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Foreign Residents and Investing in Real Property - What You Need to Know

Australia is considered by many experts to be a safe and reliable place for non-residents to invest in real property (both residential and commercial). However foreign investors need to be aware of recent changes that could have a significant impact on any proposed investment in Australia.

Investing in Australian Property

In recent years there has been a significant increase in the amount of foreign investment in Australian real property. In fact, according to the Australian Foreign Investment Review Board (‘FIRB’) in the last 6 years the number of foreign real estate acquisition applications has soared 800% resulting in nearly $100 billion dollars per annum of foreign investment in Australian real property.

Key changes foreign investors should be aware of

Foreign residents should be aware of a number of important recent changes when considering investment in Australian real property including:

  • FIRB and changes to the Foreign Acquisitions and Takeovers Act (‘the Act’);
  • Capital Gains Withholding Tax;
  • Stamp Duty.

FIRB and changes to the Foreign Acquisitions and Takeovers Act

The acquisition by non-residents of some types of Australian assets, determined by asset class or dollar value, require FIRB consent. In many instances foreign residents need to apply to the FIRB to gain permission to purchase real estate in Australia. Generally speaking applications can be made online and decisions by FIRB will be made within 30 days.

Residential Property:

  • Foreign residents (i.e. those not deemed Australian residents) are not allowed to buy an “existing” residential property. However, they can buy new residential homes, new apartments or off-the-plan apartments and vacant land.
  • Notwithstanding the above, foreign residents who are temporarily living in Australia (e.g. under visa arrangements) for less than 12 months can buy one existing residential property, but they must live in it and sell it when their visa expires.

Commercial property:

  • For the most part, commercial property will not need FIRB approval. However, the acquisition of commercial property as part of the purchase of a commercial enterprise by a foreign resident may fall within the ambit of the Act.

Changes to the Act

  • The Act, together with the FIRB regulate foreign investment in Australia. On 1 December 2015 significant changes were made to the Act.
  • The definition of ‘Agricultural land’ under the Act has been expanded to any land in Australia that is used, or that could reasonably be used, for a primary production business. The threshold has been reduced from $252 million to $15 million. As a consequence a much greater percentage of rural land purchases by foreign investors will now fall within the ambit of the Act.
  • There have also been changes relating to the acquisition of Australian companies and trusts by foreign residents. This will have an indirect impact on the purchase of Australian real property to the extent those entities may hold real property. Under the changes a person or company, alone or together with one or more “associates” may without restriction under the Act own up to 20% of an Australian entity. An associate includes but is not limited to family members, business partners, those who have substantial holdings in one another and those in an entity director relationship. There are also thresholds dealing with the aggregation of foreign entities (that may not be related).
  • The Australian Treasurer must be notified of any transaction that breaches the relevant thresholds. The Treasurer has the ability to prohibit any proposed sale. Recently, the Treasurer invoked his powers to prevent the proposed sale of a significant farming enterprise in rural Australia that resulted in widespread media attention. The Treasurer has also invoked his power to force the sale of a significant number of properties that were found to have been acquired by non-residents or parties associated with them in breach of the Act.
  • Fees are now payable on applications to the FIRB in relation to real property as set out below:

Land

Fee

Residential and agricultural

$5,000 for first $1 million and $10,100 for every additional $1 million

Vacant commercial

$10,100

Non-vacant commercial

$25,300

Mining or production

$25,300

  • Amendments to the Act now impose civil penalties (in addition to the pre-existing criminal penalties) for various breaches of the Act.

Capital Gains Withholding Tax

New foreign resident capital gains tax measures came into play on 1 July 2016.

Any purchaser of real property (residential and commercial) to the value of $2 million (inclusive of GST if applicable) or more from a foreign resident will be required to withhold 10% of the purchase price and pay this amount to the Australian Taxation Office (ATO) rather than to the foreign resident vendor.

The 10% withholding amount is calculated on the land component of the transaction (not associated chattels, goodwill or other assets). These changes could have significant implications for foreign resident vendors, in particular in relation to any financiers that the foreign resident needs to pay out or otherwise satisfy at settlement. To avoid the 10% withholding obligation, clearance process with the ATO must be undertaken before completion of the sale.

Currently, many of the “standard” contracts used by industry professionals (real estate agents, conveyancers and lawyers) do not contain adequate provisions to deal with the new withholding measures. It is recommended that foreign resident vendors consult with their legal advisors to determine if additional provisions should be included in their contracts.

Stamp Duty

In Australia, when acquiring real property, a purchaser must pay a tax on the document affecting the transfer of the property. This is known as stamp duty. The rate of stamp duty is not uniform across Australia and varies from state to state.

Foreign residents need to be aware that in addition to this stamp duty, some Australian states are now adding “surcharges” on foreign residents who purchase residential real property.

The following table provides an overview of the surcharges that apply to residential property.

State

RELEVANT Surcharge

Effective From

NSW

4% stamp duty surcharge

Current

0.75% land tax surcharge, including on principal place of residence

1 January 2017

Qld

3% stamp duty surcharge

1 October 2016

Vic

7% stamp duty surcharge

Current

0.5% absent landlord surcharge
(1 January 2017 it will be 1.5%)

Current

Foreign investors should carefully assess what surcharges may be levied on them and consult their advisors. These surcharges (if applicable) may have implications on financing arrangements.

Some State Governments, including South Australia have stated they do not intend to apply any surcharges on foreign investors for their purchase of residential property. In fact in South Australia stamp duty on commercial property is currently being phased out over a three year period.

As a consequence there is a significant divergence in the stamp duty regimes and other taxes that foreign investors will be liable for from state to state. This may have an impact on the investment decisions of foreign investors.

Conclusion

The considerable foreign interest in Australian real property is expected to increase over the years to come.

Foreign investors need to be aware of the recent changes to the FIRB regime including the expanded application of the Act in many instances and the application of fees.

There is a significant variation between the states and territories in relation to taxes. Foreign investors should carefully consider this when assessing their investment decisions.

The flow chart below provides an illustration of some of the issues foreign investors should consider when investing in Australian real property.

Cowell Clarke can assist foreign investors with the above issues and the acquisition of all real property (both commercial and residential) throughout all jurisdictions in Australia.

Flow Chart and Table – Foreign Investment in Australia

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