Buying real estate in Australia as part of an investment portfolio is not always a straightforward procedure mainly because of the constant changes of rules around overseas buyers purchasing Australian land and property. The country’s foreign investment system sets out the acquisition types that a foreign investor can make.
A foreign investor is designated as an individual who is not ordinarily resident in Australia, who is not a trust nor a corporation in which the beneficiaries, shareholders, directors or unit holders are not ordinarily resident in the country and who does or will hold a substantial interest in the investment (20% or above).
Alongside this process is a stepped approach needed to ensure your foreign investment review board application does not fall at the first hurdle. The Australian Foreign Investment Review Board or FIRB is an Australian Government statutory body which advises the Commonwealth treasurer. Their application fees vary depending on the value of the land or property being purchased but can range from land value at $1 million or less – fees payable of $5,600 to values of up to $10 million with fees of $102,300.
Here are the 3 key tips that potential foreign investors must consider starting with getting approval from the FIRB.
1. Foreign investment Approval
The first point of note for a foreign investor is understanding the four land categories in order to establish if you need Foreign Investment Approval. These land categories are:
- Mining, exploration or production tenement
Commercial land can be land already developed and foreign investors need approval if the value of interest is more than the relevant threshold. The threshold can vary but is usually $252 million (the variant can be between $55 – $1094 dependent on country of origin of foreign person and nature of the property). If the land is vacant, approval is necessary from FIRB before a foreign investor can acquire an interest.
In existing or established residential buildings, generally non-residents cannot purchase these and if residents are there on a temporary visa, then approval is also required. For land that is designated as agricultural, foreign investors will usually need to have an approved application where the cumulative value of land holdings is above $15 million. There are a number of factors that need to reviewed including type and nature of tenement which then determines whether approval is needed for mining, exploration or production tenements.
Second point of note under Foreign Investment Approval are the 3 categories of investment namely:
- Prohibited acquisitions
- Approved acquisitions
- Exempt acquisitions
As noted above, existing residential dwellings fall under the prohibited category as this is an asset class under which the foreign investor cannot make an investment. Under the approved category, a foreign investment review board application will need to be made in order to reduce the risk of a disposal order. Finally, where the foreign investor acquires an asset below the relevant monetary thresholds or % ownership thresholds (usually under 20%), this falls under the exempt category not requiring FIRB approval.
Structuring the proposal for any proposed transaction must be carefully thought through and communicated clearly along with the merits of any such proposal so it is key to work with a specialist that manages complex deals and advises solely on FIRB matters and foreign investment approval.
2. Stamp duty
Another key point to note is the payment of stamp duty which will add an incurred charge applied by the state governments in Australia in relation to transfer of property of land. If, as a foreign investor you are looking to buy in non-residential property and convert it to residential as part of an investment portfolio, you have to pay foreign purchaser duty. This is on top of the land transfer duty fee. All states in Australia will have or already have implemented stamp duty in the residential real estate market for foreign investors but these differ between the states and territories.
For example, in Victoria the current surcharge is 7% but there may be an exemption if the foreign investor is purchasing a principal place of residence jointly with their spouse who has permanent residency, or is an Australian resident or New Zealand citizen with a special category visa. In other states, the surcharge ranges from 4-8% so it is important to check with your specialist advisor depending on where you are looking to invest.
3. Tax considerations
The Australian Tax Office or ATO provide up to date information on all taxation requirements so it is important to ensure you have reviewed their website to make sure you are compliant with taxation laws when thinking about investment in Australian real estate. If you are allowed to buy Australian property as a foreign person then you have to determine your tax status in Australia. If you are a tax resident of Australia, your capital gains and worldwide income are usually subject to Australian tax. Make sure you have had the proper professional advice regarding your tax status as you may need to take into consideration any Double Tax Agreement that Australia has with your country of origin. The Double Tax Agreement could grant tax rights on certain income streams exclusive to one country. It may allow both countries to tax the same income. Then tax liability in one of the countries may be lessened by tax already paid out on the same income in the other country. Taxation rules are very complicated so seek professional advice on this area.
In terms of investing in Australian land or property, from July 2016, new capital gains tax measures have come into force which impacted on foreign investors. In essence, anyone who purchases residential or commercial real estate that comes to a value of $2 million or above from a foreign resident, is required to withhold 10% of the purchase price. This then has to be paid to the ATO and not to the foreign resident vendor. The withholding amount is worked out on the land component of the transaction and not any associated assets, goodwill or chattels.
For the best possible outcomes, speak to the experts who can steer you through your foreign investment application.