Purchasing Real Property in Australia Foreign Non-Residents
By Ross C. Koffel
Posted: 26th August 2016 07:14Torrens Title
The Australian states each have differing real property laws but are broadly speaking quite similar in each jurisdiction. This is referred to as the Torrens system of land registration and applies in each state. It is a central register of all land in the state and effectively provides indefeasible title rights to a bona fide purchaser for value. There are very limited exceptions to the rights the owner or proprietor receives on registration. The register of land is conclusive evidence of ownership and any interests in the land must be registered.
Home units and apartments are generally held in strata title which confers much the same title guarantees as with real property. It usually entitles the owner to an area of space inside the unit while the actual building structure is owned by a body corporate. Some older units are held in company title and specific legal advice should be sought before considering such a purchase.
Due to the nature of property registration guaranteeing title, title insurance is not required by lenders and is rarely purchased in the Australian jurisdictions. If title insurance is purchased in Australia it would generally cover illegal building works or an encroachment onto land.
Contract for Sale
A purchase is confirmed on the vendor and the purchaser entering into a Contract for Sale. It is usual for a 10% deposit to be paid although this can be negotiated. The terms and conditions of the sale are contained in the contract as are various disclosures and title documents.
Various state laws allow for cooling off periods for residential property after a contract is entered into allowing a purchaser to undertake various enquires and seek legal advice. Building reports, pest reports, strata unit reports and surveys are often undertaken. The purchaser can rescind or terminate the contract within that time period if they are not satisfied with the reports. A small penalty applies in some jurisdictions, New South Wales allows for a penalty of 0.25% of the purchase price.
It is important to seek legal advice and have a lawyer check the Contract for Sale carefully before it is signed or a deposit is paid. Cooling off periods may not always apply and you need to be sure of your rights. There is no cooling off period applicable for a purchase at an auction sale. The sales agent will provide a copy of the contract for sale before an auction.
Contracts for Sale are not dependent on loan finance for the purchase being approved. This should be discussed with your finance broker or bank and approval sought before proceeding or entering into the contract. If the purchase cannot be financed at settlement the vendor may be entitled to retain your deposit and sue for any additional damages and costs.
The correct entity or persons should be specified on the Contract for Sale. Complications and additional stamp duty may be payable if the incorrect purchaser is named and needs to be changed for any reason. Competent legal advice should be sought if the purchaser is a company or trustee.
Each state government applies stamp duty to a purchase which is generally payable within a certain period of contracts being exchanged or entered into. It is calculated on the contract price or improved value of the land if the purchase is not at ‘arm’s length’. Stamp duty is calculated at different rates up to certain values rather than on a simple percentage basis. The stamp duty payable in New South Wales on a purchase of land for $1,000,000 is for example $40,490 (2016 rates).
Stamp duty is also applied to purchases of shares or units in entities, companies and trusts which hold real property. Various additional rules apply to these purchases and should be discussed with your lawyer.
Various states including New South Wales, Victoria and Queensland have recently applied additional stamp duty liabilities on real property purchases by foreign property investors. These are in the range of 3% to 7% additional stamp duty surcharges on purchases. The new taxes are not of the magnitude of the 15% stamp duty surcharge imposed in Singapore and Hong Kong which it is reported have dramatically cut offshore demand and sent house prices into a dive.
Land tax is payable on a yearly basis on certain investment properties and properties with unimproved land values over a certain threshold. The present threshold is $380,600 in New South Wales and land tax is applied at the rate of $100 plus 1.6% on cumulative holdings above that value. This rate increases to 2% for unimproved land values over $2,947,000 and foreign resident land holders attract an additional surcharge of 0.75% in New South Wales. The rates vary for each other state.
Foreign Investment Review Board
Foreign non-residents are individuals not ordinarily resident in Australia including holders of a visa that permits an individual to remain in Australia for a limited time. The foreign investment framework also applies to foreign corporations, trusts (potentially any trust where a beneficiary is a foreign non-resident), limited partnerships and governments.
Purchases of all residential property by foreign non-residents require Foreign Investment Review Board approval. The purchase of new dwellings will generally be approved and the purchase of established dwellings will not be approved subject to very limited exceptions.
A developer may hold a new dwelling exemption certificate that allows them to sell new dwellings to a foreign investor in which case the purchaser may not need to seek separate foreign investment approval. A copy of the exemption certificate and legal advice should be sought in such a case.
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.
Generally, proposed purchases of agricultural land where the cumulative value of a foreign person’s land holdings exceeds $15 million require FIRB approval. Certain exemptions apply pursuant to various trade agreement entered into between Australia and the respective country. The definition of agricultural land is land used for primary production and is relatively broad but does not for example include what might be termed hobby farms.
Registration of Agricultural Land Holdings
All purchases of agricultural land must be notified and registered. All foreign owners of Australian agricultural land have been required to register their existing interests with the Australian Taxation Office’s Agricultural Land Register.
Foreign Resident Capital Gains Withholding Payment
From 1 July 2016 new taxation rules will apply to the disposal of certain taxable property pursuant to Contracts for Sale. Where a foreign resident disposes of certain taxable Australian property including real property the purchaser will be required to withhold 10% of the purchase price and pay that amount to the ATO. The rules apply to real property with a market value of $2 million or more and includes vacant land, buildings, residential and commercial property. The rules also apply to mining and similar rights and leases in specific circumstances.
Purchases of businesses, trust or company interests are broadly termed indirect Australian real property interests also attract the withholding payment. The rules apply to Australian entities whose majority of assets consist of the above asset types or options or rights to acquire any of the above asset types.
In many cases, the market value of a property will be the purchase price. Where the purchase price has been negotiated between the vendor and the purchaser, acting at arm’s length, the ATO will accept the purchase price as a proxy for market value.
The 10% non-final withholding payment will be incurred on the abovementioned transactions at settlement. Australian resident vendors selling real property will need to obtain a clearance certificate from the ATO prior to settlement to ensure they do not incur the 10% non-final withholding payment.
A credit may be claimed for the amount paid to the Commissioner in the vendor’s tax return where the capital gains tax is assessed.
Australian resident vendors can avoid the 10% withholding by providing one of the following to the purchaser prior to settlement for Australian real property, a clearance certificate obtained from the ATO and for other asset types a vendor declaration that they are not a foreign resident.
Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.
Ross C. Koffel isa commercial lawyer and business executive with a combined experience of over 40 years. Recognised as a highly experienced commercial lawyer in the provision of advice to business including the day to day transactions, corporate governance, purchase and sale of businesses, due diligence reports for business acquisition, cross border transactions, insolvency and tax advice. Has overseen a multitude of complex multi-jurisdictional commercial litigation in the Supreme Court, Court of Appeal and High Court. As Chairman and CEO of an advertising and commercial film production company, supervised and managed employees staffed over 7 offices in Australia, PNG and Fiji over a 15 year period.
Ross can be contacted on (+612) 9283 5599 or by email at firstname.lastname@example.org