The Australian real estate market has continued to show resilience. There has been strong demand for residential and commercial property assets from domestic and foreign investors.
In the past year, there have been a number of changes implemented that impact on real estate investment in Australia. The more important ones are listed below.
Foreign Investment Review Board (FIRB) approval fees
Almost all foreign investments in Australian real estate require approval from FIRB. FIRB approval is administered by FIRB, the Australian Taxation Office (ATO) and Treasury. FIRB approval must be received before finalising an interest in Australian real estate. However, a contract can be entered into as long as it is conditional on receiving FIRB approval.
On 1 December 2015, the Commonwealth Government introduced approval fees for foreign investors to purchase real estate in Australia. On and from 1 July 2016, the fee for applications for residential properties where the price of the acquisition is $1 million or less, is $5,000. Fees are tiered per $1 million for the price of the property. For example, the fee for a residential property with a purchase price between $9 million and less than $10 million is $91,300. The fees are increased by the Consumer Price Index each financial year.
However, certain exemptions may apply to obtaining FIRB approval. This depends on a number of factors. For example, a private investor from a country that Australia currently has a free trade agreement with and that have the higher threshold (such as the United States, New Zealand) may purchase developed commercial land for up to $1,094,000 without FIRB approval. Or a private investor from a country that Australia does not have a free trade agreement with may purchase developed commercial land in certain circumstances for up to $252 million. It is important to establish whether an exemption applies, as savings can be made in respect to application fees. Generally, the application fees are not refundable.
All foreign government investors must obtain FIRB approval.
The fee for acquiring an interest in commercial property that is not vacant is $25,300 and the fee for commercial property that is vacant is $10,100.
In respect to agricultural property, the fee is $5,000 where the price of the property is $1 million or less. Similarly to residential property, the fees are tiered per $1 million for the price of the property.
Foreign owners of agricultural property are also required to register their purchase with the Foreign Land Ownership Register.
Foreign purchaser's surcharge duty on residential purchases
A surcharge on stamp duty on residential real estate has been imposed in various States, being Queensland, Victoria and New South Wales.
This means that foreign purchasers must pay the following additional stamp duty:
- New South Wales – an extra 4% stamp duty;
- Victoria – an extra 7% stamp duty;
- Queensland – an extra 3% stamp duty.
Purchasers should also be aware that premium stamp duty is payable in New South Wales on residential property with a price greater than $3 million and that the foreign purchaser surcharge is in addition to any premium stamp duty.
Purchaser reporting information
As of 1 July 2016, the Commonwealth Government now requires the collection of certain information about purchasers and transferees. In New South Wales, this information is collected by the Office of State Revenue (OSR).
The information to be provided to the OSR when a transfer is being lodged for stamping includes:
- property details including land title information, property address and other descriptors;
- transactional information including price, contract and settlement dates;
- identity information of the purchaser/transferee and vendor/transferor including name, address, date of birth for individuals and name, address and ACN/ABN (Australian Company Number or Australian Business Number) for non-individuals;
- foreign identity details.
CGT withholding tax regime
From 1 July 2016, new laws now obligate purchasers of Australian real estate to withhold and remit 10% of the purchase price to the Commissioner of Taxation. This applies to properties if the sale price is $2 million or more. Certain exemptions apply.
If the withholding tax is to be paid to the Commissioner of Taxation, it must be paid on or before the day when the purchaser becomes the owner of the property. The new withholding tax regime also applies to an indirect interest in real estate. For example, any membership interest in an entity where the vendor's interest in that entity is or exceeds 10% and more than 50% of the underlying value of the entity is derived from real property in Australia.
Foreign investor land tax surcharge
In New South Wales, a new land tax surcharge has been introduced for residential property owned by foreign persons. The rate is 0.75% of the taxable value of the land.
The surcharge is assessed separately in relation to each parcel of land owned by the foreign person and is payable in addition to any current land tax already payable.
In Victoria, a land tax surcharge of 0.5% has been introduced on all property subject to land tax in Victoria.
Foreign persons will not have the benefit of any land tax threshold or principal place of residence exemption.
Developer sunset clauses
In New South Wales, an amendment has been made to the Conveyancing Act 1919 in respect to sunset clauses in contracts for residential properties.
Typically, a sunset clause allows a developer to rescind a contract if a sunset date for the completion of the building works has passed and the building is not complete.
The new amendments require that developers will only be permitted to rescind contracts under a sunset clause if either the purchaser consents to the rescission or the vendor has obtained an order from the Supreme Court permitting the vendor to rescind the contract. The vendor must be able to justify the termination of the off-the-plan contract to the Court.
This legislation therefore ensures the developer, rather than the purchaser, must prove that the delay was beyond its control.
These changes to the Conveyancing Act were made in response to claims that some developers were deliberately delaying works in order to rescind contracts, refund deposits and sell units at higher prices.
It is yet to be seen how these changes will impact real estate investment in Australia over the longer term. However, the backdrop for these changes has been long term sustained growth and with some uncertainty in international markets, such as the change of government in the United States, Brexit and forthcoming elections in France and Germany, Australia's safe haven status should continue. Therefore, for many foreign investors the changes over the last year will not significantly impact the attractiveness of Australian real estate as an investment option.