Foreign Investment in Australian Residential Real Property – Can it still be done?
By Harrison Dell, Senior Associate
Real property investing has a cult following in Australia, as it is viewed as a safe investment and has historically provided good capital growth. While Australians have been investing (or speculating) with real property for many years, foreigners have become more and more interested in recent times for two main reasons:
- Asset protection – especially from foreign governments in developing nations; and
- Investment yield through capital growth and an income stream.
However, foreign investment in Australian real property has one large roadblock – the Foreign Investment Review Board (FIRB). All foreign purchasers of Australian real property must submit an application with FIRB to seek approval for the purchase. If approval is not granted, the foreign person or entity will not be permitted to complete the purchase of real property in Australia.
Who is a foreign person for Foreign Investment Purposes?
Only ‘foreign persons’ as defined in the Foreign Acquisitions and Takeovers Act 1975 (FAT Act) are required to apply for FIRB approval when investing in Australian real property. A foreign person is generally:
- An individual not normally resident in Australia;
- Any company or unit trust where a foreign resident holds 20% of the shares or units, or two or more foreign persons have more than 40% interest in the entity; and
- Any discretionary trust where a foreign person hais a beneficial interest.
While Australian citizens are generally not subject to the FIRB approval requirements, FIRB Guidance Note 22 explains that certain interposed foreign entity arrangements will be subject to the FIRB approval requirements, even when the direct owner or ultimate owner is an Australian citizen. Accordingly, Australian citizens with foreign entities, especially expats with investment companies or trusts, will need to consider whether FIRB approval will be required for their next Australian investment. If FIRB approval is required, consideration should be given to whether their investments can be structured differently to prevent the need for a FIRB application.
What purchases by a foreign resident require FIRB approval?
If you are a foreign resident, you will need FIRB approval before purchasing Australian residential real property and in some cases, an interest in an entity that owns Australian residential real property. While FIRB will screen for threats to the national interest, it has been public in stating that acquisitions of land will generally be approved if such investment would increase the supply of housing stock in Australia (e.g. through property development).
The likelihood of obtaining FIRB approval will depend on the type of land being purchased and how it will be used. The below table summaries FIRB’s public views on certain property types and some of the conditions imposed:
|Residential property type||Usually approved by FIRB?||Other requirements|
|Established dwellings||No, unless the acquirer is a temporary resident and the property is purchased to live in as their principal place of residence.||
Must sell within three months of ceasing to live in Australia.
Can never be leased.
To be a ‘new dwelling’ it must either be:
2. part of a development which was sold by the developer and has not been occupied for more than 12 months in total.
|Vacant land||Yes, if purchased for residential dwelling development.||
Vacant land is land that has never had a dwelling. If there was a dwelling previously, it will be considered a redevelopment.
FIRB will usually impose a condition that residential development of the land is completed within four years.
|Redevelopments of an existing dwelling||
Yes, if the redevelopment will increase the number of dwellings on the land.
Approval is unlikely to be granted for a foreign person to merely renovate an existing dwelling (i.e. flipping).
FIRB will usually impose the following conditions:
2. the redevelopment is completed within four years.
In addition to the above categories, property developers can apply for a new dwelling exemption certificate (or a near-new dwelling certificate) for an entire development if it has 50 or more dwellings. However, there are strict conditions applied by FIRB, including:
- the development must be marketed in Australia;
- from 9 May 2017 at least 50% of the development must be sold to Australian resident individuals. Prior to this date there was no limit to the number of dwellings within the development which could be sold to foreign citizens; and
- reporting requirements to FIRB which must be complied with.
Obtaining an exception certification is a key consideration when planning a property development, especially for foreign property developers who may seek to market to foreign persons.
Federal tax and state tax considerations
Income tax can be one of the biggest costs of holding or developing Australian residential real property. Proper structuring for foreign resident investors and property developers is crucial to keeping the investment cost effective. In general, profits from Australian real property (including development profits) will be subject to tax in Australia as Australian sourced income and capital gains on Australian real property are also subject to Australian tax.
