CGT reforms: Proposed changes address mixed-residency indexation

The Australian Government has proposed amendments to its capital gains tax (CGT) reform package to address an important issue affecting individuals whose Australian tax residency changes while they hold investments.

Under the first tranche of the proposed reforms, individuals must generally be Australian tax residents throughout the relevant testing period to access cost base indexation. This means that if an individual is a foreign resident or temporary resident at any stage during the testing period, they may be unable to access indexation benefits.

For internationally mobile individuals, including Australians working overseas, this outcome may not appropriately reflect the time they spent as Australian tax residents.

What is changing?

The Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 proposes a more proportionate approach for taxpayers whose residency status changes during the ownership period of an asset.

Under the proposed amendments, foreign residents and temporary residents may be able to access both CGT discount and indexation outcomes based on the number of days they were Australian residents during the relevant testing period. Importantly, periods of temporary residency would be excluded from the calculation.

The Bill proposes to achieve this by:

• Extending the deemed disposal and reacquisition rules to mixed-residency scenarios involving taxable Australian property assets
• Removing residency-based restrictions that would otherwise prevent foreign and temporary residents from accessing indexation
• Introducing an apportioned indexation factor for mixed-residency cases involving direct capital gains.

These amendments build on the broader CGT reform package, which proposes replacing the current 50 per cent CGT discount with a cost base indexation regime for eligible assets held for more than 12 months. The new rules are proposed to apply to capital gains arising on or after 1 July 2027.

What does this mean for taxpayers?

The changes acknowledge that an individual's residency status can change over the life of an investment.

Rather than denying access to indexation because an individual was a foreign or temporary resident for part of the ownership period, the proposed rules would provide an outcome that acknowledges the period the individual was an Australian resident.

This is particularly relevant for:

• Australians working overseas who become foreign residents for tax purposes
• Returning Australians with investments acquired before or during an overseas assignment
• Expatriates and other internationally mobile individuals whose residency status changes while holding investment assets.

The proposed amendments currently focus on individuals who realise capital gains directly. Treasury is also considering how the rules should apply where capital gains are derived indirectly through a trust and the taxpayer's residency status changes during the relevant period.

Key considerations

While the updates may provide fairer outcomes for internationally mobile taxpayers compared to the previous draft, they also introduce additional complexity.

Taxpayers may need to accurately track:

• Periods of Australian residency
• Periods of foreign residency
• Periods of temporary residency
• Relevant acquisition, disposal and valuation dates.

Maintaining appropriate records will be critical in determining the correct CGT outcome where residency status changes over the ownership period of an asset.

How BDO can help

The mixed-residency amendments represent a welcome recognition of the realities of global mobility. However, the interaction between Australian residency, temporary residency and foreign residency rules can be complex, particularly where individuals have moved between jurisdictions multiple times.

BDO's global expatriate and employment tax specialists can help you understand how the proposed reforms may apply to your circumstances, assess the potential impact on existing investments and prepare for the commencement of the new rules.

If you would like to discuss how the proposed changes could affect you or your employees, please contact your local BDO employment tax specialist.