1 . L A W Y E R S TELEVISION EDUCATION NETWORK ACTING FOR THE FOREIGN PURCHASER OF AUSTRALIAN REAL PROPERTY by JONATHAN TISHER ACCREDITED PROPERTY LAW SPECIALIST Ph: (03) Fax: (03) Disclaimer: This publication is a guide only and the comments in this publication do not constitute legal advice and should not be relied upon as such. Tisher Liner FC Law excludes all liability in relation to your use of this publication. You should rely on your own professional legal advice
2 1. INTRODUCTION The Foreign Investment Review Board ( FIRB ) is a non-statutory government body, which was established in FIRB s main role is to advise the Government on issues concerning Australia s Foreign Investment Policy and its administration and to make recommendations concerning foreign investments. Over the last 12 months, there has been increasing scrutiny regarding foreign investment in Australia. Concerns about failure to disclose and non-compliance has caused the Government to tighten the rules and impose more significant sanctions. Purchasing land in Australia as a foreign purchaser has a number of additional requirements. Understanding what your client s obligations are and whether any exemptions apply is essential to giving accurate advice. There are also implications if you act for a vendor and the buyer is a foreign purchaser. This paper canvasses some of the issues that practitioners need to be aware of. 2. WHAT IS THE RELEVANT LEGISLATION? The relevant Commonwealth legislation which address the requirements for foreign purchasers is the Foreign Acquisitions and Takeovers Act 1975 ( the Act ) and the Foreign Acquisitions and Takeovers Regulations In addition, in so far as the State Acts impose additional taxes on foreign purchasers, the Duties Act 2000 and the Land Tax Act 2005 provide further definitions and impose new requirements which practitioners need to be aware of. 3. WHO IS A FOREIGN PERSON? The term 'foreign person' is defined under the Act. The definition identifies 5 limbs of persons who are considered foreign. They are essentially as follows: 3.1 A natural person who is not ordinarily a resident in Australia; 3.2 A corporation in which a: natural person who is not ordinarily a resident in Australia; or foreign corporation; holds a controlling interest.
3 - 3 - An example would include an Australian company where the shareholder is not ordinarily a resident in Australia and holds 51% of the shares in the corporation. 3.3 A corporation in which two or more persons, each of whom is a: natural person not ordinary resident in Australia; or foreign corporation; holds an aggregate controlling interest. An example would include two natural persons who are not ordinary residents, who together hold 51% of the shares in the corporation. 3.4 A trustee (which may be a corporation) of a trust estate in which a: natural person not ordinary resident in Australia; or foreign corporation; holds a substantial interest. The Act provides that a person is taken to hold a substantial interest in a corporation if the person either alone or together with any associates of the person: Control not less than 15% or more of the voting power or potential voting power of the corporation; or Hold interests (or would hold interest) of not less than 15% of the issued shares in the company. A reference to control of the voting power in a corporation means a reference to control that is direct or indirect and includes control that is exercisable as a result or by means of arrangements or practices. In addition, for the purposes of the Act: a person shall be taken to hold a substantial interest in a trust estate if the person, alone or together with an associate holds a beneficial interest in not less than 15% of the corpus or income of the trust estate; or 2 or more persons shall be taken to hold an aggregate substantial interest in a trust estate if the persons, together with an associate or associates,
4 - 4 - hold in the aggregate, beneficial interest of not less than 40% of the corpus income of the trust estate. 3.5 A trustee of a trust estate is 2 or more persons, each of whom is either a: natural person not ordinary resident in Australia; or foreign corporation; holds an aggregate substantial interest. A person is taken to hold an aggregate substantial interest in a corporation if they, together with any associate: Are in a position to control not less than 40% of the voting power or potential voting power; or Holds interest (or would hold interest) in not less than 40% of the issued shares in the corporation. Essentially, the Act covers individuals, companies and trusts (unit, hybrid and discretionary) and if it is a case of a company or trust, the control and interest elements need to be considered very carefully. 3.6 Examples of citizens Australian Citizen / Permanent Resident An Australian Citizen or a foreign national with a permanent residency visa does not require approval from FIRB and can buy a new property, existing property or vacant land. New Zealand Citizen New Zealand citizens do not need approval from FIRB and can buy a new property, existing property or vacant land. Temporary Resident If the person holds a temporary visa such as a spouse visa, work visa or student visa they need approval from FIRB to purchase a property and can: purchase a new dwelling; only buy one established dwelling to live in, however they will be required to sell it once they cease to live there anymore.
