Investing in Australian Real Estate
Content
Guide to Investing in
Australian Real Estate
© 2013 Allens, Australia
Allens
is an
partnership
operating
in alliance
with
Linklaters
LLP.LLP.
Allens
is independent
an independent
partnership
operating
in alliance
with
Linklaters
>
The interest in Australian real estate is underpinned by:
• Australia’s high-quality stock
• continued economic growth
• stable valuations
• access to funding
• lower interest rates
• higher yields
‘Overseas investors are facing challenges finding new
growth opportunities in their own jurisdictions and
need to look to stable countries like Australia to find
appropriate, secure returns.’
> Overview
The Australian real estate industry has emerged in a relatively healthy condition following the
global financial crisis. There is now a weight of inbound capital from overseas investors being
directed into the Australian real estate sector at a time when the domestic A-REIT sector is
re-emerging in recapitalised, acquisition mode, and the nation’s growing superannuation funds
are more often looking to invest directly in real estate, rather than indirectly via various listed
and wholesale funds platforms. All of this is creating intense competition for traditional prime
office, retail and industrial assets but is also highlighting opportunities in other asset classes.
In this Investing in Australian Real Estate guide, Allens’ real estate experts identify the primary legal and regulatory
issues that overseas investors will face when considering real estate investment opportunities in Australia.
Looking at pre-sale issues such as land ownership and due diligence, tax and regulatory issues, this guide will
assist overseas investors in planning and smoothly implementing their real estate investments in Australia.
> What you need to consider
Some of the key matters to determine before investing in Australian real estate include:
Whether a trust structure (which enables redistribution of income to others) or a
company structure will be used;
If a company structure is used, whether to register as a foreign company operating in
Australia or to establish local subsidiaries;
If a trust structure is used, whether it is to be a managed investment trust (in
order to take advantage of concessional tax rates) in which case the number and
composition of unitholders will be important and an Australian financial services
licence may be required;
Whether the character of the investor or the nature of the real estate to be acquired
will require approval from the Foreign Investment Review Board; and
What transaction costs, duties and taxes will need to be factored into the financial
modelling to ensure investment hurdles are met both at acquisition stage and during
the life of the investment.
Allens is able to provide investor and deal-specific advice on all of these areas. Our experience is that this is
best done early in the decision-making process, in order to ensure any possible hurdles to your investment are
identified, dealt with in deal terms, and programmed into deal timetables before commitments are made that
cannot be met.
3
> Pre-sale issues to consider
Land ownership in Australia
Each Australian State and Territory has its own land law, but there are general consistencies. While most investors
will prefer freehold title, in some jurisdictions only long term leasehold title is available.
The ownership of most land in Australia operates under the Torrens title system, which provides for registration
of title at the land registry of the relevant State or Territory. Each register guarantees an indefeasible title to those
registered (with some limited exceptions), which means that a person’s title to land can generally be confirmed
by a search of the register. Freehold title is the most comprehensive title that can be obtained in Australia, and it
gives an owner the most rights. It is also the most common form of title in Australia.
Certain land in Australia can only be held under a lease from the Government (known as a Crown or a State
Lease), particularly in the ACT, and in respect of agricultural areas in New South Wales, Queensland and the
Northern Territory. Such leases are either in perpetuity or for a long-term, and give the lessee many of the rights
that a freehold land owner would enjoy.
Due diligence
Land in Australia is commonly sold on an ‘as is, where is’ basis and the principle of caveat emptor (buyer beware)
applies. This means that you will generally need to undertake due diligence of a property. The extent of the due
diligence will be determined by the nature of the property, its location, and your proposed use and development
of the property.
When you are putting together your acquisition timetable, you need to consider the time required for all relevant
due diligence.
Legal due diligence of a property generally includes:
• conducting a search of the title at the land registry, to determine the owner and any registered encumbrances
(such as easements, mortgages, restrictions on use and agreements with government bodies relating to works
or the use of the property);
• applying for searches from various statutory authorities, to determine the amount of government rates
and taxes applicable to the property, planning issues (such as permitted and prohibited uses), proposed
resumptions and heritage issues;
• reviewing any tenancy documents for the property, to verify income and identify capital expenditure and
tenure risks; and
• considering any approvals or licences required to hold or operate the property.
You may engage other consultants to undertake a valuation of the property, a physical inspection/assessment of
the property and its services and equipment, to identify future capital expenditure and the level of compliance
with building codes and environmental due diligence. Financial institutions lending money will often also
undertake extensive due diligence on a property as a precondition of funding.
Each State or Territory places disclosure obligations on a person selling real estate, with consequences for
providing false or misleading information. However, the potential remedies do not displace the need for you to do
thorough due diligence.
