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JLL Blake Dawson Australian Real Estate A Legal Guide For Foreign Investors September 2009
JLL Blake Dawson Australian Real Estate A Legal Guide For Foreign Investors September 2009
WELCOME TO AUSTRaLIaN REaL ESTaTE: A LEGaL GUIDE FOR FOREIGN INVESTORS , ONE OF THE pUBLICATIONS IN OUR SERIES OF REAL ESTATE GUIDES, pUBLISHED IN CONjUNCTION WITH JONES LANG LASALLE.
Australian Real Estate A legal guide for foreign investors September 2009
The global nancial crisis has had a direct impact on the Australian real estate market. The challenging environment for real estate investment, particularly among the A-REITs, has severely tested the robust nature and strength of Australias legal and regulatory system. While condence in Australias listed REITs and unlisted real estate funds has been shaken, the prevailing view remains that the fundamentals underpinning the Australian real estate market, when compared to other world markets, remain relatively strong. It is expected that foreign institutional investors, previously unable to access real estate opportunities in Australia due to the intense competition from A-REITs and wholesale real estate funds, will see the current economic conditions in Australia as representing unique buying opportunities, either directly or indirectly through REITs and unlisted real estate funds. It is apparent many investors are still wanting a balanced exposure to a resilient Australian economy with a track record built on well-established and detailed legal principles. The legal and regulatory framework underpinning the Australian commercial real estate market has helped in protecting this market when compared to others. Over the medium to long-term, this system, is likely to contribute to the markets success by encouraging exible investment structures supported by rigorous disclosure and corporate governance. As in the past, this will allow the market to meet, at a high standard, investor criteria such as liquidity, security of title, tax pass through treatment, expert management, and transparent and responsive corporate governance. This legal and regulatory framework will continue to serve as a template for other jurisdictions globally and continues to be regularly cited as an exemplar of an investor friendly framework that provides certainty and generates condence. This is not to suggest that the framework is set in stone: we see innovation as a constant feature of Australian real estate market. A combination of a sophisticated market, an investor friendly framework and strong medium to long-term consistent returns will continue to support demand for clear advice on regulation, structuring and taxation of Australian real estate transactions. We hope this guide will give foreign investors a helpful overview and practical information, so enabling them to gain a sound base of knowledge and understanding that will assist in their dealings with Australian real estate advisers and opportunities.
LES KOLTAI
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JOHN TALbOT
SIMON STORRY
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Contents
FOREWORD BLAKE DAWSON FOREWORD JONES LANG LASALLE OVERVIEW INVESTING IN AUSTRALIAN REAL ESTATE THE AUSTRALIAN LEGAL SYSTEM FOREIGN INVESTMENT IN AUSTRALIAN REAL ESTATE AUSTRALIAN REAL ESTATE LAW STRUCTURES fOR INVESTING IN AUSTRALIAN REAL ESTATE AUSTRALIAN REAL ESTATE INVESTMENT TRUSTS (REITs) FINANCE AND bANKING TAX ENVIRONMENTAL RESPONSIbILITY AND LAND USE USEfUL WEbSITES 3 4 6 17 19 24 34 38 45 47 52 58
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Australia has a stable, multi-party democratic political system. In November 2007 the Australian Labor Party, led by Kevin Rudd, was elected to government following 11 years of government by a coalition of the Liberal Party and National Party, led by John Howard. The election of the Rudd government has not signicantly changed economic management in Australia. The main differences between the two governments are their approach to industrial relations and environmental issues. One of the rst acts of the new Labor Government was to ratify the Kyoto Protocol, which the previous government had not supported. Prior to its election the Labor Party announced its intention to make Australia the nancial services hub of Asia. Proposals by the government to support international investment in Australia include: a reduction of the withholding tax on distributions by managed funds to non-residents as discussed further in the Tax chapter on page 49 an increase in the time that international purchasers of undeveloped land will have to develop the land, from one year to ve years.