When a foreign resident is considering property development activities, FIRB applications, asset protection, Australian federal and state taxes, and foreign taxes must all be considered to achieve a profitable return on investment. Australian taxes generally apply to development profits, however various domestic and international tax issues also need to be managed, such as:
Thin capitalisation – if the development is to be funded by offshore related party loans, interest deductions can be denied if the ratio of debt to equity exceeds 3:2 and the amount of interest deduction exceeds $AUD2 million;
Withholding taxes – payments of interest, dividends and royalties are subject to withholding taxes in Australia, with rates varying depending on the country to which the interest, dividends and/or royalties are being paid and the terms of any applicable Double Tax Agreement;
Transfer pricing – investors should consider whether they need to keep transfer pricing documentation for related party loans, and whether an International Dealings Schedule (IDS) would be required in Australia; and
Australian tax compliance – this may include registering for a Tax File Number (TFN), Australian Business Number (ABN), Goods and Services Tax, and requirements for withholding on payments to foreign residents for construction activities.
Foreign persons who invest in real property should be aware of the following additional fees, state duties and federal tax implications:
Surcharge purchaser duty – most Australian states have an additional rate of transfer duty for foreign purchasers as defined under the relevant state duty legislation. In NSW, this rate is 8% of the value of residential land and is in addition to regular transfer duty. An exemption may be available for an Australian-based developer who is a foreign person if an application is made to NSW Revenue.
Surcharge land tax – most states have an additional rate of land tax, paid annually. In NSW, this is an additional 2% of the unimproved value of the land paid in December each year. An exemption may be available for an Australian-based developer who is a foreign person if an application is made to NSW Revenue.
Federal vacancy fee for foreign owners – an additional annual fee is payable by foreign persons if residential real property they own is not occupied or rented for more than 183 days in a year. This fee is usually identical to the fee for applying for FIRB approval and will vary depending on the value of the property concerned. However, the minimum fee payable is $AUD5,800.
State based vacancy fee – in addition to the Federal vacancy charge, a state based vacancy charge may also apply to certain residential property which is vacant and not made available for rent for an extended period of time.
Bank financing – some lenders are reluctant to lend to foreign investors. Many charge higher interest rates than for Australian citizens, ignore foreign business income in assessing serviceability, only lend to foreign persons from certain countries, and typically prefer financing properties in metropolitan areas. The maximum loan amount is 70% of the value of the property in most cases. We note that higher interest rates apply to foreign persons seeking to develop residential real property, often more than 10%.
Australian corporations law requirements – if an Australian company is being used to purchase Australian property, including a company as trustee for an Australian trust, guidance should be sought on the requirements of the Corporations Act 2001 (Cth). An example is the requirement for at least one director to ordinarily reside in Australia for a private company.
Each of these issues can result in significant financial costs for a foreign purchaser and should be managed prior to any investment in Australia being made.
Many foreign investors seek entry into the Australian property market, though they must traverse the complex FIRB requirements before doing so. Breaches of FIRB requirements can carry a maximum penalty of $166,500 and/or three years imprisonment, or higher for a corporate investor, and additional civil penalties.
Australian property can still be an attractive asset class to foreign investors and the right property can certainly be a solid investment choice for both individual investors, collective investment via a Managed Investment Trust or to support a significant investor visa application. It is recommended that expert advice is obtained in relation to establishing an appropriate structure, applying for FIRB approval if needed and understanding the likely restrictions if FIRB approval is granted. Velocity Legal can assist with all these matters.
Please look out for future articles, covering investing in Australian commercial real property and Australian businesses, as well as other international tax issues for Australian inbound and outbound investment.
A background as an ATO auditor, a decade in the family cinema business and a bachelor of psychology make Harrison an incredible problem solver. His unique insights give practical solutions for all tax and duty matters with a special interest in trusts, business succession planning, international tax and corporate tax issues. Harrison can do more than just heavy lifting with ATO dealings, he’s also an amateur powerlifter.