Pack Your Bags, Mind Your Gains: Capital Gains Tax Reform and Overseas Relocation

Australia’s capital gains tax (CGT) regime is undergoing its most significant reform since the introduction of the 50% CGT discount in 1999. The first tranche of reforms has now been enacted and will apply from 1 July 2027.

The key change is the replacement of the 50% CGT discount for individuals and trusts with a cost base indexation regime, together with a 30% minimum tax rate on certain capital gains.

Although the reforms do not commence until 1 July 2027, taxpayers with significant unrealised gains should begin reviewing their position now, particularly where asset disposals, pre-CGT assets, succession planning, or a proposed move overseas are under consideration.

The Current Position

Under the current CGT rules, Australian tax resident taxpayers, other than companies, may apply the CGT discount to reduce any assessable capital gain derived in an income year provided the subject CGT asset has been owned by the relevant taxpayer for at least 12 months.

The CGT discount percentage is 50% for Australian resident individuals and trusts (provided the trust capital gain is distributed to individual tax resident beneficiaries). The CGT discount percentage for complying superannuation funds is 33.33% (or one-third).

The discount applies after applying any capital losses against the capital gains and reduces the total capital gain to be included in the taxpayer’s assessable income.

However, for CGT events happening on or after 1 July 2027, the CGT discount available to Australian tax residents will be replaced by cost base indexation provided the subject CGT asset has been held for more than 12 months and the residency requirements are met. Cost base indexation is not available to foreign or temporary residents. Companies do not qualify for either the CGT discount or cost base indexation. Complying superannuation funds continue to be eligible for the existing one-third CGT discount for assets held for at least 12 months.

Transitional deemed disposal and reacquisition rules

The amendment to the CGT rules establishes a transitional deemed disposal and reacquisition mechanism for eligible CGT assets held by Australian-resident taxpayers immediately before 1 July 2027.

Under this mechanism, an eligible CGT asset is deemed to be disposed of at its market value immediately before 1 July 2027 and reacquired at that value on 1 July 2027. The ‘notional’ capital gain or loss from the deemed disposal/reacquisition is disregarded at that time, with the tax consequences deferred until a subsequent CGT event happens to that CGT asset.

This deemed disposal/reacquisition mechanism allows any gains or losses referrable to the period before 1 July 2027 to be dealt with under the old CGT discount rules, and to ‘fix’ the cost base of the CGT at the beginning of the new cost base indexation regime.

As a result, when a CGT asset held before 1 July 2027 is subsequently disposed of after that date, the capital gain or loss realised will have two components:

• the gain or loss accrued from when the asset was acquired to 30 June 2027, which is subject to the former CGT discount rules; and
• the gain or loss accruing from 1 July 2027 to the actual sale, which is generally subject to the new cost base indexation rules.

However, it should not be assumed that a sale before 1 July 2027 will necessarily produce a superior outcome.

Example – Transitional Asset

Mary, a resident individual taxpayer, acquires an investment property for $600,000 on 1 January 2024. On 30 June 2027, it is worth $1.2 million. On 1 March 2032, Mary sold her investment property for $1.5 million. Assume the indexed cost base of the property at the time is $1.3 million.

Under the new law:

• Mary is taken to have disposed of her investment property on 30 June 2027 and reacquired it on 1 July 2027 for $1.2 million being its market value at the time. The deemed disposal resulted in a notional capital gain of $600,000 which is a discount capital gain calculated under the old law, with its taxing point deferred until the property is sold in the future.
• When the property is subsequently sold on 1 March 2032, the capital gain on disposal comprises two components;
  • the pre-2027 component that is $600,000 to which the CGT discount applies; and
  • the post-2027 component that is $200,000 determined under the new law.
• Total net capital gain assessable to Mary would be $500,000.

If Mary decides to sell the property just before 1 July 2027 for a market value of $1.2 million Mary would have an assessable capital gain after applying the CGT discount of $300,000 which is less than the capital gain that she would have been assessed on if she delays selling the property until 1 March 2032.

The net after tax cash flow available to Mary under the above two scenarios (based on a 47% tax rate) is:

• Property sale on before 1 July 2027 – $1,059,000 ($1.2 million less $141K tax payable on the $300K capital gain);
• Property sale on 1 March 2032 – $1,265,000 (1.5 million less $235K tax payable on the $500K capital gain).

Whilst the above scenario example appears to suggest that a sale before 1 July 2027 will not necessarily produce a superior outcome, the examples are inherently conjectural, as the actual capital gains will depend on future factors, including CPI movements, property growth, indexation cost base adjustments etc. The example also doesn’t look at what Mary does with the 2027 sale proceeds (as she may have other income or gains arising from that which might change the relative outcomes).

