The future of foreign investment in residential real estate in Victoria is set to change following State and Federal government announcements in recent weeks. A snapshot of the proposed changes follows:
As of 1 July 2015:
An additional duty of 3% of the purchase price will be imposed on acquisitions of residential land by foreign purchasers, whether acquired directly or indirectly i.e. through a company or trust that purchases the residential property.
Due to the definition of 'foreign purchaser' in the amending legislation, the surcharge is expected to apply to majority foreign owned property developers operating in the Australian market. The State Government is experiencing significant lobbying from the property sector on this issue and is considering exemptions from the duty for majority-foreign owned companies in order to minimise negative impacts on housing supply in the State. An announcement is expected later this week on this point.
In relation to off-the-plan sales, the additional 3% duty will be calculated on the whole of the consideration paid however current off-the-plan concessions will still be available to foreign purchasers when calculating the normal duty rate.
As of 1 December 2015:
Applications for foreign investment
Foreign investment application fees ranging from AUD$5,000 to AUD$100,000 are expected to apply. Residential real estate acquisitions will be charged at the rate of $5,000 for properties under $1,000,000.This will increase to $10,000 for properties valued over $1,000,000 with an extra $10,000 payable for every additional $1,000,000 in property value.
New enforcement authority
Residential real estate functions of the foreign investment review board (FIRB) are set to be transferred to the Australian Tax Office (ATO) to enable greater enforcement of foreign investment rules through improved data-matching. The ATO has been empowered to process foreign investment data relating to residential real estate as of 4 May 2015.
Strict penalties for non-compliance with foreign investment rules including increased criminal penalties and new civil penalties in the form of fines and infringement notices are also planned. Third parties knowingly assisting a foreign investor to breach the rules will also be subject to civil and criminal penalties.
Specific penalties for property developers who fail to market apartments in Australia when required to do so and fail to comply with reporting conditions associated with advanced off-the plan approval are also proposed.
As of 1 January 2016:
A foreign purchaser not residing in the property purchased by the foreign purchaser in Victoria ('absentee person') will be charged an extra 0.5% land tax rate in addition to the general land tax rates and the surcharge rates for trusts. The definition of 'absentee person' is proposed to be far-reaching.
The proposed changes have significant impacts on those marketing to foreign investors. Developers should update their practices to ensure compliance with the proposed changes and desirable commercial outcomes.