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ECONOMIC STRENGTH
Frequently ranked the most resilient economy in the world in recent years1, Australia recorded its rst quarter of negative growth in December 2008. This follows 17 consecutive years of growth, the longest sustained period of expansion in the countrys history. The International Monetary Fund has acknowledged Australia as being at the forefront of international best practice in its annual assessment of the Australian economy, citing the sound scal, monetary and structural policies that have created the conditions for a continuous expansion, supported by high employment levels.2 Importantly, the Australian housing market, which also accounts for around two thirds of private sector wealth, remains solid. While house prices fell by 3.3% in 2008, averaged across eight of Australias largest cities, the market remains fundamentally under-supplied. Vacancy rates are close to all-time lows and rents are estimated to have risen by 8% over the past 12 months.3 Home mortgage default rates are low and the 425 basis points of reductions in ofcial interest rates have been passed immediately and almost in
6.0%
Forecast
full through to borrowers. These factors highlight the Australian housing market as being signicantly different from housing markets in many other economies. In 2008, the Australian economy was also ranked in the top three countries in the Asia Pacic region for its overall competitiveness. Among countries with a population of 20million or more, Australia ranks second in the world, behind only the United States4. While 2009 will be a challenging year for the Australian economy, the longer term outlook is for positive, stable growth over the next 10 years, with an average growth of 3.2% per annum expected over the next ve years according to independent forecaster Access Economics5. With the professional services sector and resources sector well positioned to capitalise on continued growth in the Chinese and other Asian economies, Australia is likely to be well insulated, though certainly not immune, from the impending slowdown in global growth.
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 1995 1997 1998 2000 2001 2005 2007 2008 2002 2003 2004 2006 2009 2010 1996 1999
Australia
OECD
GDP Growth
Source: OECD, ABS, Access Economics
1 International Institute for Management Development (IMD) World Competitiveness Yearbook 2007 2 International Monetary Fund: Article IV Consultation with Australia, September 2007 3 Australian Bureau of Statistics estimate 4 IMD World Competitiveness Yearbook 2008 5 Access Economics, Q1 2008
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DEMOGRAPHICS
While Australias population of 21 million people makes it relatively small on the global stage, the highly concentrated pattern of population settlement means the commercial real estate markets in the capital cities have considerable depth. As 85% of the population lives in urban areas near the coastline, Australias capital cities accommodate a high proportion of the nations population. As the map below shows, Sydney is the countrys most populous city with around 4.1million people, followed by Melbourne with 3.6million. Greater Brisbane is also relatively populous, with a population of 1.8million, but also benets from both the large and rapidly growing Gold Coast and Sunshine Coast populations in close proximity. Australias demographic prole, like many developed nations, is shifting towards an older population due to low levels of fertility and increased life expectancy. At 81.2 years, Australians have the fth highest life expectancy in the world. The median age of the population is 37 years with 13% over the age of 65. This aging of the population is making the health and aged care sector a rapidly growing focus for real estate developers in the country. Despite the aging population, Australia still has a relatively strong population growth rate for a developing country due to high rates of immigration. Over the 10 years from 1995 to 2005, Australias population grew by an average of 1.2% per annum, which compares to an average growth rate of 0.7% per annum across OECD countries. Overseas migration accounted for 51% of the increase in Australias population in 2005-06. Australians are relatively wealthy, with real GDP per capita of US$37,709 in 2006. This compares to an OECD average of US$32,484 and puts Australia on par with other OECD nations such as the UK, Canada, Germany, France and Japan. The distribution of wealth within Australia is also consistent with most other developed nations. The 20% of the population with the lowest household incomes account for 15% of total household net worth, while the 20% on the highest household incomes account for 39%. In 1992 the Australian Commonwealth Government introduced the Superannuation Guarantee, a system of compulsory retirement saving. 9% of Australian wages and salaries must be contributed to superannuation and this has led to the rapid expansion of superannuation fund assets, from just A$154 million in June 1992 reaching A$1.1 trillion in 2008. This has created a steady demand for real estate assets in Australia with superannuation funds allocating around 10% of funds to real estate investment.