Impact on Pre-CGT Assets

Currently capital gains and losses arising from pre-CGT assets are disregarded. However, with effect from 1 July 2027, assets acquired before 20 September 1985 will cease to be treated as pre-CGT assets. This change is implemented through the deemed disposal and reacquisition mechanism outlined above. The key distinction is that capital gains or capital losses accrued up to 1 July 2027 will continue to be disregarded, whereas any capital gains or capital losses accruing after that day are subject to the new indexation cost base rules.

The practical effect is that pre-CGT assets lose their “CGT-free” status from 1 July 2027, and any gains from that day will become subject to CGT.

For example, under the former CGT rules, if a property acquired in 1980 for $100,000 is worth $5 million on 30 June 2027, and sold for $6 million post 1 July 2027, $4.9 million of the growth in value would be outside the CGT system. Under the indexation cost base rules the last $1 million of the growth accrued would be subject to CGT tax adjusted for cost base indexation.

For families and businesses holding long-term legacy assets, this represents a significant policy shift.

Many taxpayers have historically viewed pre-CGT assets as permanently outside the CGT system. While the historical gain remains protected, future appreciation will no longer enjoy that treatment. This may have implications for long-term succession, estate planning and intergenerational wealth transfer strategies.

The New Indexation Regime

Under the new rules, cost base indexation applies to expenditure incurred in each element of the cost base except the third element (the costs of owning the asset). Additionally, indexation is only available if the CGT asset has been owned by the taxpayer for at least 12 months. However, where the CGT asset is subject to the transitional deemed disposal and reacquisition rules, the actual ownership period in which the asset is held is counted towards the 12-month ownership rule.

A 30 per cent minimum rate of tax applies to capital gains made or derived by Australian resident individuals from 1 July 2027, impacting such individuals if they otherwise have low incomes. Capital gains on new residential dwellings and affordable housing (where the entity chooses the CGT discount) and capital gains made by certain income support recipients are excluded from the 30% minimum rate of tax.

Why Overseas Relocation Matters More Than Ever

The new legislation also adds a layer of complexity to tax residency, as the new CGT rules include a residency requirement.

That is, the deemed disposal and reacquisition rules will not be available to foreign residents and temporary residents where section 115-105 applies to reduce the discount percentage applicable to a discount capital gain. Section 115-105 applies where the taxpayer was a foreign resident or temporary resident during any part of the discount testing period starting on the day when the taxpayer acquired the CGT asset and ending as at 30 June 2027, and the taxpayer was a foreign or temporary resident during some or all of the period that is after 8 May 2012.

In the case of a trust the disposal and reacquisition mechanism will not apply if section 115-110 would apply to all of the beneficiaries of the trust in relation to the gain.

Similarly, cost base indexation will be unavailable where the taxpayer is a foreign resident or temporary resident at any time during the period commencing on the later of 1 July 2017 and the date the asset was acquired and ending on the date the relevant CGT event happens.

Consequently, for taxpayers who are Australian tax residents for only part of the period during which they hold a CGT asset that is disposed of on or after 1 July 2027, their entitlement to a market value cost base uplift and to cost base indexation may be restricted, notwithstanding that they acquired and held the asset before 1 July 2027 while they were Australian tax residents.

Taxpayers contemplating an overseas move should consider the implications of the new CGT indexation regime when evaluating their long-term asset holding strategy, along with any residency considerations that come with moving overseas.

Key takeaways

The introduction of the indexation regime marks a fundamental shift in Australia’s approach to taxing capital gains. The treatment of pre-CGT assets, the transitional reset of an asset cost base at 30 June 2027 and the introduction of residency-based eligibility requirements means taxpayers may  need to reassess strategies that have remained largely unchanged for decades.

For taxpayers with assets such as pre-CGT or highly appreciated assets it would be prudent to model the estimated impact of the changes on these assets. The potential CGT outcomes under the new rules are likely to vastly differ from historical models (e.g. no CGT outcome for pre-CGT asset) and updated advice is important to ensuring taxpayers are aware of their potential tax liabilities.

For individuals contemplating an overseas relocation, the reforms introduce a new layer of complexity that sits alongside Australia’s existing residency rules.

As always, our Taxation team remains available to assist practitioners and their clients in navigating the new CGT changes, including residency advice. If your clients need assistance assessment of how the CGT changes may apply to their assets, please get in touch with us to discuss.

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