4
> Issues to consider when structuring
your deal
Acquiring real estate
There are various ways to acquire real estate in Australia; for example, a direct transfer from one entity to
another, an acquisition of the shares or units held by the owner, a call option or put and call option agreement,
or a long-term lease. There are legal, regulatory and tax consequences for each method, and consideration of
these issues will influence what is the most appropriate method for you. For example, the use of a Managed
Investment Trust, or of leases and subleases of a property, may have advantages for flow through or withholding
tax exemptions (see below in relation to tax issues).
Forms of ownership
Australian laws recognise various forms of ownership of real estate. Some of the more common forms for
commercial real estate include:
• Trust – a trustee holds the real estate on trust for the benefit of one or more beneficiaries; and
• Tenants in common – where there are two or more owners, and each owner owns a share of the property.
That share can be dealt with separately.
While a foreign entity will often use a company as the trustee that owns the real estate, it is less common for
a foreign entity to use a company to own the real estate in its own right, as this provides less flexibility for tax
structuring, income distribution and capital returns.
Security structuring
Financial institutions will require certainty that they hold valid and enforceable security and will often request
one or more of the following securities:
• a mortgage over the real estate (including the land and improvements);
• a charge over the assets of the owner of the property;
• a charge over the assets of any other entity in the borrower group relevant to the business or the property; or
• guarantees from parent entities.
The structure of the borrower group is an important consideration in ensuring that the entities holding Australian
assets can be isolated.
Regulatory issues
Various regulatory issues can flow from the choice of ownership structure used. For example:
• A foreign company acquiring real estate may need to be registered under the Australian Corporations Act as a
foreign company operating in Australia.
• If a trust is involved in the structure, it may require an Australian financial services licence, or may need to
become registered as a managed investment scheme under the Corporations Act.
5
> Foreign Investment Review Board
Foreign entities (in general terms, an entity where a single non-Australian person or entity holds 15 per cent
or more of the entity, or where two or more such non-Australians in aggregate hold 40 per cent or more of the
entity) are required to obtain approval from the Australian Treasurer by making an application to the Foreign
Investment Review Board (FIRB) before acquiring an interest (which includes freehold and leasehold interests
and interests in companies and trusts) in Australian real estate (with some limited exceptions). The approval
requirements are as follows:
• For developed commercial real estate (such as factories, offices, warehouses, hotels and retail property)
approval will be required if the value of the property is $54 million or more (unless the real estate is heritage
listed; then a $5 million threshold applies). For New Zealand and US investors, a $1,078 million threshold applies
instead. Proposals are normally approved without conditions.
• For vacant land for commercial development, approval is required regardless of the value of the land, with
approvals for proposals usually being given subject to the condition that a certain percentage of the land
price be used on construction of new improvements and that continuous construction of the development
commences within five years.
• For rural land (being land used wholly and exclusively for the carrying on of a primary production business,
and that does not include land used for mining or stock agistment), approval will be required if the acquisition
is of an interest in a primary production business where the total assets of the business exceed $248 million
(or $1,078 million for US investors). Proposals are normally approved without conditions. However, the new
Commonwealth Government has foreshadowed a reduction of the $248 million threshold to $15 million.
• If the acquisition is of shares or units in a corporation or trust that has interests in Australian urban land that
make up more than 50 per cent of the value of its total assets, then an approval is generally required before
making that acquisition, regardless of its value. Proposals are normally approved without conditions.
• If the entity acquiring the interest is a sovereign wealth fund or other foreign government investor (in general
terms, an entity owned or controlled by a foreign government, or an entity in which a foreign government has
more than a 15 per cent interest), then an approval is required before purchasing any real estate, regardless of
its value.
• If the acquisition is of new residential dwellings, then an approval is required, regardless of its value. Proposals
are normally approved without conditions. For vacant land for residential development, approval is required
regardless of the value of the land, with approvals for proposals usually being given subject to the condition
that continuous construction of the development commences within 24 months. Owners of new residential
developments may apply to FIRB for pre-approval to sell a certain number of those dwellings to foreign persons
without the need for the purchaser of the developed dwelling to obtain separate FIRB approval.
• Approvals are not normally granted for the acquisition of developed residential land, except in limited
circumstances.
FIRB has 30 days from receipt of the application to provide a response, but can extend this period by up to
90 days.
It is possible to agree to acquire an interest in real estate subject to obtaining foreign investment approval.
6
> Tax issues to consider
Foreign entities intending to invest in Australian real estate need to consider the Australian taxation
consequences of such an investment. In considering what structure to adopt, different considerations may apply
for each investor and each investment. Consequently, the optimal structure may differ for each investor.
