Living overseas is a rite of passage for many Aussies, but under new rules buried in the budget, they may be in for a nasty surprise if they have an investment property.
Tax experts are now warning that Australians working overseas could lose access to any capital gains tax discount on investment properties under new residency requirement rules.
As part of the budget’s new tax rules, the 50 per cent capital gains tax (CGT) discount for assets held longer than 12 months was scrapped, and replaced with a cost-base indexation model (adjusting for CPI inflation) plus a 30 per cent minimum tax.
KPMG workforce and innovation partner Craig Robinson, who also advises expats on tax, said that under the current rules, tax relief was proportional based on the time you spent overseas — as a nonresident for tax purposes.
His understanding is that, under the new legislation, stepping foot overseas long enough to break tax residency completely strips you of post-July 2027 indexation benefits when selling your Australian property — even for the years you realised capital gains while actually living in it as a resident.
The change will affect investment property-owning Aussies working overseas for several years after July 1, 2027 and Aussies currently working overseas, who will still be doing so after that date.
$70k worse off under new rules
Take the case of an investor who buys a Brisbane apartment and holds it for 15 years and makes a capital gain of $450,000. For 13 of those years, they live, work and pay taxes in Australia, but in the middle of their ownership, they accept a three-year corporate secondment to London, officially breaking their Australian tax residency.
Under the old rules, the tax office applied a proportional calculation. The investor would only lose their tax concessions for the exact years they were physically overseas, while successfully claiming the 50 per cent capital gains discount for the 13 years they lived and worked locally.
This effectively reduced their taxable capital gain from $450,000 down to $270,000. Applying a typical Australian marginal tax rate of 39 per cent (including the Medicare levy), their final tax bill upon selling the property would have come to $105,300.
Under the new all-or-nothing system, that brief stint overseas changes everything. Because they broke their tax residency at some point during the asset’s post-July 2027 testing period, they are entirely disqualified from accessing cost-base indexation. Despite spending more than a decade as a domestic taxpayer, those two years in London completely strips them of their inflation-adjusting tax relief, leaving them to face a tax bill on the full, unindexed capital gain.
With the old 50 per cent discount scrapped entirely, the full $450,000 capital gain is dumped directly onto their tax return.
Assuming the same 39 per cent tax rate, the total tax bill suddenly climbs to $175,500 — leaving the investor an eye-watering $70,200 worse off.
Mr Robinson said the rules only apply to people who have broken their Australian tax residency.
“Typically to do that, you’re talking about a fairly significant period of time and that you have largely severed your connection with Australia,” he said.
“So think people that have moved to London for multiple years and really established life there rather than somebody that has left for, say, six months.
“Previously, you got a proportion of the relief under the 50 per cent discount rules. As it currently stands, there is no ability to get a proportion of indexation on that property under the new rules.”
Property owners hit harder than shareholders
Mr Robinson said the rules do not hit Aussies who own shares as hard, because they are eligible for something called “deemed disposal” when they sell.
“So if you’re an Australian, leaving Australia, you’ve got, say, a share portfolio, and it’s not real Australian property,” he said.
“You can do what is referred to as a deemed disposal in your tax return when you come to leave. And that means that you would get access to indexation for the period that you have been an Australian resident, but you wouldn’t get it thereafter.
“So with property, you don’t have the ability to undertake a deemed disposal. So you wouldn’t get any cost-based indexation. Property is referred to as taxable Australian property.”
He said Aussies need to think carefully about their investments if they are planning to move overseas.
“I think the main thing is a planning perspective. So obviously, individuals are likely to need to consider how they’re going to be impacted across their portfolio,” he said.
“So they should review their assets when making decisions about selling or relocating internationally. It’s just important that people understand the complexity that sits behind that change and how it impacts them.”
‘Surprisingly harsh’ new rules
Other tax experts have weighed in on the changes, with one saying the rules are “surprisingly harsh”.
Ben Turner, an accountant specialising in expat tax at Atlas Wealth Management, said he also understood the new rules mean an individual must not be a foreign resident or temporary resident at any time during the testing period, or they will lose their indexation benefits.
“The practical consequence is that a relatively short period of overseas employment may prevent access to the new indexation regime for that property, despite decades of Australian tax residency beforehand,” Mr Turner told the Australian Financial Review.
“It potentially captures Australians who have spent the overwhelming majority of their ownership period living, working and paying tax in Australia but happened to accept an overseas assignment before eventually selling an Australian investment property.”
Aussies living overseas have the option to become non-tax residents if their host country offers a more advantageous tax regime. But breaking away from the Australian tax net is not automatic.
To officially break residency, expats must satisfy a series of strict criteria. The first benchmark is spending fewer than 183 days in Australia during the financial year, but individuals must also clear the Australian Taxation Office’s rigorous ‘resides’ and ‘domicile’ tests to prove they have truly relocated.
Mr Turner said Aussies who spend two years working overseas are unlikely to become nonresident for tax purposes, with the change more likely to hit those who are away for longer.
News.com.au has reached out to the Treasury for comment.