Under the new foreign resident main residence rules, most non-residents have until 30 June 2020 to sign a contract to sell their former Australian main residence, with the benefit of the MRE (either on a full or partial basis). For any sale contracts entered into after that date, the majority of Australian expats (i.e. non-residents) will not be entitled to apply the MRE at all for any capital gain made on their former Australian main residence.

The foreign resident main residence rules will severely impact Australian expats who own Australian real property that they previously lived in, and "increases the stakes" of determining whether a person working overseas (particularly an Australian citizen) is a "resident" or "non-resident" for tax purposes. On a more positive note, some of the most severe impacts can in many situations be properly managed through appropriate tax planning.

Prior to the new rules, a person could purchase a property in Australia, live in the property for a period of time and then live elsewhere (either in Australia or overseas), and still access the MRE on the sale of that property (either on a full or partial basis).

What are the core changes?

Under the new foreign resident main residence rules if a person is a "foreign resident" (i.e. not a resident of Australia for the purposes of the Income Tax Assessment Act at the time of sale), their entitlement to the MRE is completely denied as though they had never been entitled to the MRE.

Perversely, if the same individual requalifies as an Australian tax resident before the time of sale, the MRE can apply once again, causing the MRE to "switch on" and "switch off" as a person's residency status changes.

It is retrospective

The foreign resident main residence rules are retrospective.

While taxpayers still have a window of opportunity to sell before 30 June 2020, those who do not may have their entitlement to the MRE retrospectively extinguished.

The importance of "tax residency"

Determining whether an individual is a resident of Australia can be extremely difficult (and particularly for Australian expats), considering terms such as "reside", "domicile", "permanent place of abode" and "usual place of abode". Australian expats have often sought to argue that they are not a resident of Australia for tax purposes (often due to foreign-sourced income). With the removal of the MRE for non-residents, taxpayers in certain situations may be more inclined to be treated as a resident of Australia!

Transitional provisions until 30 June 2020 –– still time to avoid retrospective tax

Although the foreign resident main residence rules operate retrospectively, foreign residents who would otherwise be affected will be entitled to disregard the new rules and apply the MRE if:

• a CGT event occurs in relation to the dwelling on or before 30 June 2020, and

• the foreign resident held an ownership interest in the dwelling before 7:30 pm on 9 May 2017.

The upshot of these transitional provisions is that Australian expats who purchased their main residence property on or before 9 May 2017 still have a window of opportunity to claim the MRE if they take action to trigger a CGT event (such as entering into a contract to dispose of the property) before 30 June 2020.

Any foreign tax resident who intends to sell their Australian main residence prior to 30 June 2020, or to apply the life events MRE exemption, should take proactive steps to obtain a Foreign resident capital gains withholding variation certificate well in advance of the sale. This will ensure that when the settlement date arrives, the purchaser will not be required to withhold any component of the purchase price on account of the CGT withholding provisions.

The way forward –– planning opportunities remain

The timer is now ticking down towards the 30 June 2020 deadline, from which non-residents will be completely disqualified from applying the MRE in most situations.

Individuals who are set to be affected by the new changes will only be able to avoid incurring a tax liability on their Australian main residence by:

• triggering a CGT event (such as entering into a contract to sell the dwelling) on or before 30 June 2020

• applying the "life events" exemption, or

• relocating to Australia prior to selling the property (i.e. commencing tax residency).

The foreign resident main residence rules will severely impact Australian expats who own Australian real property that they previously lived in, and "increases the stakes" of determining whether a person (particularly an Australian citizen) working overseas is a "resident" or "non-resident" for tax purposes.

All hope is not lost however, as in many situations some of the most severe impacts can be properly managed through appropriate tax planning.

Any individual who spends substantial time overseas and intends to rely on the MRE should seriously consider seeking specialist advice regarding their tax residency before selling their property.