lived, worked and paid tax here for most of their lives, who happen to accept an overseas assignment before eventually selling an Australian investment property.
A relatively short period of overseas employment can be enough to switch off access to the new regime for that property. That is a harsh result when someone has been a resident taxpayer for the overwhelming majority of the time they owned the asset. Confirmation of how this legislation will affect individuals in this situation is still subject to future reviews by the Commissioner.
There is a second group I am particularly worried about. Australians who are already overseas as non-residents right now, and who plan to return home after 1 July 2027. Many will come back assuming nothing has changed, only to find they have quietly triggered a problem. It is the kind of issue you do not discover until you sell, and by then the options to fix it have usually closed.
The good news is you have time, if you move early
The change does not take effect until 1 July 2027. That is the whole point of writing about it now. There is a genuine planning window, and it favours people who act while they still have choices.
If you have recently left Australia, or you are weighing up a move that could change your tax residency, this is the moment to get advice. Not after you have gone. Not on the flight home. The decisions that protect you, around when you leave, how long you stay away, what you own and in which structure, are far easier to make before your tax residency status shifts.
There are three tests required to be reviewed to determine whether you have break Australian residency. First is spending 183 days in Australia, the other two are in respect to residency and domicile tests. As a rule of thumb, spending more than two years can be a useful rule of thumb to determine whether you may have changed residency status, however, all three tests require to be applied and can be difficult to determine.
Property is treated differently to shares
One point worth understanding is that property and other assets are not treated the same way.
If you own shares or similar assets and you leave Australia, the rules generally let you make a deemed disposal when you go. In plain terms, you are treated as having sold the asset on departure. That triggers a CGT event at a point where the discount still applies, and it can make future gains on that asset effectively outside the Australian net until you return. If you have not chosen to deem disposal of these asset types upon exiting Australia, you may still have a capital gains consideration on Australian assets and require careful consideration and planning aswell.
Property does not offer deemed disposal release valve. You cannot simply crystallise the gain on the way out. That is exactly why forward planning matters so much more for property owners, and why the mix of assets you hold should be part of the conversation before you go.
Talk to us before you go
Cross-border tax is one of those areas where a short conversation early saves a large amount later. At BlueRock, our tax specialists work with high-net-worth individuals and business owners to plan residency changes properly, protect the value of their assets and avoid nasty surprises on the way home.
If you are heading overseas, already abroad, or planning your return, get in touch via the form below and let's map out your position while there is still time to shape it.
Disclaimer: The information in this article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.
