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 have their relative advantages in terms of asset protection, taxation treatment, ease of transacting, disclosure and sharing ownership.
The most popular forms for indirect investment are a listed real estate investment trust (REIT) or an unlisted property scheme or syndicate.i Personal names
Real estate held in a personal name is exposed to creditors and others who make legal claims.
Why is it that most Australians own their family home in their own names despite this exposure? The answer is that the family home has many tax advantages – the sale proceeds are completely exempt from capital gains tax, the home is exempt from land tax and no inheritance tax is payable on death. Investment property has no such tax exemptions.
Transacting is subject to full transfer taxes (known as stamp duty or transfer duty), no matter if it is a family home or an investment property.
If ownership is shared, the names of all owners are recorded on the title.ii Company
Real estate held in the name of a limited liability company protects the shareholders and directors of the company from legal claims. The exceptions are director liabilities for personal guarantees, payroll tax and environmental offences. Joint ownership of properties for investment is best in a company structure or a fixed trust structure.
Real estate investment companies pay tax at the rate of 30 cents in the A$1 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 rate will be lower at 27.5 cents in the A$1. The tax paid is able to be distributed as a tax credit against the Australian tax payable by the shareholder. This is called a 'franking credit'.
Transacting is subject to full transfer taxes. Ownership interests are held as shareholdings.iii Trust
The title to real estate held in a trust is usually held 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.
There is no income tax payable by a trust because all of the profit is distributed to the trust beneficiaries annually. Tax is payable by the trust beneficiaries at rates according to their own tax position.
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 the unit holdings.
If the trust is a discretionary trust, which beneficiaries receive the distributions and the amounts they receive are at the trustee's discretion. For this reason, a discretionary trust protects the trust assets if claims are made against beneficiaries personally.
Transacting units in a unit trust follows similar rules as transacting shares in a company. The rules are found in the unit trust deed.
Interests in a discretionary trust are not transacted because the trust beneficiaries have no fixed entitlements, only an entitlement to be considered for a distribution.
Transacting interests in a custodian trust follows the same rules as transacting interests in a personal name.iv Joint venture
Real estate held in a joint venture can be held in any one of three ways:
- in the name of a company. If so, it is an incorporated joint venture and the commentary about companies and fixed trusts applies;
- in the names of the investors personally, as joint venturers. If so, it is an unincorporated joint venture and the commentary about personal names applies; or
- in the name of a nominee company. If so, it is an unincorporated joint venture and the commentary upon custodian trusts applies.
This description is provided by the Australian Securities and Investments Commission:
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.
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.
Some property schemes invest in property development, which means there are extra construction and development risks.
Listed property schemes, known as property trusts or REITs, are property schemes 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 provide less liquidity and are less transparent in terms of disclosures to investors.
In terms of taxation, the commentary upon unit trusts applies.
Australia is open to foreign investment in real estate in new residential housing (up to 50 per cent of an apartment development can be sold to foreign investors), and as a general rule, in residential development sites, commercial real estate and farms.
Investment in existing housing stock is restricted to Australian citizens and permanent residents. The 'existing house' policy is directed to increasing housing affordability for the average Australian, so that they are not crowded out or priced out of the housing market.
Foreign investors need approval from the Foreign Investment Review Board (FIRB). This is the foreign investment policy as explained by the FIRB:
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 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 where the value of the investment is more than $55 million, with an exemption applying to investors from Australia's trade agreement partners and a $0 threshold applying to Foreign Government investors.
Strict criminal and civil penalties may apply for breaches of the law, including disposal orders.
In 2016–17 the total number of applications approved by the FIRB was 14,357 for A$192.9 billion of proposed investment. Foreign investment applications are falling rapidly. In 2015–16, 41,445 applications were approved. Most approvals are for purchases of A$1 million or less in price, which indicates that the approvals were for the purchase of residential real estate.