Managed Investment Trusts (MITs)
In a move specifically designed to enhance the competitiveness of the Australian funds management industry
and to increase its ability to attract foreign investment, the Australian tax system was amended in 2008 to
introduce generous withholding tax concessions to foreign investors participating in investment structures
qualifying as MITs.
For investors, the key tax benefit of the MIT regime is that it generally entitles foreign investors in a MIT product
to a concessional withholding tax rate of 15 per cent (down from the standard 30 per cent rate that would
otherwise apply) in respect of eligible distributions made from the MIT.
In order for a trust to be an MIT, there are four broad requirements that must be satisfied:
• either the trustee of the trust must be an Australian resident, or otherwise central management and control of
the trust must be in Australia;
• the trust must be a ‘managed investment scheme’ operated by a ‘financial services licensee’ (as defined in the
Corporations Act);
• the trust must satisfy certain requirements aimed at ensuring the trust is ‘widely held’; and
• the trust must not be a public trading trust for tax purposes (which goes to the nature of the trust’s
investments and business).
Interest and other withholding taxes
This can be of concern, first where overseas entities have entered into loans with Australian financial institutions
and are obliged to withhold tax in the jurisdiction of their incorporation, and, second, where overseas financial
institutions are providing loans to entities established in Australia. The manner in which finance is requested is
an important consideration in ensuring that a withholding tax exemption can be sought in respect of the loan,
rather than a borrower being obliged to gross-up payments.
Goods and services tax
Australia has a goods and services tax (GST) regime. It is similar to many value-added tax (or VAT) and GST
regimes in other jurisdictions. GST in Australia (currently at the rate of 10 per cent), although strictly payable by
the vendor of real estate, is generally passed on to a purchaser. However, the sale of a property will not give rise
to GST where it is sold as a going concern, which is generally applicable for occupied commercial, retail and
industrial properties.
Duty
Duty (also known as stamp duty) is payable by a purchaser on a transfer of land (with some exemptions and
concessions) with the dutiable value generally calculated on the greater of: (a) the market value of the property;
and (b) the consideration (the price paid), in both cases including GST.
7
Each Australian State administers its own duty system, with varying rates, exemptions, concessions and timing
for payment. The location of the property will determine the applicable regime. The following table provides an
example of the duty payable in each State or Territory based on a property with a dutiable value of $10 million.
Duty payable on property with dutiable value of $10m*
NSW
VIC
QLD
SA
WA
TAS
NT
ACT
$535,490
$550,000
$555,525
$543,830
$508,915
$445,185
$545,000
$550,000
* Rates applicable as at 19 July 2013, and with the assumption that GST is included. no additional premiums or surcharges apply and no concessions or exemptions
are relevant.
Income tax
Australia imposes a tax on the taxable income of residents and non-residents. The income tax rate for both
resident and non-resident companies is 30 per cent.
Generally, foreign entities investing in Australia use a company as the vehicle through which the investment
is made. In certain special circumstances, a trust or a limited partnership may be used instead of a company.
Companies that are resident in Australia for Australian tax purposes are liable for income tax on their Australian
source taxable income and on certain foreign source income. Companies that are not tax resident in Australia are
generally liable for Australian income tax only on their Australian source income.
The income tax treatment of Australian branches of foreign companies and Australian subsidiaries of foreign
companies is similar in most respects, and there is generally no advantage from an Australian tax perspective in
using a branch, rather than an Australian subsidiary.
Capital gains tax
Non-residents are taxed on capital gains arising from the disposal of Australian real property or on disposal of
certain ‘non-portfolio’ interests in entities the assets of which, directly or indirectly, consist principally of real
property in Australia. This liability can arise where one non-resident entity disposes of its interest in another nonresident entity if the underlying assets of that other entity directly or indirectly consist principally of real property
in Australia.
Non-residents are also taxed on capital gains on the disposal of assets used by them in carrying on business
through a branch in Australia.
Funding the investment
An investment in Australian real estate may be funded by debt, equity or a combination of the two. Tax
considerations in the foreign investor’s country of residence, as well as Australian tax considerations, may
be relevant in determining how the investment is to be funded.
Where an Australian resident company that is controlled by non-residents borrows to finance its activities,
a deduction is generally allowed for Australian income tax purposes for interest incurred in respect of the
borrowing.
However, the amount of interest that is deductible may be limited under ‘thin capitalisation’ rules. Under those
rules, if the amount of a company’s debt exceeds 75 per cent of the value for thin capitalisation purposes of its
assets, interest deductions may be denied in respect of the excess debt. In some circumstances, it is possible to
have a level of gearing higher than 75 per cent if it can be demonstrated that the amount of debt represents an
arm’s length level of debt.