5 - 5 - You do not need FIRB approval if your spouse is an Australian citizen and you purchase property together with them as joint tenants. 4. THE APPLICATION PROCESS Applications should be lodged in advance of any transaction, or purchase contracts should be made conditional on obtaining foreign investment approval. They can be submitted electronically on the FIRB website. FIRB has 30 days to consider an application and make a decision. This time period may be extended by up to a further 90 days where a proposal is complicated or additional information is required. The final decision will either raise no objections, impose conditions or block the proposal altogether. For non residential real estate proposals, applications will be accepted when they contain sufficient detail i.e. information about the parties, the proposed investment, a statement of the investor s intentions and how the proposed investment may impact national interest. 5. FIRB S ENFORCEMENT POWERS 5.1 New increased penalties The Act makes it an offence to acquire interests in land (where FIRB approval is required) without providing prior notification to the Treasurer. Foreign person who acquires new property without approval: The increased penalties for such foreign persons are as follows: Criminal penalty is a maximum of: Individual 750 penalty units ($135,000) or 3 years imprisonment; Company 3,750 penalty units ($675,000) The increased civil penalty is the greater of the following: 10% of purchase price in addition to the relevant application fee; or 10% of market value of the property in addition to the relevant application fee
6 - 6 - Foreign person acquires established property without approval or fails to begin construction within 24 months without seeking extension The increased penalties for such foreign persons are as follows: Criminal penalty is a maximum of: Individual 750 penalty units ($135,000) or 3 years imprisonment; Company 3,750 penalty units ($675,000) The increased civil penalty is the greater of the following: Capital gain made on divestment of property; 25% of purchase price; or 25% of market value of the property in addition to the relevant application fee Third party penalties There are also penalties for third parties who assist foreign persons to breach the rules, particularly where they are aware of doing so. In such circumstances, they will be subject to both civil and criminal penalties. Forced sale The penalties also allow for the requirement to force the sale of either the underlying asset, being the property or alternatively the shares or units held by the corporate or trust entity which owns the asset. The Act gives the Government very broad ranging powers to address the breach. 5.2 Come forward reform Part of the reform commencing on 1 December 2015 is that: the ATO is taking an increased regulatory role because they have more specialised data matching systems; and there will be a reduced penalty period until 30 November 2015 to encourage investors that are breaching the FIRB rules to voluntarily come forward before the new penalties apply. In particular, if you voluntarily disclose a breach of the FIRB rules for residential real estate before 30 November 2015 you may:
7 - 7 - Be given 12 months to divest the property rather than a shorter period; or Not be referred for criminal prosecution. 5.3 Temporary residency ceasing It is important to note that the ability to buy under a temporary residency requires that you must sell when you cease being a temporary resident. The following penalties apply to a temporary resident who: fails to sell an established property when it ceases to be their principal residence; rents out their established property; acquires second established property; Maximum criminal penalty of: Individual 750 penalty units ($135,000) or 3 years jail; Company 3,750 penalty units ($675,000). Maximum civil penalty is the greater of the following: The capital gain made on divestment of the property; 25% of the purchase price; 25% of the market value of the property; Investors are more likely to face criminal prosecution if they do not voluntarily admit to a breach prior to 30 November In particular, a foreign purchaser will obtain a lesser penalty if they come forward rather than being discovered by the Government. 6. WHAT ARE THE RULES? UNDERSTANDING THE NEW REGULATIONS GOVERNING FOREIGN INVESTMENTS IN REAL ESTATE There are different rules and requirements depending on what category the real estate purchased by the foreign investor falls into.