Broome
NORTHERN TERRITORY
Alice Springs
WESTERN AUSTRALIA SOUTH AUSTRALIA
QUEENSLAND
VICTORIA
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Norway
75,000
Ireland
50,000
Switzerland
USA
Australia Canada UK
Germany Japan Greece South Korea Malaysia Russia Brazil 3 Turkey China India 4
25,000
DEbT ASSETS
TRaded DebT SecURITIes COMMERCIAL MORTGAGE BACKED SECURITIES PROPERTY TRUST BONDS
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The Australian commercial property sector has suffered the impact of the global nancial crisis that emerged in the US in the second half of 2007. The Australian REIT (A-REIT) sector as a whole produced a -55% return for calendar year 2008. Direct property, in contrast produced a modest but positive 1.8% investment return for the year6. The sharp divergence is partly to be explained by the unique characteristics of the A-REIT sector. In recent years A-REIT have become increasingly exposed to offshore markets. By the end of 2007 the Australian REIT sector was around 29% exposed to the US market and 7% exposed to other offshore markets7. Offshore exposure carried with it exchange rate risk and hedging risk. In addition, nancial gear levels rose steadily in the years prior to 2007. And, many REITs adopted stapled structures, which exposed them to the volatile earnings of tourism, development and funds management businesses. The contraction of the A-REIT sector is not therefore a reliable proxy for future trends in the market for prime real estate assets within Australia. Until the end of 2008, commercial real estate capital values had proved to be resilient against the global downturn in property values. Some fall in asset values seems inevitable, however, as the economy weakens through 2009, risk averse investors are withdrawing from property funds and many A-REITs are looking to sell assets in order to pay down debt and re-capitalise their operations. Beyond 2009 the outlook for property investment is favourable. The economy is expected to regain momentum. Vacancy rates are forecast to decline again in CBD ofce markets from 2011, reecting the many projects that have been postponed or cancelled over the past 12months. While many institutions and fund managers are looking to reduce exposure to Australian real estate, sometimes under duress, cashed up private buyers and offshore investors are increasingly active in seeking opportunities. Therefore 2009 represents a unique but small window of opportunity for astute investors to enter the market ahead of the inevitable recovery of investor sentiment and capital ows.
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12
14
Property Investment Returns: Average Annual Returns December 1998 to December 2008
Source: PCA/IPD, Jones Lang LaSalle Research
Commercial real estate investment in Australia over the last 15 years has provided solid returns with very low volatility.
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OffICE
THE AUSTRALIAN OffICE MARKET OffERS ATTRACTIVE PROSPECTS fOR GLObAL INVESTORS. THE NATIONAL VACANCY RATE REMAINS bELOW EqUILIbRIUM AND fACE RENTS HAVE MANAGED TO REMAIN RELATIVELY fIRM DESPITE WEAK ECONOMIC CONDITIONS.
Demand for ofce space has moderated in response to the slowdown in the global economy. Despite a moderation of demand, the national CBD ofce markets recorded an increase in occupied space of 150,000 sqm in 2008. The sector has achieved annualised returns over the past ve years of 12.5%.
OPPORTUNITIES fOR fOREIGN INVESTORS
In one of the most developed REIT markets in the world, and with a large volume of funds from superannuation trusts pouring into commercial real estate, competition for available assets is usually intense. However, the rising cost of debt and the problems of re-capitalising the Australian REIT sector means that prime grade assets will be accessible to investors during 2009. In addition, the decline in equity markets has led to several superannuation trusts being over-allocated to Direct Property. With these purchasers largely absent from the market, it provides an opportunity for foreign investors to purchase commercial assets that would otherwise be unavailable. Foreign investors have remained active in the Australian ofce market with recent purchases by global investors including Credit Suisse, KK DaVinci Advisors and German funds such as Deka and Real I.S. Although international market volatility will cause a slowdown in occupier demand, particularly in Sydney and Melbourne, the strength of the Australian economy relative to other mature economies and low vacancy rates are expected to keep face rentals at or around current levels. Vacancy rates are expected to increase to the upper end of equilibrium by the start of 2011, to around 10% to 11%, before tightening in response to a more favourable demand environment in line with a broader economic recovery.