8
> Annual rates and taxes
There are various rates and taxes incurred annually by an owner of real estate in Australia. They are levied by the
relevant State, Territory, local government and State government authority. The main types are:
• council (local government) rates – generally based on the capital improved value (value of land and buildings)
or unimproved value (land only) of the property, the rates contribute towards the cost of running the council
and community services (eg garbage collection and disposal, development, repair and maintenance of
community centres, libraries, parks and gardens and local roads). Each council imposes a different rate for
calculating the rates payable;
• water rates – used for the installation, repair and maintenance of water assets; and
• land tax – calculated by reference to the taxable value of a property (being the unimproved or site value of the
land). The taxable value of all property of an owner within a State or Territory is aggregated to determine the
rate of land tax payable. The following table provides an example of the annual land tax payable in each State
or Territory based on a commercial property with a taxable value of $10 million.
Annual land tax payable on property with taxable value of $10m*
NSW
VIC
QLD
SA
WA
$183,676
$182,475
$175,000
$341,770.50 $139,650
TAS
NT
$146,587.50 N/A+
ACT
N/A++
* Rates applicable as at 1 July 2013, and with the assumption that a single-holding basis and no additional surcharges apply.
+ Northern Territory does not impose land tax.
++ Commercial properties in the ACT are not subject to land tax (since 1 July 2012).
Rates and taxes are generally able to be paid by quarterly instalments and are passed on to a tenant through the
outgoings provision in a lease; however, this may be precluded by legislation for some charges – for example,
land tax in Victoria and Queensland is not able to be passed on to a retail tenant under each of those State’s retail
lease legislation.
Water consumption is generally paid by the occupier of a property and charged separately.
> Planning approvals and heritage
Each Australian State has its own system for administering planning law, which relates to the use and
development of land. In general terms, each parcel of land is allocated a zone that will specify which uses are
permitted, permitted with approval, or prohibited.
Generally, planning law is undertaken at the local government level in consultation with various government
authorities (eg water, power and road authorities) but larger projects may be dealt with at State level. Interested
parties (such as adjoining owners, neighbours and the local community) may also be entitled to be heard before
a decision is made regarding planning laws. Decisions of the local government are subject to review by tribunals
and courts.
Properties considered by the State to have cultural or historical significance, including in respect of Indigenous
cultural heritage, may have certain restrictions on their use or development, or obligations imposed in relation to
their maintenance. Heritage issues are ordinarily considered as part of legal due diligence.
9
> Contamination
Although each Australian State has its own laws relating to the contamination of land, generally the ‘polluter
pays’ principle is applied, which means the person who caused the contamination is responsible for any required
remediation. However, the various State authorities responsible for the enforcement of environmental laws in
Australia may also have recourse to the owner, occupier or mortgagee of land in certain circumstances (eg where
the polluter no longer exists or cannot be found).
It is usual for industrial properties, or properties where contamination is suspected, that a purchaser commission
an environmental consultant to prepare an environmental report as part of the due diligence for the acquisition
or, at least, review available reports provided by a vendor. This information can then be used to consider
appropriate allocation of liability going forward and any indemnities that may be required (including whether
there is a need for any security in support of the indemnities).
The potential for ongoing liability for contamination may be relevant when deciding whether to proceed through
an acquisition of shares or a direct transfer of the asset.
> Native title
Australia recognises that its Indigenous inhabitants may retain traditional rights over land, and these are known
as native title rights.
A large number of government actions have completely extinguished any potential native title rights over land,
and this is the case for all registered freehold land, and for most types of leasehold interest. Consequently, native
title is usually not an issue for a buyer of land in Australia.
However, where native title may not have been extinguished, further investigations may be required.
10
> Contacts
Sydney
Mark Stubbings
Real Estate Sector Leader
Nicholas Cowie
Partner
T +61 2 9230 4257
T +61 2 9230 4025
M +61 414 223 925
M +61 405 154 025
[email protected] [email protected]
Victoria Holthouse
Partner
T +61 2 9230 4303
M +61 410 693 038
[email protected]
Melbourne
David McLeish
Partner
Michael Graves
Partner
T +61 3 9613 8954
M +61 411 864 182
[email protected]
T +61 3 9613 8814
M +61 407 235 221
[email protected]
Brisbane
Paul Newman
Partner
Alister Fitzgerald
Partner
John Beckinsale
Partner
Tony Davies
Partner
T +61 7 3334 3514
M +61 414 483 514
[email protected]
T +61 7 3334 3365
T +61 7 3334 3520
T +61 7 3334 3250
M +61 403 137 755
M +61 416 103 520
M +61 408 763 590
[email protected] [email protected] [email protected]
11
www.allens.com.au
Allens is an independent partnership operating in alliance with Linklaters
17041 9/13
Australian Real Estate
© 2013 Allens, Australia
Allens
is an
partnership
operating
in alliance
with
Linklaters
LLP.LLP.