8 Residential real estate Residential real estate means all house and land that can be used for residential purposes. It does not include commercial real estate or rural land New Premises A foreign purchaser may obtain approval to purchase a new premises or an off the plan residential apartment. A new dwelling is one which is purchased off the plan from a developer and has not been previously occupied for more than 12 months in total. A new dwelling will also include one that has undergone extensive refurbishment where the building s use has changed from non residential to residential. It does not include established residential real estate that has been refurbished Established dwelling A foreign person may obtain approval to purchase an established dwelling to reside in but not as an investment property. It will usually be a requirement that the foreign purchaser sells the dwelling when they are no longer a resident or depart from living in Australia Redevelopment A foreign purchaser may obtain approval to purchase a residential dwelling for redevelopment. Proposals for redevelopment are normally approved as long as the redevelopment increases Australia s housing stock. Approvals are usually subject to conditions i.e. it cannot be rented out prior to redevelopment. Redevelopment does not include refurbishment of an existing dwelling. It is noted a redevelopment proposal that does not increase the number of dwellings is only likely to be approved where it can be shown that the existing dwellings are at the end of their economic life Vacant land A foreign person may obtain approval to buy vacant land for residential development. This is normally approved subject to conditions i.e. construction commences within 24 months.
9 Exemptions may apply to: a company, trust or managed investment scheme (primarily) for the benefit of individuals ordinarily resident in Australia; a corporation that is providing custodian services; or if you are a Foreign Person buying shares in certain Australian urban land corporations that are publicly listed on an Australian Stock Exchange, or units in certain Australian urban land trusts (an Australian Urban Land Corporation or Trust is a corporation or trust that has interests in Australian urban land which make up more than 50 per cent of the value of its total assets). 6.2 Commercial Property Commercial property includes vacant and developed property that is not for residential purposes, such as offices, factories, warehouses, hotels and shops and may also include land that does not meet the definition of rural land such as mining operations Vacant Land Foreign persons need to apply to buy or take an interest in land for commercial development, regardless of the value of the land. Such proposals are normally approved subject to development conditions Developed Commercial Property Foreign persons need to apply to buy or take an interest in developed commercial real estate valued at $55 million or more unless the real estate is heritage listed, and then a $5 million threshold applies. New Zealand and United States investors only need to apply for developed commercial real estate valued at $1,094 million or more. Such proposals are normally approved without conditions. Developed commercial property includes hotels, motels, hostels and guesthouses, as well as individual dwellings that are a part of these properties. A unit in a hotel that is owner-occupied or rented out privately (that is, it is not part of the hotel business) is considered to be residential property. The application needs to be detailed and consideration of the FIRB requirements must be had before submitting. It includes the name of the purchaser entity, ownership structure, purchaser s future interest of the property, the source of funding, a copy of audited financial statements, the reason for the proposed acquisition, etc.
10 Commercial Land for Development Foreign persons can apply to purchase land for commercial development. This would usually involve conditions that continuous construction commences within 5 years Exemptions may apply where: An interest in developed commercial property (regardless of value) where the property is to be used immediately and in its present state for industrial or non-residential commercial purposes (the acquisition must be wholly incidental to the purchaser s proposed or existing business activities); or An interest in developed commercial property valued below $54 million generally or $5 million for heritage listed properties (or $1,078 million for New Zealand and United States investors); or A company, trust or managed investment scheme (primarily) for the benefit of individuals ordinarily resident in Australia; A corporation that is providing custodian services; or If buying shares in certain Australian urban land corporations that are publicly listed on an Australian Stock Exchange, or units in certain Australian urban land trusts (an Australian Urban Land Corporation or Trust is a corporation or trust that has interests in Australian urban land which make up more than 50 per cent of the value of its total assets). 6.3 Rural Land Rural land is land that is used wholly and exclusively for carrying on a business of primary production to be a business of primary production, the business must be substantial and have a commercial purpose and character. Foreign persons must seek prior approval for a proposed acquisition of an interest in rural land where the cumulative value of rural land that the foreign person (and any associates) already holds exceeds, or immediately following the proposed acquisition is likely to exceed, $15 million (as of 1 March 2015). As of 1 July 2015, foreign persons and government investors holding interests in agricultural land must register those interests with the ATO. This includes all existing holdings to be registered by 31 December 2015 and any new interests within 30 days.
