Steve Douglas shares how the new ruling affects foreign investors and what you’ll need to understand if you’ve been thinking of investing in the Australian property market.
In the May 2015 Australian Federal Budget, Treasurer Joe Hockey announced a new Foreign Investor Fee, effective from December 1 2015, to help fund the policing of the current Foreign Investor Review Board (FIRB) Legislation.
For years, foreign investors have been welcome to acquire Australian property, provided that they acquire a newly constructed property. Alternatively, construction must have commenced on the land they have bought. These rules help ensure the housing stock satisfies the rising demand from strong population growth, economic activity and job creation occurs through the building and construction industry and protects the local buyers from having to compete in established suburbs with foreign investors that are often financially stronger, effectively keeping Australia as one of the safest and most consistent property markets.
The FIRB Annual report indicates that Australian property has been rising from 4,648 approvals in 2005/06, to 23,054 approvals in 2013/14, 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, when the increased supply has actually relieved price pressure in the market.
These regulations only apply to those who do not hold Australian Permanent Residency or Citizenship. 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 provided 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 times are actually locals that have recently migrated to Australia and brought significant capital with them to acquire a home in Australia, which fuels the natural demand in the 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.
This is where the new Foreign Buyer fee comes into play. From December 1 2015, an A$5,000 fee will apply where the property is valued under A$1 million, and increased to A$10,000 if it exceeds A$1 million. The fee increases by a further A$10,000 for each additional A$1 million. Additionally, the task of monitoring activity has been passed to the Australian Taxation Office (ATO), which has already begun investigation into almost 200 cases.
The government has also introduced significant penalties for those acquiring property illegally and for those who help them. Those caught acquiring property illegally will be forced to sell the property and be subject to a penalty that is the greater of:
- The capital gain made on sale,
- 25 percent of the purchase price, or
- 25 percent of the market price (or sales proceeds)
Those found assisting a foreign buyer to breach the rules will face a maximum penalty of A$42,500 for individuals and A$212,500 for corporations.
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. Also, too many foreign investors in any project add a speculative element that could make that project more risky than one where a significant local buyer content exists.
Finance remains readily available at 80 percent of the purchase price or valuation, whichever is the lower; so there will be good leveraging potential which keeps the property tax effective. It is important to ensure that your selection will value up on settlement, so make due investigation prior to making a commitment.
Even with the new Foreign Buyer Fee, Australia remains a preferred and safe investment option. A strong landlord, building and ownership regulations, combined with a growing economy and population, will ensure that acquiring a quality, well sized and well located property is as profitable in the future as it has been in the past.
Steve Douglas is the Co-Founder and Managing Director of Australasian Taxation Services (ATS). ATS provides specialist taxation services for anyone looking to invest in Australian property, including Australian expatriates living overseas. Areas of specialization include the Australian taxation aspects of property investment, as well as expatriate and migration planning.