Allens
is independent
an independent
partnership
operating
in alliance
with
Linklaters
>
The interest in Australian real estate is underpinned by:
• Australia’s high-quality stock
• continued economic growth
• stable valuations
• access to funding
• lower interest rates
• higher yields
‘Overseas investors are facing challenges finding new
growth opportunities in their own jurisdictions and
need to look to stable countries like Australia to find
appropriate, secure returns.’
> Overview
The Australian real estate industry has emerged in a relatively healthy condition following the
global financial crisis. There is now a weight of inbound capital from overseas investors being
directed into the Australian real estate sector at a time when the domestic A-REIT sector is
re-emerging in recapitalised, acquisition mode, and the nation’s growing superannuation funds
are more often looking to invest directly in real estate, rather than indirectly via various listed
and wholesale funds platforms. All of this is creating intense competition for traditional prime
office, retail and industrial assets but is also highlighting opportunities in other asset classes.
In this Investing in Australian Real Estate guide, Allens’ real estate experts identify the primary legal and regulatory
issues that overseas investors will face when considering real estate investment opportunities in Australia.
Looking at pre-sale issues such as land ownership and due diligence, tax and regulatory issues, this guide will
assist overseas investors in planning and smoothly implementing their real estate investments in Australia.
> What you need to consider
Some of the key matters to determine before investing in Australian real estate include:
Whether a trust structure (which enables redistribution of income to others) or a
company structure will be used;
If a company structure is used, whether to register as a foreign company operating in
Australia or to establish local subsidiaries;
If a trust structure is used, whether it is to be a managed investment trust (in
order to take advantage of concessional tax rates) in which case the number and
composition of unitholders will be important and an Australian financial services
licence may be required;
Whether the character of the investor or the nature of the real estate to be acquired
will require approval from the Foreign Investment Review Board; and
What transaction costs, duties and taxes will need to be factored into the financial
modelling to ensure investment hurdles are met both at acquisition stage and during
the life of the investment.
Allens is able to provide investor and deal-specific advice on all of these areas. Our experience is that this is
best done early in the decision-making process, in order to ensure any possible hurdles to your investment are
identified, dealt with in deal terms, and programmed into deal timetables before commitments are made that
cannot be met.
3
> Pre-sale issues to consider
Land ownership in Australia
Each Australian State and Territory has its own land law, but there are general consistencies. While most investors
will prefer freehold title, in some jurisdictions only long term leasehold title is available.
The ownership of most land in Australia operates under the Torrens title system, which provides for registration
of title at the land registry of the relevant State or Territory. Each register guarantees an indefeasible title to those
registered (with some limited exceptions), which means that a person’s title to land can generally be confirmed
by a search of the register. Freehold title is the most comprehensive title that can be obtained in Australia, and it
gives an owner the most rights. It is also the most common form of title in Australia.
Certain land in Australia can only be held under a lease from the Government (known as a Crown or a State
Lease), particularly in the ACT, and in respect of agricultural areas in New South Wales, Queensland and the
Northern Territory. Such leases are either in perpetuity or for a long-term, and give the lessee many of the rights
that a freehold land owner would enjoy.
Due diligence
Land in Australia is commonly sold on an ‘as is, where is’ basis and the principle of caveat emptor (buyer beware)
applies. This means that you will generally need to undertake due diligence of a property. The extent of the due
diligence will be determined by the nature of the property, its location, and your proposed use and development
of the property.
When you are putting together your acquisition timetable, you need to consider the time required for all relevant
due diligence.
Legal due diligence of a property generally includes:
• conducting a search of the title at the land registry, to determine the owner and any registered encumbrances
(such as easements, mortgages, restrictions on use and agreements with government bodies relating to works
or the use of the property);
• applying for searches from various statutory authorities, to determine the amount of government rates
and taxes applicable to the property, planning issues (such as permitted and prohibited uses), proposed
resumptions and heritage issues;
• reviewing any tenancy documents for the property, to verify income and identify capital expenditure and
tenure risks; and
• considering any approvals or licences required to hold or operate the property.
You may engage other consultants to undertake a valuation of the property, a physical inspection/assessment of
the property and its services and equipment, to identify future capital expenditure and the level of compliance
with building codes and environmental due diligence. Financial institutions lending money will often also
undertake extensive due diligence on a property as a precondition of funding.
Each State or Territory places disclosure obligations on a person selling real estate, with consequences for
providing false or misleading information. However, the potential remedies do not displace the need for you to do
thorough due diligence.
