This isn’t a budget proposal still working its way through parliament. It’s law now. A lot of expats will read about this change and assume it doesn’t apply to them, but you might be missing something important here.
If you own an investment property in Australia and you’ve ever spent time overseas as a non-resident, there’s a new rule buried in the recent tax reform that can permanently cost you a benefit you haven’t even been offered yet, one you might never get back, even after you move home for good.
Here’s how it’s worked before this tax reform: non-residents get no 50% CGT discount at all, but the moment you return and become an Australian resident again, that discount comes back, pro-rated for the years you’re home. Coming home has always fixed the problem going forward. That’s about to stop being true.
It’s called the CGT indexation testing period, and it starts on 1 July 2027. Most expats will read the headline, “capital gains discount is changing,” and assume it doesn’t apply to them yet, or that returning to Australia fixes it. Neither is true.
This is not a “sort it out later” issue. It affects property you already own, right now, regardless of when you plan to sell.
How the CGT Discount Works Today
Under the current rules, non-residents don’t get the 50% CGT discount at all. You pay tax on the full capital gain. But the moment you return and become an Australian tax resident again, the discount starts applying to your property, pro-rated for the years you’re back.
In other words, coming home fixes the problem going forward. Every year you spend back in Australia as a resident earns you a slice of the discount on that property. This is the version of the rule most expats have in their head, and it’s the version that’s about to change.
What Changes on 1 July 2027
From 1 July 2027, the flat 50% discount is being replaced with an inflation-based indexation system for Australian tax residents. Instead of a straight 50% haircut on your gain, your cost base gets adjusted upward for inflation, which, depending on how long you’ve held the property, can be worth more or less than the old discount.
That part is a mechanical change. The part that matters for expats is the eligibility condition attached to it, under section 114-25(2) of the reform.
To access indexation, you must not have been a foreign resident or temporary resident at any point during the “testing period,” which runs from 1 July 2027 until the date you sell the property. Not “on average.” Not “mostly.” Any point.
Under the current rule, returning to Australia restores your benefit from that point forward. Under the new rule, one period of non-residency during the testing window disqualifies the property from indexation permanently, even if you’re a resident again for the next 20 years before you sell.
| Old rule (before 1 July 2027) | New rule (from 1 July 2027) |
|---|---|
No discount for the years you’re a non-resident after May 2012 | No indexation for the years you’re a non-resident |
Discount restored pro-rata once you return as a resident | Indexation permanently unavailable if you were ever non-resident during the testing period. Return doesn’t restore it. |
A Worked Example
Say you bought an investment property in Brisbane in 2026 while working in Singapore. You move back to Australia in 2031 and become a resident again. You hold the property as a resident for the next eight years, then sell in 2039.
Under the current rule, your $500,000 gain is apportioned by ownership period: 5 years non-resident (2026-2031), 8 years resident (2031-2039), 13 years total. The resident-period share of the gain, $500,000 × 8/13 = $307,692, gets the 50% discount, worth $153,846 off your taxable gain. The non-resident-period share, $500,000 × 5/13 = $192,308, is taxed in full. Total taxable gain under the current rule: $346,154.
Under the new rule, you fail the test. You were a foreign resident for part of the period between 1 July 2027 and your 2039 sale. That’s enough. It doesn’t matter that you spent eight of those years back in Australia as a resident. Indexation is unavailable for the entire gain, permanently, not partially. Taxable gain: the full $500,000.
On this example alone, the new rule turns $153,846 of previously-discounted gain into fully taxable gain. That’s not a rounding difference, it’s the entire benefit of having been a resident for eight of those thirteen years, wiped out.
This isn’t only a new-purchase problem. Say instead you’ve owned an investment property in Melbourne since 2018. You were an Australian resident the entire time you held it, until you relocated to Dubai in 2028. You’re still overseas when you sell in 2035, as a non-resident.
Under the current rule, your gain is apportioned the same way: the resident years (2018-2028) get the 50% discount, the non-resident years (2028-2035) don’t. You’d still walk away with a partial discount on the resident portion.
Under the new rule, none of that decade as a resident matters. Because you were a foreign resident at some point between 1 July 2027 and the 2035 sale, indexation is blocked for the entire gain, not just the years you were away. A property you’ve held for years, resident the whole time until you left, fails the test exactly the same way a brand-new purchase does.
