Investments in Commercial Real Estate Property in Australia
I Procedure of a real estate transaction
1Outline about the formal procedure of a real estate transaction in Australia starting from the signing of the contract (including settlement) until formal ownership vests in the purchaser.
Australia is a federation of six states and two territories:
New South Wales;
Australian Capital Territory, and
Each state or territory has different laws dealing with the sale and registration of property. Australia follows the Torrens System that allows a purchaser to become registered on title showing that he has an indefeasible right of ownership, subject to any mortgage or other encumbrance known when transacting the acquisition. This paper deals with the laws of the state of Victoria and Behan Legal can provide further details on specific transactions in particular states on request.
In Victoria, for example, before parties can execute a contract of sale of real estate, the vendor must provide a disclosure statement to a purchaser, which forms part of the contract. The purchaser must acknowledge and sign receipt of the disclosure statement before executing a contract of sale. The disclosure statement deals with statutory obligations of disclosure that the vendor must give before selling real property. A contract of sale of land is unenforceable if the purchaser does not first sign the disclosure statement.
The contract of sale contains general conditions, special conditions, warranties, procedures for settlement, agreement on payment of goods and services tax, finance terms, property condition, and procedures on default. The contract will have a particulars page identifying the selling price and the settlement date, which is the date the transfer of ownership, takes effect in equity, as the purchaser must register the transfer to complete the legal transfer.
Estate agents often negotiate the sale. They will obtain the signature of both the vendor and purchaser to bring a binding contract into effect. If there are no estate agents, lawyers can exchange signed contract counterparts to bring the contract into force with the purchaser paying the deposit on signing the contract and the balance paid at settlement. The purchaser submits the legal document that is necessary to transfer the title in the period between signing and settlement by the purchaser. The vendor ultimately hands the executed transfer to purchaser’s representatives at settlement, along with a stamp duty declaration from the vendor used in assessing “stamp duty” a tax paid by the purchaser on the transfer of land.
On settlement day, the vendor receives the balance of the purchase price in exchange for the certificate of title to the land, which is the deed that denotes ownership in the land registry office, a government body that keeps record of ownership of land in the state under the Torrens System of registration.
All outgoings for the property including land tax, water authority service charges, local council rates, rents, and Owner’s Corporation fees are ‘adjusted’ proportionately between the vendor and purchaser. The parties notify the authorities by either a notice of acquisition or disposition. Once settlement occurs, the estate agent, vendor or representative hands over the keys to the property and give vacant possession (unless a lease is in place).
Once the purchaser obtains the transfer document and the declaration for stamp duty, the duty for the property is paid and “stamped” on the transfer document so it may then be registered at the land registry office and legal title passes to the purchaser.
2Does the Australian legal system permit different sorts of ownership like ownership of the whole land and construction or ownership for example only of one unit or many units (condominium of the improvements)?
Ownership allows ownership of the land as a whole including the building, or portions of the land/building specified in the certificate of title. A “strata” plan of subdivision of a block of land can issue separate certificates of title for each ‘unit’ or ‘apartment’, which confers the applicable rights for the land on the proprietor registered on that title. In this situation, there is often ‘common property’, which confers rights on proprietors of each unit or apartment for that common property. An Owners Corporation responsible for decision-making, maintenance, etc. of the common property generally manages the common property.
3Does the Australian legal system permit joint ownership of real estate? Which kind of entities can own real estate in Australia?
It is possible for ownership of property by two or more people or corporations or other legal entity. Co-ownership can take the form of ‘joint tenants’, which under the “rule of survivorship” means that if one owner dies or ceases to exist, the title to the property passes to the surviving proprietor or proprietors as specified on title.
Alternatively, co-ownership can exist as ‘tenants in common’ where a fraction of ownership exists on the title registered, and this portion can be ‘disposed’ of by the owner in any way available to them. Under this form of ownership, if a tenant in common dies, they can bequeath their fraction of ownership to whom they wish by way of will or otherwise.
4In some countries, the ownership of a building is implied in the ownership of the land. Is it this way in Australia as well, or is it possible to have different owners of the land and the building erected on it?
Ownership of land includes ownership of any building on the land, as well as ownership of a limited space below the boundaries of the land and above the land.