4
> Issues to consider when structuring
your deal
Acquiring real estate
There are various ways to acquire real estate in Australia; for example, a direct transfer from one entity to
another, an acquisition of the shares or units held by the owner, a call option or put and call option agreement,
or a long-term lease. There are legal, regulatory and tax consequences for each method, and consideration of
these issues will influence what is the most appropriate method for you. For example, the use of a Managed
Investment Trust, or of leases and subleases of a property, may have advantages for flow through or withholding
tax exemptions (see below in relation to tax issues).
Forms of ownership
Australian laws recognise various forms of ownership of real estate. Some of the more common forms for
commercial real estate include:
• Trust – a trustee holds the real estate on trust for the benefit of one or more beneficiaries; and
• Tenants in common – where there are two or more owners, and each owner owns a share of the property.
That share can be dealt with separately.
While a foreign entity will often use a company as the trustee that owns the real estate, it is less common for
a foreign entity to use a company to own the real estate in its own right, as this provides less flexibility for tax
structuring, income distribution and capital returns.
Security structuring
Financial institutions will require certainty that they hold valid and enforceable security and will often request
one or more of the following securities:
• a mortgage over the real estate (including the land and improvements);
• a charge over the assets of the owner of the property;
• a charge over the assets of any other entity in the borrower group relevant to the business or the property; or
• guarantees from parent entities.
The structure of the borrower group is an important consideration in ensuring that the entities holding Australian
assets can be isolated.
Regulatory issues
Various regulatory issues can flow from the choice of ownership structure used. For example:
• A foreign company acquiring real estate may need to be registered under the Australian Corporations Act as a
foreign company operating in Australia.
• If a trust is involved in the structure, it may require an Australian financial services licence, or may need to
become registered as a managed investment scheme under the Corporations Act.
5
> Foreign Investment Review Board
Foreign entities (in general terms, an entity where a single non-Australian person or entity holds 15 per cent
or more of the entity, or where two or more such non-Australians in aggregate hold 40 per cent or more of the
entity) are required to obtain approval from the Australian Treasurer by making an application to the Foreign
Investment Review Board (FIRB) before acquiring an interest (which includes freehold and leasehold interests
and interests in companies and trusts) in Australian real estate (with some limited exceptions). The approval
requirements are as follows:
• For developed commercial real estate (such as factories, offices, warehouses, hotels and retail property)
approval will be required if the value of the property is $54 million or more (unless the real estate is heritage
listed; then a $5 million threshold applies). For New Zealand and US investors, a $1,078 million threshold applies
instead. Proposals are normally approved without conditions.
• For vacant land for commercial development, approval is required regardless of the value of the land, with
approvals for proposals usually being given subject to the condition that a certain percentage of the land
price be used on construction of new improvements and that continuous construction of the development
commences within five years.
• For rural land (being land used wholly and exclusively for the carrying on of a primary production business,
and that does not include land used for mining or stock agistment), approval will be required if the acquisition
is of an interest in a primary production business where the total assets of the business exceed $248 million
(or $1,078 million for US investors). Proposals are normally approved without conditions. However, the new
Commonwealth Government has foreshadowed a reduction of the $248 million threshold to $15 million.
• If the acquisition is of shares or units in a corporation or trust that has interests in Australian urban land that
make up more than 50 per cent of the value of its total assets, then an approval is generally required before
making that acquisition, regardless of its value. Proposals are normally approved without conditions.
• If the entity acquiring the interest is a sovereign wealth fund or other foreign government investor (in general
terms, an entity owned or controlled by a foreign government, or an entity in which a foreign government has
more than a 15 per cent interest), then an approval is required before purchasing any real estate, regardless of
its value.
• If the acquisition is of new residential dwellings, then an approval is required, regardless of its value. Proposals
are normally approved without conditions. For vacant land for residential development, approval is required
regardless of the value of the land, with approvals for proposals usually being given subject to the condition
that continuous construction of the development commences within 24 months. Owners of new residential
developments may apply to FIRB for pre-approval to sell a certain number of those dwellings to foreign persons
without the need for the purchaser of the developed dwelling to obtain separate FIRB approval.
• Approvals are not normally granted for the acquisition of developed residential land, except in limited
circumstances.
FIRB has 30 days from receipt of the application to provide a response, but can extend this period by up to
90 days.
It is possible to agree to acquire an interest in real estate subject to obtaining foreign investment approval.
6
> Tax issues to consider
Foreign entities intending to invest in Australian real estate need to consider the Australian taxation
consequences of such an investment. In considering what structure to adopt, different considerations may apply
for each investor and each investment. Consequently, the optimal structure may differ for each investor.
