The following are some of the most common questions asked around the issues that relate to Australian Property owners living abroad.
In the May 2015 Australian Federal Budget, the Treasurer Joe Hockey announced that a new Foreign Investor Fee would be introduced effective 1st December 2015.
There has been no change in the regulations relating to what foreign investors are allowed to buy in Australia, just the introduction of a new fee to help fund the policing of the current Foreign Investor Review Board (FIRB) Legislation.
For many years, foreign investors have been welcome to acquire Australian property provided that they acquire a newly constructed property or if they buy land they must commence construction within 2 years.
The rationale behind these rules is to ensure that the housing stock is increased to satisfy the rising demand from strong population growth, economic activity and job creation occurs through the building & construction industry and to protect the local buyers from having to compete in established suburbs with foreign investors that are often financially stronger than local buyers.
These regulations have kept Australia as one of the safest and most consistent property markets.
In recent time, the attractiveness of Australian property has been rising from 4,648 approvals in 2005-06 to 23,054 approvals in 2013-14 (Source Foreign Investment Review Board Annual Report). This is largely fuelled by new demand from Chinese Investors who acquired 12,406 of these properties in 2013-14.
Much of the media commentary in Australia has wrongly considered that Foreign Investors are pushing prices up, where in truth the increased supply actually relieves price pressure in the market.
The FIRB Regulations only apply to anyone that does not hold Australian Permanent Residency or Citizenship and there is also a concession for anyone with a Temporary Residency Visa (such as a Student or Retiree Visa) to allow them to acquire an established property provide that it the property is sold when their Temporary Visa expires.
As such, the great majority of perceived “Foreign Investors” that have been active in Australia in recent time are actually locals that have recently migrated to Australia and brought significant capital with them to acquire a home in Australia. This is fuelling the natural demand in the Australian market.
Despite this, the Government has recognised that there has been some abuse and that the FIRB has been inactive in policing situations where Foreigners acquire illegally in the established market.
To combat this and maintain the integrity of the Australian Property Market, there will be a Foreign Buyer Fee introduced from 1st December 2015 of A$5,000 where property is under A$1m in value and increased to A$10,000 where it is over A$1m. The fee has now increased to A$14,700 where property is under A$1m in value, the fee increases by a further A$14,800 for each additional A$1m up to A$2m, and then increases by A$29,500 for every additional A$1m, so a A$2.5m purchase would cost A$59,000 as a Foreign Buyer Fee.
This fee remains significantly less than the impost in Singapore (10% of the purchase price) and Hong Kong (15% of the purchase price, so it is unlikely to be a major deterrent to investing in Australia.
In addition to this fee, the task of monitoring activity has been passed to the Australian Taxation Office (ATO) who are more skilled and determined in seeking out abuse. In the first few months since taking this assignment, the ATO has already begun investigation into almost 200 cases, so we can expect a far more vigilant defence of these rules in the future.
Importantly, the Government is also introducing significant penalties for anyone caught acquiring a property illegally and also anyone that assists in the transaction.
For a Foreign Buyer that acquires an established property illegally they will be forced to sell the property and be subject to a penalty that is the greater of:
For anyone found assisting a Foreign Buyer to breach the rules the penalty will be a maximum of A$42,500 for individuals and $212,500 for corporations.
These new fees are very welcome by us and SMATS was a significant contributor in the process of deliberation that the Government went through to build this policy decision.
It will also be welcome by the Australian population that has concerns over the impact of Foreign Buyers on the established market.
In truth the main concern in the Australian Property Market has been the influx of cashed up Foreign Developers that have been acquiring sites in Australia, designing smaller less desirable properties and selling them to their clients abroad often at very optimistic prices.
Until 2009, there was a regulation that only allowed a maximum of 50% of any Australian Property Development to be sold to Foreign Investors, but the then Prime Minister Kevin Rudd changed this to permit 100% of a project to be sold overseas. This has distorted the market as there is no natural check or balance and we are seeing many projects being developed that don’t have local market appeal but seem desirable and affordable when compared with the offerings in the Foreign Investors home property market.
Sadly, this may turn out to be an expensive mistake as although these properties rent strongly due to the natural demand in Australia, they struggle to sell for the prices paid and often offer little prospect of growth potential.
It is easy to spot these more risky propositions in the market as they tend to be very small in size, often under 50sqm for a 1 bedroom apartment and under 65sqm for a 2 bedroom apartment, and part of very large high rise developments in excess of 30 floors. It is not that there isn’t demand for this type of product, it is just that the demand is quite limited and the level of supply is currently very excessive, hence it may prove to be a under-performing asset in the long term.
There is ample supply of high quality and well sized property that Foreign Investors can access and achieve consistent and attractive long term rental and growth in value. You just need to be careful that the property you chose to invest in offers an above average lifestyle that would appeal to the discerning local buyer.
In addition, too many foreign investors in any project add a speculative element that could also make that project more risky than one that a significant local buyer content exists.
Finance remains readily available for Foreign Investors in Australia of 80% of the purchase price or valuation, whichever is the lower, so there will be good leveraging potential which keeps the property also very tax effective. It is important to ensure that your selection will value up on settlement, so make sure you make due investigation prior to committing.
Even with the new Foreign Buyers Fee, Australia remains a preferred and safe investment option and the strong landlord, building & ownership regulations combined with a growing economy and population will ensure acquiring a quality, well sized and well located property will be a profitable investment in the future as it has been in the past.
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