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Foreign investment

The real estate purchase policy laid down by the Foreign Investment Review Board (FIRB) is as follows:

Residential Real Estate Under Australia's foreign investment framework, foreign persons generally need to apply for foreign investment approval before purchasing residential real estate in Australia.Foreign investment applications are considered in light of the overarching principle that the proposed investment should increase Australia's housing stock (by creating at least one new additional dwelling).Foreign persons who purchase residential real estate will be subject to an annual vacancy fee where the property is not residentially occupied or rented out for more than six months in a year.

As a result, purchasers of existing housing stock must have permanent residency status, but up to 50 per cent of the apartments in a new development can be sold to foreign investors without permanent residency or citizenship status.

A vacancy fee return must be lodged with the Australian Taxation Office. An annual vacancy fee is payable (A$5,600 for a property less than A$1 million in value) if the property was unoccupied for more than 183 days during a vacancy year. Vacancy years are unique to each property because each one is 12 months after the occupation day for the property. Currently, vacancy fee returns show that only approximately 5 per cent of property owners are liable to pay the annual vacancy fee.

Commercial Real EstateForeign persons may be required to notify and receive a no objections notification before acquiring an interest in commercial land in Australia. Different rules apply depending on whether the land is vacant or not, whether the proposed acquisition falls into the category of sensitive commercial land that is not vacant, and the value of the proposed acquisition.Proposed direct interests in an agribusiness generally require approval with an exemption applying to investors from Australia's trade agreement partners.Strict criminal and civil penalties may apply for breaches of the law, including disposal orders.

FIRB approvals for commercial properties can take up to six months.

The following statistics are sourced from the FIRB Annual Report 2019–2020:

  1. in 2019–2020, there were 7,056 residential real estate purchase transactions with a total value of A$17.1 billion and 410 commercial real estate purchase transactions with a total value of A$38.8 billion;
  2. an increase in applications for commercial real estate purchases was experienced, particularly for low-value small business premises given the reduction in threshold to A$0 introduced on 20 March 2020;
  3. since 2016–2017, foreign demand for residential real estate in Australia has declined for a variety of factors including a tightening of domestic credit and increased restrictions on capital transfers in home countries; state taxes and foreign resident stamp duty increases; and
  4. Victoria, New South Wales and Queensland represented 81 per cent of residential approvals.

Structuring the investment

Investors in real estate in Australia have a wide choice of structures and investment vehicles in which to make their investment.

The most popular forms for direct investment are personal name, a company, a trust or a joint venture. Each has relative advantages in terms of asset protection, taxation, ease of transacting and disclosure.

The most popular forms for indirect investment are a listed real estate investment trust (REIT) or an unlisted property scheme or syndicate.

i Personal name

Real estate held in a personal name is exposed to creditors and others who make legal claims unrelated to the real estate. If ownership is shared, the names of all owners are recorded on the title.

Why is it that most Australians own their family home in their personal name despite this exposure? The answer is that if the family home is used as a main residence, it is sheltered from many taxes – the sale proceeds are completely exempt from capital gains tax and no annual land tax is payable. These tax shelters apply to foreign owners in a more limited way.

No death tax or inheritance tax is payable in Australia when real estate is transferred to a beneficiary on death. If the value of the real estate has increased, no capital gains tax is payable until the property is sold ('death' is not treated as a sale).

When purchasing real estate, transfer taxes (known as stamp duty or transfer duty) are payable no matter if it is a family home or an investment property. Transfer duty surcharges apply to foreign purchasers.

ii Company

Real estate held in the name of a limited liability company protects shareholders and directors of the company from legal claims that arise from the real estate. The exceptions are director liabilities for personal guarantees such as for loans, payroll tax and environmental offences.

Real estate investment companies pay tax at the rate of 30 cents in the A$1 on profits if they are passive investors. If more than 20 cents in the A$1 of income is 'active' income, then the company may be treated as carrying on a business and the tax rate is 25 cents in the A$1. The term 'profits' includes capital gains.

The tax paid is an imputed to the shareholders. This means that dividends paid to shareholders can include a tax credit (called a 'franking credit'). Shareholders can use the tax credit against tax payable by them on other income.

Transacting is subject to full transfer taxes. Ownership interests are held as shareholdings.

iii Trust

If real estate is owned by a trust, the title is registered in the name of a trustee, which is usually a limited liability company. The trustee is usually able to deal with the real estate in its name, as owner, for the benefit of the beneficiaries of the trust.

The trustee must lodge a tax return for the trust. The trust pays no tax on the profit. Profit is distributed to the trust beneficiaries who declare the trust distributions as income and pay tax.

If the trust is a fixed trust, such as a unit trust or custodian trust, then the distributions made to the trust beneficiaries are fixed, according to their entitlements.

If the trust is a discretionary trust, then the distributions made to the beneficiaries are at the trustee's discretion. For this reason, a discretionary trust protects the trust assets if claims are made against beneficiaries personally: beneficiaries have no vested or fixed entitlement to receive a distribution. Their entitlement is to be considered for a distribution.

Transacting units in a unit trust is restricted, except in an REIT, and follows the rules found in the unit trust deed.

Interests in a discretionary trust are not transacted.

Transacting interests in a custodian trust is not restricted.

iv Joint venture

Joint ownership of investment real estate can be in any one of these three forms:

  1. in the name of a company. If so, it is an incorporated joint venture, and the commentary about companies and fixed trusts applies;
  2. in the names of the joint venturers personally. If so, it is an unincorporated joint venture and the commentary about personal names applies; or
  3. in the name of a nominee company or trustee company. If so, it is an unincorporated joint venture and the commentary about trusts applies.
v Property scheme

Property schemes must be registered as managed investment schemes with the Australian Securities and Investments Commission (ASIC). ASIC provides the following description:

A property scheme, also known as a property fund or property syndicate, is an investment where you, and other investors, buy 'units' in an investment operated by a professional investment manager. The scheme's money is invested in property assets which may include commercial, retail, industrial or other property sector assets.The investment manager selects and buys investment properties and is responsible for maintenance, administration, rental collection and improvements to the properties. Some property schemes invest in property development, which means there are extra construction and development risks.
Your money usually stays in the property scheme until it ends, when the properties are sold and the net proceeds are distributed to investors.You may be able to withdraw your money early but there may be penalties. If the scheme is listed, you may be able to sell your units on the public market.Depending on the type of property fund you invest in, you might get a regular income (distributions), usually quarterly or half-yearly, and a capital gain on your original investment, if the value of the scheme's underlying investment assets increases.

Listed property schemes are known as property trusts or REITs. They are listed on a public market, such as the Australian Securities Exchange. They are easy to value, easy to sell and are subject to listing (disclosure) rules.

Unlisted property schemes have limited liquidity and are less transparent in terms of disclosures to investors.

In terms of taxation, the commentary upon fixed trusts applies.