11 In assessing foreign investment applications in agriculture, the Government considers the effects of the quality and availability of Australia s agricultural resources, land access and use, production and productivity, Australia s capacity to remain a reliable seller of agricultural production, and the employment in Australia s local and regional communities. 7. WITHHOLDING TAX ON SALES BY FOREIGN INVESTORS In October 2014, the Commonwealth Government issued a proposal of a 10% withholding tax for the sale of a taxable Australian properties by foreign investors. The purpose of this regime is to assist in the collection of foreign residents gains tax liabilities. Under this proposal, there will be an obligation on foreign investors to withhold 10% of the purchase price, payable to the ATO. This will be regarded as a non-final withholding of tax. As a practical issue in respect to interest when a deposit is invested and there is no TFN and an overseas address is provided, the bank will withhold a percentage of the interest earned depending on the country that the person is from (as withholding tax). 8. STAMP DUTY AND LAND TAX - UNDERSTANDING THE NEW RULES IN VICTORIA AND THEIR IMPLICATIONS & ISSUES FOR FOREIGN TRUSTS 8.1 Residential land As of 1 July 2015, there has been an introduction of a 3% surcharge to apply to foreign investors who purchase residential property. This surcharge will be in addition to the normal stamp duty payable. Residential property is defined as land in Victoria: (a) On which there is a building affixed that: Is designed and constructed solely or primarily for residential purposes; and May lawfully be used as a place of residence; or (b) On which a foreign purchaser intends to affix a building that: Is designed and constructed solely or primarily for residential purposes; and
12 May lawfully be used as a place of residence; or It is important to note that if it is an off the plan sale, the purchaser will be required to pay the additional 3% on the full value of the land and will not obtain the concessional stamp duty treatment for the additional 3% component. 8.2 What if I nominate after 1 July 2015? The position of the State Revenue Office in respect to a nomination after 1 July 2015 (for a contract entered into prior to 1 July 2015) is that if it: Does not trigger a subs-sales event, there will not be the additional 3% duty; Triggers a sub-sales event, additional duty of 3% is payable. A sub-sales event is essentially where there is additional consideration or land development. 8.3 Change of use to residential land If after 1 July 2015, a foreign person purchases non-residential land and then after the land is transferred, the foreign purchaser changes the use to residential land, 3% duty will be payable. In addition if the foreign purchaser forms an intention to affix a building on the land that is designed and constructed solely or primarily for residential purposes or may be lawfully used for a place of residence, then within 14 days after the foreign purchaser forms the intention, they must lodge with the Commissioner a statement of the foreign purchaser s intention. Thirty days after the foreign purchaser forms the intention, the foreign purchaser must pay duty in relation to such land at a rate of 3% of the dutiable value of the interest at the time it was transferred. 8.4 Who does the SRO consider a foreign purchaser for the purposes of determining stamp duty? A foreign purchaser is defined in the Duties Act 2000 to mean a foreign natural person, a foreign corporation or a trustee of a foreign trust Foreign Natural Person
13 A citizen or permanent resident of Australia or a NZ citizen with a special category visa (subclass 444) are not considered foreign purchasers. Anyone else is a foreign natural person Foreign Corporation A foreign corporation includes: Corporations incorporated outside Australia; and Corporations incorporated in Australia where a foreign natural person, foreign corporation or foreign trust has a controlling interest in those corporations. A controlling interest means where a foreign person (either alone or with an associated person): Is in a position to control more than 50% of the votes (voting power or potential voting power); or Has more than 50% of the issued shares in that company; or Has in the Commissioner s view, the ability to influence the outcome of the decisions about the corporation s financial and operating policies taking into account certain factors (the practical influence a person can exert, the practice of behaviour, etc). An associated person includes a relative of the foreign purchaser, a partner in a partnership, another company with the same majority as the foreign corporation or a trustee of the trust in which the foreign purchaser is a beneficiary Foreign Trusts A foreign trust is a trust where the foreign natural person, foreign corporation or trustee of the foreign trust has a substantial interest in the trust estate of that trust. A foreign natural person, foreign corporation or foreign trust has a substantial interest in a trust (either alone, or with an associated person) when that person or entity: Has a beneficial interest of more than 50 per cent of the capital of the estate of the foreign trust, or Has in the Commissioner's opinion the capacity to determine or influence the outcome of the decisions about the administration