Technically, under the ‘strata’ scenario, it is possible to own independently ‘part’ of a building. However, if this were the case the Owners Corporation would own any accessible land on which the building is erected being common property. A certificate of title exists for each unit, and the accessible land detailed on title will indicate it is common property, therefore the ownership of that land is not held in the same manner as the unit itself.
5Is the land or the building registered in a formal register and is a good faith purchaser protected with regard to the entries in this formal register?
Certificates of title are registered at the land registry office. The ‘doctrine of indefeasibility of title’ means that the registered proprietor of land specified in the land registry office’s registry has a paramount interest (subject to any encumbrances such as mortgages, easements etc.) in the land. The registered proprietor is protected from losing title to a good faith purchaser who purchases the property without notice of the current owner’s title to the property.
II Costs for transaction
1What tax aspects are directly involved in a purchase of real estate, for example, real estate transfer tax and what is the percentage of it?
Each state or region has different tax structures applicable to land acquisition and ownership. In Victoria, the two main sources of revenue derived from real property are land tax and stamp duty. Land tax is an annual charge on owners of land at midnight on 31 December of the year before the year of assessment. The State Revenue Office assesses on a calendar year basis on the unimproved value of the land determined by general valuations carried by the relevant council every two years. There are some exemptions to land tax but it is generally payable on investments properties and vacant land. As an example, the 2010 general land tax rates for Victoria are:
TOTAL TAXABLE VALUE
0 < $250,000
$250,000 < $600,000
$275 plus 0.2% for each dollar over $250,000
$600,000 < $1,000,000
$975 plus 0.5% for each dollar over $600,000
$1,000,000 < $1,800,000
$2,975 plus 0.8% for each dollar over $1,000,000
$1,800,000 < $3,000,000
$9,735 plus 1.3% for each dollar over $1,800,000
$3,000,000 and over
$24,975 plus 2.25% for each dollar over $3,000,000
State Revenue Office assesses stamp duty on the greater value of the consideration or unencumbered value of the land at the time of entering the contract of sale. The Duties Act sets out the following formulae for calculating the stamp duty:
DUTIABLE VALUE OF PROPERTY TRANSFERRED
1.4% of the dutiable value of the property
$350 plus 2.4% of the excess over $25,000
$2870 plus 6.0% of the excess over $130,000
5.5% of the dutiable value of the property
Stamp Duty is payable before a purchaser can register title, and in some states, it is payable before settlement can take place.
2Does a purchaser have to hold the property for a specific time for tax reasons or is it in the context no problem to buy and sell property on a short term basis for example within a year?
Capital gains taxation on the sale of real property is payable at the owning entity’s normal marginal tax rate. It is possible to offset capital losses from the capital gains in a financial year to calculate the net capital gain for a specific entity, which could mean a smaller liability amount for this tax.
3Can the vendor get his money out of Australia after the transaction (repatriation of funds)?
There are no general rules or restrictions on repatriation of funds from Australia under normal circumstances involving a sale of real property.
4Can a purchaser terminate a lease; or which restrictions have to be taken into account, if one buys real estate that has a lease?
When a property owner of freehold interest in the land disposes of that interest, any lease applicable to that land will remain in force, and its particulars disclosed in the contract of Sale and vendor disclosure statement. The new property owner will generally stand in place of the previous owner and have the same rights and obligations in relation to the tenant of the land.
5Can one change the use of a building from residential use to office space; does one need approval for doing so?
Local councils define the use of land in any particular area within their planning scheme by zoning. The zones include residential, business, industrial, parks and recreational, mixed zones and more. Each zone type carries with it requirements, permitted, and prohibited uses of the land within that zone.
Each zone has uses permitted without a permit, uses that require a permit, and prohibited uses or have conditions attached to them.
If a use is not permitted under a particular zone, a person may apply to the Minister to have the planning scheme amended. Depending on the circumstances of the amendment, this could prove quite difficult to achieve.
6What costs are likely if a foreign investor bought an existing building (and land) for a purchase price of € 5 Million, particularly?
Real property transfer tax
Advising lawyer (due diligence)
Lawyer draft the contract of sale and vendor disclosure statement for a sale of real property, and handle the conveyance of the land for the entire transaction. The type of property and its intended use determine the complexity of the transaction, and there are many variables in determining legal fees. The legal fees will usually be determined on an hourly or item basis or mixture of the two. Therefore, the more complex the transaction and attendances required to complete it, the higher the legal fees.
