In response to a spike in offshore demand for Australian property assets in the past three years, federal and state regulators have tightened regulations and increased costs for non-resident investors. But the new regime is unlikely to significantly deter foreign investors from seeking real estate assets in Australia, according to JLL.
Foreign investors must now face four new hurdles before securing property in the country:
Foreign Investment Review Board (FIRB): Foreign investors must now pay a fee, ranging between AU$5000 and AU$101,500, to register with the FIRB, which was not the case before December 2015. FIRB approval is still required for all land acquired by a foreign government, all vacant commercial land and all residential property. The acquisition of established dwellings is generally prohibited. Thresholds apply for agricultural and commercial non-vacant land depending on the investor’s country and other factors.
Australian Taxation Office (ATO): All FIRB residential real estate functions have been transferred to the ATO, including the administration of the new foreign resident capital gains tax withholding regime. Where a foreign resident divests an Australian property with a market value of more than AUD $2 million, the purchaser must withhold 10% of the purchase price and submit it to the ATO. The vendor can apply for a clearance certificate so the purchaser does not have to withhold the amount.
State Government Transfer Tax (i.e. Stamp Duty) surcharges in Victoria, NSW & Queensland: The Victorian Government introduced a foreign purchaser stamp duty surcharge on 1 July, 2015 on residential property. Since then, Victoria has more than doubled this surcharge to 7 percent, coming into effect from 1 July, 2016. The NSW and Queensland state governments followed suit, introducing a 4% surcharge (from 21 June, 2016) and a 3% surcharge (from 1 October, 2016), respectively.
State Government Landholder (Land Tax) surcharges for absentee owners in Victoria & NSW: From 1 January, 2017 the absentee owner surcharge will triple, from 0.5 percent to 1.5 percent, for all Victorian land. (Positive economic or community impacts may qualify for exemption). NSW introduced a 0.75 percent surcharge, with effect from 31st December, 2016 that applies to residential land only.
According to Annabel McFarlane, JLL’s Director – Strategic Research – Victoria, the introduction of this new regulatory regime may reduce Australia’s appeal as a destination for foreign capital slightly.
“Changes to investor rules always create uncertainty which is not ideal, but Australia is not alone in introducing regulatory rules to counter spikes in dwelling prices in recent years,” McFarlane says. “Both Singapore and Vancouver introduced 15 percent surcharges in 2013 and 2016, respectively, which were aimed at moderating the residential markets in those jurisdictions.”
Instead, McFarlane argues that other factors, such as restrictions on bank lending, appear to be having a greater impact on the residential market than the new regulatory mechanisms.
“Demand from foreign investors is present in Australia, but Australian banks have also imposed their own foreign purchaser limits on residential projects,”
“The surcharges may have a moderating effect on demand from China, but that is unlikely to be different from any other country. It’s likely other factors may have a bigger impact – such as market conditions and visa rules, relative to other countries.”
Director - Strategic Research – Victoria, JLL