14 Land tax and conduct of the trust, taking into account certain factors (such as the practical influence the person can exert in addition to any rights the person can enforce, and any practice or behaviour) Furthermore, pursuant to section 3B(2) of the Duties Act if under the terms of a foreign trust the trustee has a power or discretion as to the distribution of the capital of the trust estate to a person or member of a class of person, any such person is taken to have a beneficial interest in the maximum percentage of the capital of the foreign trust that the trustee of the discretionary trust is empowered to distribute to that person. The practical impact of this provision is very problematic because most trusts grant the trustee a power or discretion to distribute capital to a beneficiary, whether they are primary or secondary, specified or general. So effectively if one foreign person is included as a general beneficiary and can theoretically receive distributions of capital even though they may never, it effectively means that such trusts may be deemed foreign trusts and therefore be subject to the 3% surcharge. The unfairness of this result is apparent particularly when there is no intention and the primary beneficiaries are not foreign persons. This definition focuses on powers of distribution rather than patterns of distribution The definition of foreign trusts is so broad that it potentially encompasses many discretionary trusts which should not realistically be considered a foreign trust. This therefore means that such trusts may inadvertently become subject to the additional 3% tax on a technical basis. This issue has currently been raised at State level with a view to obtaining clarity and as of the date of this paper is an unresolved issue because of the drafting of the legislation. It may be that new deeds need to curtail and exclude foreign persons until this issue is properly resolved. From 1 July 2016, the Victorian Government will be imposing a 0.5% land tax for absentee owners. It is not confined to residential property and applies to all land owned by the absentee owner. An absentee person is defined in the Land Tax Act 2005 to mean:
15 A natural person absentee A natural person absentee is a natural person who is not an Australian citizen or holder of a permanent visa within s 30(1) of the Migration Act 1958 or a New Zealand citizen with a special category visa pursuant to s 32(1) of the Migration Act 1958 and who does not ordinarily reside in Australia and who: was absent from Australia on 31 December in the year prior to the tax year; or in the year prior to the tax year was absent from Australia for a total period of at least 6 months An absentee corporation An absentee corporation means a corporation incorporated outside Australia or a corporation in which an absentee person has an absentee controlling interest. For the purposes of this Act, an absentee person holds an absentee controlling interest in a corporation if: the absentee person, or that person acting together with another absentee person, can control the composition of the board of the corporation; or the absentee person, or that person acting together with another absentee person, is in a position to cast or control the casting of more than 50% of the maximum number of votes that might be cast at a general meeting of the corporation; or the absentee person holds, or that person acting together with another absentee person hold, more than 50% of the issued share capital of a corporation A trustee of an absentee trust An absentee trust means a trust under which at least one absentee beneficiary has a beneficial interest in the land subject to a fixed trust, is a unitholder in a unit trust scheme or is a specified beneficiary of a discretionary trust. Specified beneficiary of a discretionary trust means a beneficiary who is specifically named in the trust deed or declared in writing pursuant to the trust deed as a beneficiary to or in whom, by the terms of the