Managed Investment Trusts (MITs)
In a move specifically designed to enhance the competitiveness of the Australian funds management industry
and to increase its ability to attract foreign investment, the Australian tax system was amended in 2008 to
introduce generous withholding tax concessions to foreign investors participating in investment structures
qualifying as MITs.
For investors, the key tax benefit of the MIT regime is that it generally entitles foreign investors in a MIT product
to a concessional withholding tax rate of 15 per cent (down from the standard 30 per cent rate that would
otherwise apply) in respect of eligible distributions made from the MIT.
In order for a trust to be an MIT, there are four broad requirements that must be satisfied:
• either the trustee of the trust must be an Australian resident, or otherwise central management and control of
the trust must be in Australia;
• the trust must be a ‘managed investment scheme’ operated by a ‘financial services licensee’ (as defined in the
Corporations Act);
• the trust must satisfy certain requirements aimed at ensuring the trust is ‘widely held’; and
• the trust must not be a public trading trust for tax purposes (which goes to the nature of the trust’s
investments and business).
Interest and other withholding taxes
This can be of concern, first where overseas entities have entered into loans with Australian financial institutions
and are obliged to withhold tax in the jurisdiction of their incorporation, and, second, where overseas financial
institutions are providing loans to entities established in Australia. The manner in which finance is requested is
an important consideration in ensuring that a withholding tax exemption can be sought in respect of the loan,
rather than a borrower being obliged to gross-up payments.
Goods and services tax
Australia has a goods and services tax (GST) regime. It is similar to many value-added tax (or VAT) and GST
regimes in other jurisdictions. GST in Australia (currently at the rate of 10 per cent), although strictly payable by
the vendor of real estate, is generally passed on to a purchaser. However, the sale of a property will not give rise
to GST where it is sold as a going concern, which is generally applicable for occupied commercial, retail and
industrial properties.
Duty
Duty (also known as stamp duty) is payable by a purchaser on a transfer of land (with some exemptions and
concessions) with the dutiable value generally calculated on the greater of: (a) the market value of the property;
and (b) the consideration (the price paid), in both cases including GST.
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Each Australian State administers its own duty system, with varying rates, exemptions, concessions and timing
for payment. The location of the property will determine the applicable regime. The following table provides an
example of the duty payable in each State or Territory based on a property with a dutiable value of $10 million.
Duty payable on property with dutiable value of $10m*
NSW
VIC
QLD
SA
WA
TAS
NT
ACT
$535,490
$550,000
$555,525
$543,830
$508,915
$445,185
$545,000
$550,000
* Rates applicable as at 19 July 2013, and with the assumption that GST is included. no additional premiums or surcharges apply and no concessions or exemptions
are relevant.
Income tax
Australia imposes a tax on the taxable income of residents and non-residents. The income tax rate for both
resident and non-resident companies is 30 per cent.
Generally, foreign entities investing in Australia use a company as the vehicle through which the investment
is made. In certain special circumstances, a trust or a limited partnership may be used instead of a company.
Companies that are resident in Australia for Australian tax purposes are liable for income tax on their Australian
source taxable income and on certain foreign source income. Companies that are not tax resident in Australia are
generally liable for Australian income tax only on their Australian source income.
The income tax treatment of Australian branches of foreign companies and Australian subsidiaries of foreign
companies is similar in most respects, and there is generally no advantage from an Australian tax perspective in
using a branch, rather than an Australian subsidiary.
Capital gains tax
Non-residents are taxed on capital gains arising from the disposal of Australian real property or on disposal of
certain ‘non-portfolio’ interests in entities the assets of which, directly or indirectly, consist principally of real
property in Australia. This liability can arise where one non-resident entity disposes of its interest in another nonresident entity if the underlying assets of that other entity directly or indirectly consist principally of real property
in Australia.
Non-residents are also taxed on capital gains on the disposal of assets used by them in carrying on business
through a branch in Australia.
Funding the investment
An investment in Australian real estate may be funded by debt, equity or a combination of the two. Tax
considerations in the foreign investor’s country of residence, as well as Australian tax considerations, may
be relevant in determining how the investment is to be funded.
Where an Australian resident company that is controlled by non-residents borrows to finance its activities,
a deduction is generally allowed for Australian income tax purposes for interest incurred in respect of the
borrowing.
However, the amount of interest that is deductible may be limited under ‘thin capitalisation’ rules. Under those
rules, if the amount of a company’s debt exceeds 75 per cent of the value for thin capitalisation purposes of its
assets, interest deductions may be denied in respect of the excess debt. In some circumstances, it is possible to
have a level of gearing higher than 75 per cent if it can be demonstrated that the amount of debt represents an
arm’s length level of debt.