Square metres 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Melbourne
CBD Sydney CBD Adelaide CBD Brisbane CBD
As the current ofce cycle gathers pace, the amount of new stock to be added to the Australian ofce market before 2010 has steadily increased. New supply in all CBD markets except Sydney and Adelaide is expected to exceed projected demand over the next two years. However, all capital cities are currently recording vacancy at or below their long-term average and this means the market can accommodate signicant supply additions over the next few years and in some markets, such as Perth and Brisbane, supply is needed to alleviate the acute shortage of space. The credit crunch has curtailed further development activity, impacting medium-term supply expectations in CBD ofce markets. Consequently there will be minimal supply additions in the 2011 to 2012 period, which coupled with a recovery in tenant demand is expected to tighten vacancy rates and lead to an acceleration of rental rates in Sydney and Melbourne. By 2012, the correction in Brisbane and Perth rents will have occurred and these markets will start to record rental growth from a more sustainable base. Further, strong momentum in tenant demand for environmentally sustainable ofce space will drive the next development cycle. Australias ofce stock is ageing and with over 40% of stock in the Eastern Seaboard in excess of 30 years, obsolescence is a factor of increasing importance.
Perth CBD
Canberra CBD
Supply
Demand
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RETAIL
AUSTRALIAN RETAIL PROPERTY HAS CONSISTENTLY DELIVERED STRONG STAbLE RETURNS OVER THE PAST fEW DECADES, MAKING THE SECTOR HIGHLY SOUGHT AfTER bY bOTH DOMESTIC AND fOREIGN INVESTORS.
Despite a more challenging retail environment in the wake of the global economic slowdown, the sector remains in a strong position to weather the storm, with low vacancies prevailing across all retail sub sectors and limited new supply under construction. With yields already returning to attractive levels and the possibility of some forced sales, the next 12 months presents an opportunity for investors to acquire trophy assets in the usually tightly held market. Over the long-term the Australian retail sector has had the strongest returns and lowest volatility of Australias commercial real estate sectors. Industry data shows retail property had an annualised total return of 13.0% for the 23 years to December 2008 (IPD/PCA Property Investment Digest).
STRONG CONSISTENT PERfORMANCE
The strong and stable performance of the retail sector relates to a number of factors. Australian shopping centres contain strong anchor tenants who commit to long-term leases, providing steady and predictable income returns. In addition, rental increases are generally linked to ination each year and have been steadily rising by around 4% to 5% per year. The Australian shopping centre industry is also relatively mature, with new supply constrained by strict planning and development controls, and is dominated by existing centres. New supply is usually by way of expansion of existing centres or new centres on greeneld sites, rather than new urban inll development.
Occupancy levels remain very high, following more than a decade of expansion by major retailers and assisted by active centre management. Vacancy rates have started to trend higher in 2008 as the economic slowdown has progressed, but rates are still at historically low levels. In regional shopping centres vacancies are particularly low, at below 1% across the major capital cities. This is illustrated in the chartbelow. Given their strong performance, retail assets have been in strong demand by investors over the past decade and the market has been very tightly held. The need for many listed entities to de-leverage and for institutional investors to rebalance their portfolios means that the next 12 to 18 months will see many good assets reach the market and provide an opportunity for willing buyers to purchase without the same level
of intense competition for assets that has prevailed over recent years. Furthermore, with yields across all retail sub-sectors already softening by between 50 and 150 basis points over 2008, the retail sector now offers an attractive return relative to the 10 year bond rate. Foreign investment in the retail sector, while low compared to ownership by domestic buyers, has seen some signicant purchases in recent years. A half share in Westeld Parramatta was bought by Singaporean investor GIC Real Estate and GIC was also part of a consortium which purchased the Myer store in the Melbourne CBD. The level of offshore interest has picked up more recently and foreign investors are expected to dominate the buyer prole of retail assets in2009.
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08
CBD Regional
Sub-Regional Neighbourhood
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INDUSTRIAL
INDUSTRIAL REAL ESTATE IS ESTIMATED TO bE THE LARGEST COMMERCIAL PROPERTY SECTOR bY fLOOR SPACE IN AUSTRALIA. IT IS ALSO THE SECTOR WITH THE LOWEST LEVEL Of INSTITUTIONAL OWNERSHIP, ESTIMATED TO bE AROUND 50%. THIS IS GROWING AS THE SECTOR DEVELOPS.
