Australian property still makes sense – but tax planning has changed
Australian property remains a compelling long-term investment, but proposed capital gains tax changes mean Australians who move overseas may need to rethink their tax planning before they leave—and again when they return.
For decades, purchasing an Australian investment property has been a proven long term wealth creation strategy.
The approach was straightforward. Purchase an investment property, allow rental income to help fund the investment while building capital growth and progressing your career, whether that be in Australia or overseas.
From 1 July 2027, Australian property remains an attractive long-term investment. What has changed is how capital gains may be taxed if you become a foreign tax resident while you own that property under the new capital gains tax indexation rules.
Much has been written about the Government replacing the 50 per cent capital gains tax discount with a new indexation regime for future capital gains. What has received far less attention is how these new rules interact with Australians who become foreign tax residents after acquiring an Australian investment property.
Rather than changing whether Australians should invest in property, these reforms highlight the importance of considering tax residency as part of any long-term investment strategy.
They also reinforce the growing importance of seeking professional tax advice before departing Australia and again before returning, as both points in time now present significant tax planning opportunities.
The issue is not the property, it is your tax residency
Australian investment property will continue to be taxable in Australia regardless of where you live. That has not changed.
What changes is access to the new indexation regime.
Subject to the operation of the legislation, if you become a foreign tax resident after 1 July 2027 while owning an Australian investment property, that property may lose access to the new indexation regime for its entire ownership period. Returning to Australia and re-establishing Australian tax residency does not restore that entitlement for that particular property.
It is important, however, to view these changes in context.
While you are a foreign tax resident, you generally do not receive access to the capital gains tax discount for the period you are living overseas. As a result, for many Australians who intend to remain overseas long term, losing access to indexation may have relatively little practical impact while they continue to be foreign tax residents.
The more significant planning consideration often arises when they return to Australia. If they are a foreign tax resident after 1 July 2027, any future capital growth on that existing investment property may still be ineligible for indexation, even though they have once again become an Australian tax resident.
A practical example
Consider two investors who purchase identical investment properties on the same day. They pay the same purchase price, sell on the same day 20 years later and earn the same employment income in the year of sale.
The only difference is that one investor accepts a three-year overseas assignment during the ownership period.
Illustrative comparison
Assumptions
Purchase price: $1,000,000
Sale price after 20 years: $2,500,000
Capital gain: $1,500,000
Employment income in year of sale: $220,000
Investor B becomes a foreign tax resident for three years before returning to Australia
Figures are illustrative only
| Investor A | Investor B | |
|---|---|---|
| Purchase price | $1,000,000 | $1,000,000 |
| Sale price | $2,500,000 | $2,500,000 |
| Total capital gain | $1,500,000 | $1,500,000 |
| Overseas assignment | None | 3 years |
| Foreign tax resident | No | Yes |
| Access to indexation | Yes | No |
| Illustrative taxable capital gain* | $950,000 | $1,500,000 |
| Approximate CGT payable** | $285,000 | $450,000 |
| Additional tax | Approximately $165,000 |
Source: Australasian Taxation Services. *Illustrative only. Actual indexation will depend on future CPI movements. **Assumes an identical 30% effective tax rate purely for comparison. Actual tax outcomes will depend on future legislation, inflation and each investor's individual circumstances.
The key point is not whether the additional tax is exactly $165,000.
The key point is that both investors owned exactly the same property for exactly the same period and generated exactly the same economic gain.
The only difference was that one investor became a foreign tax resident during part of the ownership period.
For investors who remain overseas indefinitely this outcome may have limited practical significance, however, for those who eventually return to Australia, it may influence how they manage their property portfolio over the long term.
Returning to Australia creates an important planning opportunity
For many Australian expatriates, the key planning opportunity arises when they return to Australia, and returning should become a deliberate portfolio review point.
Some properties will continue to be ideal long-term holdings because of their location, rental performance, future use as a principal place of residence or intergenerational wealth objectives.
Others may have already achieved their investment objectives and, subject to each investor’s individual circumstances, selling selected properties and redeploying that capital into new investments may allow future long term capital growth to once again benefit from the new indexation regime.
The objective is not to sell simply because the legislation has changed. It is to determine whether each property continues to support your long-term investment objectives.
Property investors need to ask two new questions
The traditional investment fundamentals of location, rental demand, cash flow, interest rates and long-term capital growth remain unchanged.
From 1 July 2027, however, two additional questions should become part of every long-term investment strategy.
Is there any realistic possibility that I may become a foreign tax resident while I own this property?
If the answer is yes, understanding the long-term tax implications before purchasing may become just as important as selecting the right suburb or negotiating the purchase price.
When returning to Australia, investors should also ask:
Does my existing portfolio still represent the most tax effective long term investment strategy, or should some capital be redeployed into new investments that once again become eligible for the new indexation regime?
These questions are not intended to encourage buying or selling. Rather, they ensure investment decisions and tax residency decisions are considered together.
The growing importance of tax planning
These reforms demonstrate why pre-departure and pre-return tax planning have become increasingly important for Australians with international careers.
A pre-departure review provides an opportunity to understand how an overseas assignment may affect existing investments, ownership structures, future capital gains tax outcomes and broader wealth creation strategies before becoming a foreign tax resident.
Equally important is a pre-return tax planning review. Returning to Australia is no longer simply about re-establishing tax residency. It is an opportunity to review your investment portfolio, reassess long term objectives and determine whether retaining existing assets or redeploying capital into new investments is likely to produce a stronger long-term outcome under the legislation in force at that time.
Career opportunities and family considerations will always be the primary drivers behind international relocation decisions. Increasingly, however, tax legislation such as these reforms can materially influence how those decisions are implemented and the long-term financial outcomes they produce.
Property still a viable investment
Australian property remains one of the strongest long term wealth creation opportunities available to Australians, including those who spend part of their careers working overseas.
The new legislation does not change that.
It simply means tax residency has become another important consideration when building and managing a property portfolio.
For Australians with international careers, pre-departure and pre-return tax planning are becoming just as important as the investment decisions themselves.
Understanding how changes in tax residency interact with evolving legislation allows investors to make informed decisions before major life events occur rather than discovering the consequences many years later when an asset is eventually sold.