16 trust, the whole or any part of the trust income or property may be distributed or vested: In the event of the exercise of a power or discretion in favour of the beneficiary (whether or not that power is presently exercisable); or In the event that a discretion conferred under the trust is not exercised. 9 PROPOSED FEES As of 1 December 2015, it is proposed that the fees for applications will be as follows: 9.1 Residential land The fees for purchasers will be as follows: An interest in residential land valued at $0 to $1,000,000 - $5,000; An interest in residential land valued at $1,000,000 to $2,000,000 - $10,000; An interest in residential land valued at $2,000,000 to $3,000,000 - $20,000; An interest in residential land further $1,000,000 increments - $10,000 per $1 million. 9.2 Commercial land The fees for purchasers will be as follows: An interest in commercial land that is not vacant - $25,000; An interest in commercial land that is vacant - $10, Off the plan exemption certificates If blanket approval is held prior to 1 December 2015 (for a development of more than 100 apartments and for which there is a development permit), then the developer may sell to foreign buyers and those buyers do not have to apply to FIRB for separate approval
17 If blanket approval is sought after 1 December 2015, the fees for vendors will be $25,000 plus reconciliation based on the number and consideration of dwellings acquired by foreign persons. There are a range of other fees depending on the circumstances and type of land which are detailed on the FIRB website. 10 ADVISING AUSTRALIAN RESIDENTS SELLING TO OVERSEAS BUYERS If you are an Australian resident and wish to sell a property, it is important that your contract has provisions which address this. The contract should contain warranties under which the purchaser provides that they are not a foreign purchaser or that if they are, they have obtained foreign investment approval prior to purchasing. In the writer s view, the contract is still enforceable by a vendor against a purchaser who is a foreign investor that has failed to obtain approval. However, there are practical issues in enforcing where the Government has ordered the foreign purchaser to divest themselves of the asset or the foreign purchaser does not reside here and cannot complete the contract. It is obviously difficult to take recovery action against a foreign purchaser that leaves the country or that simply does not wish to settle because they are unable to obtain Government consent for the purchase. If you are selling lots within a development and there are more than 100 lots within the development, advanced off the plan approval can be obtained. The comments about fees are addressed above. If it cannot be obtained in advance, there should be the conditions noted above, however, banks will inevitably want to see the FIRB approval notwithstanding the provisions in the contract. Banks also strictly regulate the number of sales to foreign investors where a development is completed and this needs to be factored in during the selling process. 11 ACTING FOR THE FOREIGN PURCHASER - HOW TO STRUCTURE THE INVESTMENT AND OTHER KEY ISSUES If you are acting for a foreign purchaser, it is important that you obtain the approval in advance. If they are looking to purchase at an auction, the approval can be
18 obtained relatively quickly. If it is not obtained, the individual or entity will not be able to bid at an auction but can bid on a private sale where the contract is subject to and conditional upon such entity obtaining FIRB approval. Foreign investors might ask you to set up a new company or trust which appears to be an Australian company but has foreign investors. The rules, as noted above, may be invoked depending on whether they are then defined as a foreign purchaser and the issue of foreign trusts needs to be considered. It is obviously important to warn such purchasers about the additional stamp duty and land tax. Nominations need to be watched very carefully. The nominated entity may be a foreign purchaser and in such circumstances, approval needs to be obtained in advance before the nomination occurs. Practitioners should develop a checklist to ensure they consider the relevant issues. If you receive the contract after it has been signed, your first letter should raise the question on whether the purchaser is a foreign purchaser. Retrospective applications can be submitted and the general position of the Government appears to be that it is better to be open and admit an error rather than the Government finding out on its own accord, in which case the penalties may be more significant. In conclusion, it is important to keep appraised of the relevant legislation and the changes which are occurring in this area of law. If your client appears to be a foreign purchaser, make sure you address all of the issues in writing with your client so that they are aware of the potential risks and costs.