Completed Underconstruction
Dominated by the transport and logistics industry, investment performance of the sector is closely linked to the economy and housing market. Strong GDP growth in Australia in recent years has enhanced the performance of industrial property. The sector has delivered a ve year annualised return of 11%. Over the last decade structural change has resulted in the industrial sector moving away from a manufacturing base to a transport/storage/logistics oriented one. This shift was primarily driven by the change in the nature of Australian manufacturing, which has halved its contribution to the Australian economy over the past 30 years as a result of increased competition from Asia. With an increasing number of Australian manufacturers locating production offshore and focusing on local assembly of products, property requirements shifted from factory to logistics space. The process has been facilitated by continued innovation in technology and communications and, over the past ve years or so, the release of serviced industrial land adjacent to new road infrastructure. The new developments provide occupiers with large modern facilities at a relatively low cost located near growing population bases with signicantly improved transportation infrastructure.
Associated with the growing dominance of the transport and logistics industry is an increasing preference to lease rather than purchase real estate. The trend is driven by the industrys need for increased exibility in matching contract lengths and occupying purpose-built facilities. New demand for industrial real estate is expected to be subdued in the short-term as the economy is contracting leading to retail sector weakness and imports falling. On a mediumterm basis, the sectors requiring industrial space, including manufacturing, transport and storage, and wholesale and retail trade, are forecast to register solid growth over the next ve years. The large wave of supply that came into the market in 2007 and 2008 will go some way to constraining future rental growth nationally. As the construction cycle wanes in 2009 and 2010, land values are coming under downward pressure in markets with a high availability of development land and construction costs are easing from recent very high levels. Rental growth is expected to pick up in line with a recovery in residential activity and the broader economy.
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HOTELS
A SURGE IN INVESTOR DEMAND, UNDER-PINNED bY AN AbUNDANCE Of bOTH EqUITY AND COMPETITIVELY PRICED DEbT, RESULTED IN RECORD LEVELS Of INVESTMENT IN THE AUSTRALIAN HOTEL PROPERTY SECTOR OVER THE fOUR YEARS TO 2007.
An improved outlook for earnings growth, due to limited new supply in most markets and strong demand growth, also underpinned this unprecedented demand for the sector. However the onset of the us sub-prime crisis in the latter part of 2007 and increased volatility in world debt/equity markets throughout 2008 has resulted in rapidly declining market sentiment and added uncertainty to the current outlook. Against this backdrop, Australian hotel transaction activity declined by around 50% through 2008 (with other countries around the Asia Pacic showing a stronger decline). Lower volumes were also largely attributable to the slowdown in activity by highly leveraged players, such as global private equity and real estate funds, who have dominated activity over the last few years. As lending institutions have grappled to understand the extent of their exposure, they have sought to limit their risk, reducing the amount of debt which is available (from both global and regional lenders). Prior to monetary intervention in the second half of 2008, the cost of capital had increased with spreads widening between 50 and over 150 basis points. Financing has also been made more difcult by a reduction in loan to value ratios and strict adherence to interest cover guidelines by major lenders, to varying degrees across the region. Positive trading in many markets for most of 2008 also meant that owners were not forced to sell which, when combined with credit restrictions and the more cautious buying approach, resulted in a gap in pricing expectations limiting transaction volumes. The softening trend in initial yields that became apparent in the latter part of 2008 has put downward pressure on capital values. The asset revaluations to date have come primarily as a function of liquidity, though a further decline may be expected should hotel trading performance taper off materially through 2009. As economic growth slowed through the second half of 2008 and inationary pressures subsided, the Reserve Bank of Australia started to loosen monetary policy and interest rates have reduced. Interest rates were cut by 100 basis points in February 2009, plus an additional 25basis points in April 2009, bringing the total rate cut to 425 basis points since September2008. The cash rate as at April2009 is 3.00% and debt serviceability has therefore improved. These factors, combined with the ensuing positive yield spread for hotels, are likely to tempt more investors back into market and instill some semblance of condence. This competitive landscape across Australia has now softened in the wake of the current global nancial environment. Many domestic investors are paring back their investment strategies. The combination of a reduced domestic capital base, lower interest rates, more favourable exchange rates and an increasing number of acquisition opportunities is creating a very attractive and unique environment for astute investors, particularly liquid overseas investors.
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Generally investors will be most attracted to Australias nancial capital of Sydney, which has little new supply and holds high barriers to entry. However, Perth and Brisbane are still held in high regard even though the resources boom has now softened.