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> Annual rates and taxes
There are various rates and taxes incurred annually by an owner of real estate in Australia. They are levied by the
relevant State, Territory, local government and State government authority. The main types are:
• council (local government) rates – generally based on the capital improved value (value of land and buildings)
or unimproved value (land only) of the property, the rates contribute towards the cost of running the council
and community services (eg garbage collection and disposal, development, repair and maintenance of
community centres, libraries, parks and gardens and local roads). Each council imposes a different rate for
calculating the rates payable;
• water rates – used for the installation, repair and maintenance of water assets; and
• land tax – calculated by reference to the taxable value of a property (being the unimproved or site value of the
land). The taxable value of all property of an owner within a State or Territory is aggregated to determine the
rate of land tax payable. The following table provides an example of the annual land tax payable in each State
or Territory based on a commercial property with a taxable value of $10 million.
Annual land tax payable on property with taxable value of $10m*
NSW
VIC
QLD
SA
WA
$183,676
$182,475
$175,000
$341,770.50 $139,650
TAS
NT
$146,587.50 N/A+
ACT
N/A++
* Rates applicable as at 1 July 2013, and with the assumption that a single-holding basis and no additional surcharges apply.
+ Northern Territory does not impose land tax.
++ Commercial properties in the ACT are not subject to land tax (since 1 July 2012).
Rates and taxes are generally able to be paid by quarterly instalments and are passed on to a tenant through the
outgoings provision in a lease; however, this may be precluded by legislation for some charges – for example,
land tax in Victoria and Queensland is not able to be passed on to a retail tenant under each of those State’s retail
lease legislation.
Water consumption is generally paid by the occupier of a property and charged separately.
> Planning approvals and heritage
Each Australian State has its own system for administering planning law, which relates to the use and
development of land. In general terms, each parcel of land is allocated a zone that will specify which uses are
permitted, permitted with approval, or prohibited.
Generally, planning law is undertaken at the local government level in consultation with various government
authorities (eg water, power and road authorities) but larger projects may be dealt with at State level. Interested
parties (such as adjoining owners, neighbours and the local community) may also be entitled to be heard before
a decision is made regarding planning laws. Decisions of the local government are subject to review by tribunals
and courts.
Properties considered by the State to have cultural or historical significance, including in respect of Indigenous
cultural heritage, may have certain restrictions on their use or development, or obligations imposed in relation to
their maintenance. Heritage issues are ordinarily considered as part of legal due diligence.
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> Contamination
Although each Australian State has its own laws relating to the contamination of land, generally the ‘polluter
pays’ principle is applied, which means the person who caused the contamination is responsible for any required
remediation. However, the various State authorities responsible for the enforcement of environmental laws in
Australia may also have recourse to the owner, occupier or mortgagee of land in certain circumstances (eg where
the polluter no longer exists or cannot be found).
It is usual for industrial properties, or properties where contamination is suspected, that a purchaser commission
an environmental consultant to prepare an environmental report as part of the due diligence for the acquisition
or, at least, review available reports provided by a vendor. This information can then be used to consider
appropriate allocation of liability going forward and any indemnities that may be required (including whether
there is a need for any security in support of the indemnities).
The potential for ongoing liability for contamination may be relevant when deciding whether to proceed through
an acquisition of shares or a direct transfer of the asset.
> Native title
Australia recognises that its Indigenous inhabitants may retain traditional rights over land, and these are known
as native title rights.
A large number of government actions have completely extinguished any potential native title rights over land,
and this is the case for all registered freehold land, and for most types of leasehold interest. Consequently, native
title is usually not an issue for a buyer of land in Australia.
However, where native title may not have been extinguished, further investigations may be required.
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> Contacts
Sydney
Mark Stubbings
Real Estate Sector Leader
Nicholas Cowie
Partner
T +61 2 9230 4257
T +61 2 9230 4025
M +61 414 223 925
M +61 405 154 025
[email protected] [email protected]
Victoria Holthouse
Partner
T +61 2 9230 4303
M +61 410 693 038
[email protected]
Melbourne
David McLeish
Partner
Michael Graves
Partner
T +61 3 9613 8954
M +61 411 864 182
[email protected]
T +61 3 9613 8814
M +61 407 235 221
[email protected]
Brisbane
Paul Newman
Partner
Alister Fitzgerald
Partner
John Beckinsale
Partner
Tony Davies
Partner
T +61 7 3334 3514
M +61 414 483 514
[email protected]
T +61 7 3334 3365
T +61 7 3334 3520
T +61 7 3334 3250
M +61 403 137 755
M +61 416 103 520
M +61 408 763 590
[email protected] [email protected] [email protected]
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