Could This New CGT Rule Change the Tax Outcome on Your Property?
Own an Australian investment property and spend time overseas? Tell us where things stand and we’ll map your residency timeline against this rule before we talk, no forms, just a short message so we know what to prepare.
Why This Catches People Off Guard
Every other major CGT concession expats deal with rewards you for coming home. The six-year main residence rule protects you if you sell within six years of leaving. The 50% discount today is restored once you’re a resident again. The pattern expats have learned is: return to Australia, and your tax position improves.
The testing period breaks that pattern. It is not asking “are you a resident when you sell?” It is asking “were you ever not a resident during this window?” A single yes is permanent. A three-year posting overseas taken in 2029, fifteen years before you eventually sell, is enough to disqualify the property for good.
This also applies to property you already hold. It is not limited to purchases made after the reform. If you own an Australian investment property today and there is any chance you’ll spend time overseas as a non-resident before you eventually sell it, this rule is already relevant to your planning.
What You Can Do About It
The rule is still relatively new, and how it plays out depends on your specific timeline and structure. A few planning angles worth understanding, based on what we’re advising clients on right now:
- New builds keep your options open. Off-the-plan purchases and land-and-build properties retain the choice between the old 50% discount method and the new indexation method. Even where indexation itself isn’t available, this preserves optionality the existing-property route doesn’t have.
- Your future home is unaffected. The main residence exemption and six-year absence rule are unchanged by this reform. If you’re planning to buy the home you’ll eventually live in when you return, that plan doesn’t carry this risk. Once you move in, the exemption applies from that date regardless of your residency history.
- Timing your return and your sale matters more, not less. If you’re weighing whether to sell an existing investment property before or after a period overseas, this rule changes the maths. Selling and resetting into a new purchase at the right time can avoid the testing period issue entirely for future purchases.
- Model it before you decide anything. Whether this rule costs you meaningfully depends on your specific ownership timeline, the property’s likely gain, and how long you intend to hold it. That’s a calculation worth running properly rather than guessing at.
One more thing worth knowing: this condition has drawn criticism since the reform passed, and there is an active push, including from ODIN’s team, to have it reconsidered before it takes effect. Whether that succeeds is genuinely uncertain, which is exactly why it’s worth planning on the assumption that the rule stands as written.
Frequently Asked Questions
Does this rule apply to property I already own, or only future purchases?
It applies to property you already own. The testing period runs from 1 July 2027 until the date you sell, regardless of when you bought the property. There is no exemption for existing holdings.
How is "foreign resident" or "temporary resident" worked out for this rule?
The same four tests the ATO already uses to determine tax residency: the resides test, the domicile test, the 183-day test, and the superannuation test. You are treated as a foreign resident for any period where none of these tests are satisfied.
If I sell before 1 July 2027, does this rule affect me?
No. The indexation regime and its testing period only start on 1 July 2027. If you sell before then, you are taxed under the current rules: no discount as a non-resident, pro-rata discount if you have returned as a resident.
Does this change the six-year rule or the main residence exemption?
No. Both are unchanged by this reform. A property that qualifies as your main residence, or falls within the six-year absence window, is assessed under those separate rules, not the indexation testing period. To claim the exemption, you must also be an Australian tax resident when you sign the sale contract; confirm your position with a registered tax agent.
I don't plan to return to Australia. Does this rule matter for me?
Less than it does for expats planning to return. If you remain a non-resident permanently, you were already excluded from the 50% discount under current law, and you would be excluded from indexation under the new law for the same reason. Your residency status is what drives the outcome, not this testing period specifically.
Can this be undone once it applies, or is it worth waiting to see if the rule changes?
Once a period of non-residency triggers the testing period condition, it is permanent. There is no way to restore eligibility for that property. There is an active push, including from ODIN’s team, to have the rule reconsidered before it takes effect, but that outcome is not guaranteed. Plan on the assumption the rule stands as written, and treat any change as a bonus.
Compliance Disclaimer: This article is general information only and does not constitute financial, tax, or legal advice. The CGT indexation testing period reflects the tax reform legislation as passed; details may be subject to amendment before 1 July 2027. Your individual circumstances will determine your tax position. Consult a qualified Australian expat tax advisor before making decisions based on this content.
