Individual foreign residents – the general case
Generally, the MRE applies where an individual disposes of a dwelling (or an ownership interest in a dwelling) that was their main residence throughout all, or part, of the taxpayer’s ownership period. Where the exemption applies, any capital gain or loss arising from the disposal will be disregarded as follows:
- A full exemption will apply (i.e., the capital gain or loss is entirely disregarded) where the dwelling was the taxpayer’s main residence throughout their entire ownership period and the dwelling was not used for income-producing purposes. Refer to S.118-110(1).
- A partial exemption will apply (i.e., the capital gain or loss is only partially disregarded) where the dwelling was the taxpayer’s main residence for only part of their ownership period and/or the dwelling was used for income-producing purposes. Refer to S.118-185 and S.118-190.
Under the new rules, for CGT events that occur at, or after, 7:30pm (AEST) on 9 May 2017 (simply referred to as 9 May 2017 from hereon), the MRE (full or partial) will no longer be available where the individual disposing of the dwelling is a foreign resident at the time of the CGT event (subject to exceptions and transitional measures). Refer to the new S.118-110(3), (4) and (5).
In the context of selling a main residence, the most common CGT event would be CGT event A1, which generally occurs at the time a contract for the sale is entered into. Therefore, if a taxpayer is a foreign resident at the time of entering into a contract of sale for their main residence, the MRE will generally not apply. This will be the case even if the taxpayer subsequently becomes a resident after entering into the contract but prior to settlement.
Furthermore, the MRE also no longer applies for a foreign resident where part of their property is compulsorily acquired. Traditionally, a special MRE applies to disregard any capital gain or loss arising from the disposal of land adjacent to a dwelling (where the dwelling is not also disposed of) in the case of a compulsory acquisition. Unless an exception applies, foreign residents are also denied access to this special MRE. Refer to the new S.118-245(3).