The stamp duty on the legal transfer of the property differs from state to state. As an example, in Victoria, in the case of €5 Million (AUD$7,153,680.24) this would equate to AUD $393,452.00 or € 274,985.75. Another table of formulae calculates the registration of the new proprietor’s name on title, when used for the amount specified (€5 Million), it would equate to AUD$1,352.00 or €944.73, which is the maximum fee for registration of a transfer.
Estate agents fees are negotiable and usually a percentage of the sale price generally around 2 to 5% of the sale price.
III Costs for holding real estate
1What tax aspects are directly involved when holding a property, for example yearly land tax after the transfer of ownership and what is the percentage of it?
Land tax is levied and is payable on a yearly basis. Land tax forms a charge on the land; calculated on the unimproved value of the land determined every two years by local councils. This varies from state to state.
There are some exemptions to land tax such as property used for primary production or as a principal place of residence. Land tax usually applies to investment properties and holiday houses. A surcharge may apply if a trustee of a trust, with certain exceptions, holds the land.
2What are the costs one has to calculate as a foreign investor, if one engages a manager for the purchased property? How does the manager normally charge for their work?
Real estate agencies that organise a tenant for a property generally manage that property for the duration of the lease. Fees can vary but are usually approximately 5% of the gross monthly rent. In the case of a unit dwelling or condominium; the Owners Corporation is responsible for the management of the common property, and will levy annual fees. This fee will vary greatly depending on the quality and services of the common property (gym, pool, etc.).
IV Foreign Investors
1Would you advise foreign investors now to invest in your country?
Directly in real estate
Through real property funds, open or closed ones
Through other clear and secure financial products
At the moment not because of the impacts of the worldwide financial crisis
There are factors to consider when investing in real property, as the prospects of capital gains can vary depending on where the property is located. Potential purchasers should make their own financial enquires as to whether the investment best suits them. Purchasers should seek the advice of licenced financial advisors who are the only professionals allowed to give advice on financial products.
2Is there any individual person and legal entity allowed to buy property in Australia or are there restrictions for example to nationality or registered office of legal entities? If there are restrictions, are there ways to organise a domestic entity for the purchase on a valid legal structure notwithstanding?
If a foreign person wishes to acquire land in Australia, they must give notice to the Treasurer of their proposed acquisition. If there is an objection to the acquisition, the Australian Government will provide that advice and make an order prohibiting it. If a person is required to give notice of their intention and they fail to, they may be liable for criminal charges.
There are controls and restrictions on the ability of non-residents being able to own property in Australia even using a company. The ability to contract for the acquisition of property is subject to approval from the Foreign Investment Review Board. Any foreign person wishing to invest in Australia must consider whether there is a requirement to notify, or obtain government approval under its foreign investment policy. The proposals that require approval are:
Transactions involving certain foreign interests, and
Where the government considers few benefits accrue from foreign investment and where the proposal exceeds the $50m threshold.
It is critical to understand the purchaser’s property intentions to determine if it will come under the threshold arm, however it falls under the foreign interest arm, and a foreign interest includes:
A natural person, not ordinarily resident in Australia, and
Any entity in which there is a substantial foreign interest, which is defined as an interest of 15% or more in ownership or voting power held by a single foreign person (including associates), or an interest of 40% or more in the aggregate ownership or voting power held by more than one foreign person (or their associates).
Proposals involving the acquisition of interests in Australian urban land are subject to special scrutiny. The definition of urban land is wide and includes leaseholds and these proposals are subject to examination by the F.I.R.B, irrespective of value.
3If a foreign investor buys a land in Australia to run a business there, what kind of official approvals, time and effort are necessary to get it.
Subject to the issues stated above, a foreign company can also register with ASIC as a foreign company under the Corporations Act.
It is important to note that if a foreign person intended to come to Australia from overseas to work in the business, strict guidelines on obtaining a working visa must be adhered to and the visa must be granted before this can occur. Each business migration is different and different criteria apply.
4Could Behan Legal assist foreign investors in?
Finding interesting real estate and related valid investment products real property in Australia where required through personally known agents and other advisers
Developing construction projects
All legal aspects involved in these contexts
Yes, Behan Legal deals with numerous and diverse real estate transactions including construction projects and organising legal and corporate structures to assist clients in their property holdings.
NEED MORE INFORMATION
Behan Legal advises and assists on these important issues. For an appointment, call 03 9646 0344