The combination of a reduced domestic capital base, lower interest rates, more favourable exchange rates and an increasing number of acquisition opportunities is creating a very attractive and unique environment for astute investors, particularly liquid overseas investors.
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The States and Territories (and their capital cities) are: The Australian Capital Territory (ACT) (Canberra, the national capital of Australia) The Northern Territory (NT) (Darwin) New South Wales (NSW) (Sydney) Queensland (QLD) (Brisbane) South Australia (SA) (Adelaide) Tasmania (TAS) (Hobart) Victoria (VIC) (Melbourne) Western Australia (WA) (Perth).
The Federal Government, which is based in Canberra, is the major governmental body. Federal Parliament effectively comprises two levels: the House of Representatives (the Lower House) and the Senate (the Upper House). Members of each House are elected by popular vote. All States have equal representation in the Senate. New laws are introduced into Parliament by a member from one of the two Houses of Parliament in the form of a Bill. Each Bill must be passed by both Houses of Parliament. This means it must be agreed to and voted on by a majority in each House.
Once the Governor-General assents to the Bill, it is called an Act and becomes law. Laws are also made by State and Territory Parliaments in a similar way. A Federal Constitution shares power between the Federal Government and the State and Territory governments. The Constitution vests legislative power in the Federal Government to pass laws on various specic areas such as taxation, defence, trade and commerce, immigration, foreign investment, communications, banking, corporations and external affairs.
The second tier, the State and Territory governments, pass their own laws, except on matters exclusive to the Federal Government. They are particularly concerned with the running of State and Territory facilities (for example, water and electricity supplies, education and hospitals). The third tier is Local government, which has restricted powers. Land use and development usually fall within Local government control, although Federal, State or Territory government bodies may have some authority, especially on major development projects.
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In addition to the formal judicial resolution of disputes, a variety of alternative dispute resolution techniques is increasingly being utilised by parties in Australia.
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A STAbLE AND TRANSPARENT REAL ESTATE MARKET, RObUST LEGAL fRAMEWORK AND EffICIENT TITLES SYSTEM MAKES AUSTRALIAN REAL ESTATE ATTRACTIVE TO LOCAL AND fOREIGN INVESTORS. WHILE THERE ARE SOME RESTRICTIONS ON fOREIGN INVESTMENT, THE AUSTRALIAN GOVERNMENT RECOGNISES THAT fOREIGN REAL ESTATE INVESTMENT CAN ENHANCE AUSTRALIA ECONOMICALLY AND SOCIALLY. ACCORDINGLY THE GOVERNMENT ACTIVELY PROMOTES fOREIGN INVESTMENT PROVIDED THAT IT IS CONSISTENT WITH THE NATIONAL INTEREST.
According to the Australian Treasurer the largest number of foreign investment proposals involve the purchase of real estate.
Australian Real Estate A legal guide for foreign investors
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Where the foreign investment proposal involves Australian real estate, the specic regulations regarding the real estate sector should be considered.
AUSTRALIAN URbAN LAND
The denition of Australian urban land includes all land situated in Australia that is not used exclusively for carrying on a substantial business of primary production. That is, generally speaking, land that is not used for commercial farming or forestry purposes. It should be noted that land used for mining purposes is considered urban land.
PROPOSALS REqUIRING NOTIfICATION
Under current regulations and policy, proposals that must be notied to FIRB and require approval include acquisitions of: vacant real estate regardless of value residential real estate regardless of value (subject to the exemptions detailed below) developed non-residential commercial real estate valued at A$50 million or more (A$913 million or more for US investors). For commercial heritage listed properties the threshold is A$5 million where the acquirer is not a US investor residential and commercial leases where the likely term of the lease is more than ve years, including any option or right to renew. (Commercial leases are, however, subject to the above monetary notication thresholds where possible this is done by valuing the asset subject to the lease) accommodation facilities (including hotels, motels, guest houses and serviced apartments) regardless of value although with the changes to FIRB, accommodation facilities will be treated as commercial real estate rather than residential real estate. Accordingly, acquisitions of such facilities valued below the relevant developed commercial property threshold ($5 million for heritage listed property, $50 million for nonheritage listed property or $953 million for US investors) will be exempt from the FATA and will not require FIRB notication and approval any prot sharing arrangement held over urban land (unless the asset subject to the prot sharing arrangement is developed commercial real estate, in which case the above monetary notication thresholds apply).
