Buying property in Australia – as a foreign investor – is not always a simple and straightforward process. The rules surrounding the purchase of Australian real estate by foreign buyers and investors are constantly changing. Knowing which pitfalls to avoid can save you considerable time and money.
Set out below are some tips and background information that will be of benefit if you are considering buying property in Australia, as a foreign investor.
A foreign person is someone who does or will hold a substantial interest (generally 20% or more) and who is not:
- ordinarily resident in Australia; or
- a corporation or trust in which the directors, shareholders, unitholders or beneficiaries are not ordinarily resident in Australia.
These tips briefly explain the basics of the foreign investment review framework, foreign purchaser duties, foreign resident capital gains withholding, and what to consider prior to investing.
Tip 1: Know the land: do you need foreign investment approval?
It is important to keep the land categories in mind when determining whether a foreign investor can invest in the Australian real estate market.
There are four categories of Australian Land:
1. Residential Land
- Established or existing dwellings – foreign non-residents are generally unable to purchase an existing dwelling and Australian temporary residents require approval.
- New dwellings – both foreign non-residents and Australian temporary residents – generally require approval from the Treasurer who is advised by Foreign Investment Review Board (FIRB) before entering into a purchase contract.
- Vacant land – foreign investors require approval to buy vacant land for residential development.
2. Commercial Land
- Vacant land – foreign investors require approval before acquiring an interest in any vacant commercial land.
- Developed land – foreign persons require approval of the value of the interest is more than the relevant threshold. The threshold is usually $252 million, but can vary from $55 to $1,094 million depending on the nature of the property and country of origin of the foreign investor.
3. Agricultural Land
- Foreign persons generally require approval where the cumulative value of a foreign person’s agricultural land holdings exceed $15 million
4. Exploration, mining or production tenement
- Whether foreign investment approval is required depends on a range of factors including the nature and type of the tenement.
These categories are not mutually exclusive meaning that an area of land could fall under several categories.
Tip 2: Does additional purchaser duty apply?
If you are a foreign purchaser, and acquire residential property in Victoria (or a non-residential property with the intention to convert it to a residential property), you must pay foreign purchaser duty in addition to the land transfer duty on the dutiable value of the property. This is calculated on the greater of the price you pay or the market value of the property.
This additional purchaser duty is currently 7% on contracts entered into from 1 July 2016.
There are limited exemptions. However, in most cases, the State Revenue Office will impose the additional duty.
Tip 3: Where’s my 10 percent? Foreign resident capital gains withholding
From 1 July 2016, when purchasing properties or land with a market value greater than $2 million, the purchaser is required to withhold 10% of the purchase price and remit the funds to the Australian Tax Office (ATO) ensuring the collection of foreign residents’ Australian tax liabilities.
To avoid this non-final withholding tax, Australian resident vendors (who are resident for tax purposes) are able to obtain a clearance certificate from the ATO prior to settlement of the property to ensure they do not incur the 10% withholding.
The rules surrounding the purchase of Australian real estate by foreign buyers are complex and intricate and are constantly changing. It is therefore essential that you evaluate the type of land being purchased, the nature of the purchaser and country of origin and the relevant thresholds to determine whether you need foreign investment approval prior to entering into a purchase contract.