The 2026 CGT Reforms – How Australian Expats Are Taxed on Australian Property

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 fundamentally changes the way capital gains are calculated from 1 July 2027. For Australian expatriates, the interaction between the new rules and the existing foreign resident CGT provisions is complex and, in some areas, remains open to interpretation.

This article explains how the new rules are expected to apply to Australian residential property owned by individuals who become foreign residents. It focuses on Australian tax law only and does not consider foreign tax consequences.

To illustrate the rules, we will use the following example.

Example Mr Moon leaves Australia on 27 July 2026 to live and work overseas. He becomes a foreign resident for Australian tax purposes and owns:

• several Australian investment properties; and

• a former Australian main residence.

When Mr Moon ceases Australian tax residency, CGT Event I1 is triggered. However, because Australian real property is Taxable Australian Property (TAP), there is generally no deemed disposal when residency ceases. Instead, Australia retains taxing rights over the properties and the CGT event generally occurs when the property is ultimately sold.

The tax outcome then depends on:

• whether the property is an investment property or a main residence;

• whether Mr Moon is an Australian tax resident or foreign resident when the sale contract is entered into; and

• how the transitional provisions commencing on 1 July 2027 apply.

Part 1 – Investment Properties

Unlike the main residence rules, there is no general six-year rule for investment properties.

The length of time spent overseas does not, of itself, determine the CGT outcome.

Instead, the outcome depends primarily on the taxpayer's residency status at the time of disposal and the operation of the transitional provisions.

Scenario 1 – Property Sold While Still a Foreign Resident

Where an Australian investment property is sold while the owner remains a foreign resident, Australia continues to tax the capital gain because the property remains Taxable Australian Property.

The existing foreign resident CGT rules continue to apply, including the foreign resident CGT withholding regime.

Transitional Market Value Rules

One of the more technically difficult issues arising from the 2026 reforms is whether a taxpayer disposing of Australian real property while still a foreign resident qualifies for the transitional market value rules contained in Subdivision 112-E.

The legislation requires several gateway conditions to be satisfied, including a condition referring to section 115-105.

In our view, there is a credible interpretation that these gateway requirements may not be satisfied where the taxpayer remains a foreign resident at the time of disposal. If that interpretation is correct, the taxpayer would calculate the capital gain under the ordinary CGT rules rather than using the 30 June 2027 market value split.

As at the date of writing, neither the legislation nor publicly available ATO guidance expressly resolves this issue.

CGT Discount

Where the pre-1 July 2027 gain remains subject to the existing CGT discount rules, any available discount continues to be subject to the existing foreign resident apportionment provisions in Division 115.

This generally means the available discount may be reduced to reflect periods during which the taxpayer was a foreign resident.

Post-1 July 2027 Gains

From 1 July 2027, the new indexation regime replaces the general 50% CGT discount.

However, where the statutory conditions in Division 114 are met, foreign residents may not qualify for cost base indexation.

Accordingly, gains accruing after 1 July 2027 may be calculated without the benefit of either the former CGT discount or the new indexation rules.

The new minimum tax provisions may also apply depending on the taxpayer's circumstances.

Scenario 2 – Returning to Australia Before Sale

Where the taxpayer returns to Australia, re-establishes Australian tax residency and subsequently disposes of the investment property, the analysis changes.

On our current interpretation of the legislation, the transitional market value provisions are more likely to apply because the relevant gateway provisions are tested by reference to the ultimate disposal event.

If that interpretation is correct:

• gains accrued before 1 July 2027 are separated from gains accruing afterwards;

• any pre-2027 gain remains subject to the existing CGT discount rules (including any foreign resident apportionment under Division 115); and

• gains arising after 1 July 2027 are calculated under the new post-reform regime.

Returning to Australia does not necessarily restore entitlement to cost base indexation for the post-2027 period where the statutory testing requirements in Division 114 are not satisfied.

As this area of the legislation has not yet been considered by the Courts or clarified by the ATO, taxpayers should obtain advice based on their individual circumstances before relying on any particular interpretation.

Part 2 – Former Main Residence

The taxation of a former main residence is governed by different provisions.

Unlike investment properties, the foreign resident main residence rules can significantly affect whether any exemption is available.

Broadly, individuals who are foreign residents when a CGT event occurs may not qualify for the main residence exemption unless the statutory requirements for one of the limited exceptions are satisfied.

These rules are separate from the new 2026 CGT reforms and must be considered independently.

Scenario 3 – Selling While a Foreign Resident

If the former home is sold while the taxpayer remains a foreign resident, entitlement to the main residence exemption depends on the specific legislative requirements applying at the time of disposal.

These rules are highly fact-specific and require consideration of matters including:

• when the property was occupied as the taxpayer's home;

• whether it was later used to produce assessable income;

• the taxpayer's residency status at the time of disposal; and

• whether any legislative exceptions apply.

No assumption should be made that the exemption will automatically remain available merely because the taxpayer returns to Australia at a later date.

Scenario 4 – Returning to Australia Before Sale

Where the taxpayer returns to Australia and becomes an Australian tax resident before entering into the sale contract, the foreign resident denial provisions may no longer apply.

However, this does not automatically produce a full exemption.

The extent of any available main residence exemption must still be determined under the ordinary provisions of Subdivision 118-B, including consideration of:

• periods during which the property qualified as the taxpayer's main residence;

• any absence rule elections;

• periods during which the property produced income; and

• the interaction between those rules and the transitional CGT provisions commencing on 1 July 2027.

Key Takeaways

The 2026 reforms have created a significantly more complex CGT regime for Australians who own property while living overseas.

For investment properties, the principal issues are the interaction between the transitional market value rules, the foreign resident CGT provisions and the new indexation regime.

For former main residences, separate foreign resident exemption rules continue to apply and may substantially affect the outcome.

Importantly, some aspects of the interaction between the new legislation and the existing foreign resident CGT provisions have not yet been clarified by the ATO or considered by the Courts. Until further guidance becomes available, taxpayers should seek advice based on their particular facts rather than assuming the legislation produces the same outcome in every case.