After hardly 40 days, the Government has now decided to amend its new cost base indexation laws to allow Australian expats (and other non-residents) to have the benefit of the cost base indexation on a proportionate basis from 1 July 2027.
On 26 June 2026, the Government legislated and introduced Section 114.25 ITAA 1997 which reads as follows:
INCOME TAX ASSESSMENT ACT 1997 – SECT 114.25
Residency requirements for individuals for indexation to be included in a cost base under subsection 110 – 36(1A)
(1) This section sets out requirements for indexation to be included under subsection 110 – 36(1A) in the * cost base of a * CGT asset for the purposes of working out your * capital gain from a * CGT event happening in relation to the * CGT asset if:
(a) you are an individual; and
(b) the CGT event happened while you were holding the CGT asset (as a result of earlier * acquiring it).
Note: This section applies for working out a capital gain you make from directly holding the asset. A similar result arises for any capital gain you make indirectly as a beneficiary of a trust (see Subdivision 115 – C, in particular subsections 115 – 225(4) and (5)).
(2) You must be neither a foreign resident nor a * temporary resident at any time during the period (the testing period) :
(a) starting on the later of 1 July 2027 and the day of * acquiring the * CGT asset; and
(b) ending on the day the * CGT event happens.
The Problem: Complete Loss Of Indexation
The effect of Section 114.25 is that if a person is a non-resident at any time during their ownership period of an Australian investment property, they will not be able to benefit from cost base indexation at all – regardless of how long they may have owned the property while living in Australia.
We highlighted this inequity in a tax seminar held for members and invitees of the American Australian Association in New York on 16 July 2026.
We are pleased that the Government has now proposed to address this issue.
Legislation As “Beta Code”?
Curiously, the Explanatory Memorandum which introduced the Tax Reform Act 2026 flagged that
“Future amendments may be considered in relation to how entities that are resident for only part of the period they hold a CGT asset …may access indexation. “
That begs the question: Why did the Government legislate in this manner in the first place if they knew there was an equity issue that would need to be addressed?
It is disappointing to see this legislative approach, which wastes valuable time and resources and fuels uncertainty.
New tax rules should not be treated as some form of ‘beta code’, released for user acceptance testing with bug fixes in the form of amendments.
Since the equity issue here was surely known at out the outset it, these issues would have been far better addressed as part of exposure draft legislation rather than being rush through with all the other Budget changes.
RIP Section 114.25 ITAA 1997 – alive for hardly 40 days and already ready to be cast aside!
“O, ill-fated tax Section, whither goest thou? To become an irrelevancy after not having inconvenienced a single person!”
What The Proposed Amendments Mean For Expats
The proposed removal of Section 114.25 will mean that:
- a Departing Australian moves overseas and becomes a non-resident, they will NOT lose the benefit of cost base indexation completely (on property they directly own).
- a Returning Australian can also benefit from cost base indexation upon returning, on a proportionate basis.
Trust Ownership
We caution that this amendment only addresses the equity issue where a person directly owns real estate and changes tax residency.
It does not deal with the situation where a beneficiary of an Australian trust changes tax residency and the asset of the Trust is sold.
The Government is aware of this, given its latest comments as follows:
‘Further consideration is being given to determining appropriate outcomes for taxpayers who change their residency status and how make capital gains indirectly through a trust.’ (paragraph 1.92 Exposure Draft Explanatory Memorandum Treasury Laws Amendment (Tax Reform No. 3) Bill 2026: CGT Adjustments (Tranche 2).
It would be straightforward to permit a non-resident to benefit from cost base indexation to the extent they have been a resident of Australia at some point during the Trust’s ownership of the asset.
That approach to apportionment for trust level capital gains was already perfectly operational under the previous 50% CGT discount rules.
Whether the Government extends this reasonable approach to trust beneficiaries remains to be seen. Will they or won’t they (allow it) – that is the question.
Need Guidance On Your Australian Tax Residency Status?
If you are an Australian expat owning property directly or through family trusts, evolving CGT rules can significantly impact your international tax profile.
Contact our team today to discuss how these indexation amendments affect your assets and future tax planning.
Disclaimer: This article provides general information only and does not constitute formal tax or legal advice. Tax laws are complex and subject to change. Please consult a qualified tax advisor regarding your specific circumstances.