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Importantly, notication is required in the case of the acquisition of shares in a company or units in a trust if the value of its (and its subsidiaries) total Australian urban land assets exceeds 50% of the value of its total assets irrespective of the total value of the company, trust or the value of the proposal. When considering whether a proposed investment is notiable, funding arrangements including debt instruments having quasi-equity characteristics are treated as direct foreign investment. Where a person, together with any associates, holds 15% or more of the issued shares, units or voting power of a corporation or trust or where two or more persons, together with any associates, hold 40% or more of the issued shares, units or voting power of a corporation or trust, they are taken to hold a substantial interest unless the Treasurer is satised that they are not in a position to determine the policy of the corporation or trust. Proposals in sensitive sectors such as banking, telecommunications, shipping, civil aviation, airports, tourism and media are subject to more detailed examination but are approved unless considered contrary to the national interest. The Australian government recommends that where any doubt exists as to whether a proposal is notiable to FIRB, it should be notied. It should be noted that exemptions from notifying FIRB apply to foreign persons acquiring less than a substantial interest in certain managed investment schemes having more than 100 unitholders and either being an urban land trust estate or a trust which is primarily engaged in the development of land and less than 10% of its real estate assets are developed residential real estate. With the changes to FIRB, it is expected that there will be exemptions for temporary residents acquiring established dwellings as a residence, new dwellings and single blocks of vacant residential land.
RESIDENTIAL REAL ESTATE
Generally, foreign buyers intending to acquire real estate in Australia must seek prior approval from the Australian government, unless specically exempted as follows: acquisitions by Australian citizens resident abroad acquisitions of real estate zoned residential by foreign nationals who hold permanent resident visas or hold, or who are eligible to hold, a special category visa (for example a New Zealand citizen) foreign persons purchasing real estate zoned residential, as joint tenants, with their Australian citizen spouse. Generally, acquisition of residential real estate by a foreign person for investment purposes will otherwise not be permitted unless such acquisition is an off the plan sale of no more than 50% of newly constructed dwellings with existing FIRB approval. With the changes to FIRB, this requirement will be removed provided that developers market locally as well as overseas.
RURAL LAND
The denition of rural land includes all land that is used wholly and exclusively for carrying on a substantial business of primary production. A substantial business of primary production must have a commercial purpose or character and be involved in activities related to the cultivation of land, animal husbandry/farming, horticulture, shing, forest operations, viticulture or dairy farming (but does not include vacant land, hobby farms, land used for stock agistment or mining). Proposed acquisitions of such a business valued at A$100 million or more (or the relevant threshold for US investors) must be notied to FIRB and require approval.
CONTRACTS
Residential real estate means all Australian urban land other than commercial real estate (that is, ofces, factories, warehouses, accommodation facilities, restaurants and shops). The Australian government seeks to ensure that foreign investment in residential real estate increases the supply of new housing stock including new developments such as house and land packages, home units and townhouses.
It should be noted that any contracts by foreign persons to acquire real estate in Australia must be made conditional upon FIRB approval (unless approval has already been granted). Contracts should provide for a minimum 40 days from date of lodgement for a decision from FIRB. For real estate to be purchased at auction prior FIRB approval must be obtained.
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PROPOSALS GENERALLY
Foreign investment proposals (non-specic to real estate) subject to FATA include: acquisitions by a foreign person or persons of a substantial interest in an Australian corporation, business or trust that has total (gross) assets of A$100 million or more or where the proposal values the corporation at A$100 million. For US investors, a higher notication threshold of A$913 million currently applies, unless the proposed investment is by a US government or is in one of the prescribed sensitive sectors, in which case the threshold is currently A$105 million acquisitions by a foreign person or persons of a substantial interest in a foreign company with Australian subsidiaries or assets that are valued at A$100 million or more and represent half or more than half of the global assets. Where the foreign company has Australian subsidiaries or assets that represent less than half of the global assets, the threshold value for the notication is A$200 million (being the value of Australian assets). In the case of US investors, the higher notication thresholds described above also apply arrangements under which an Australian business valued at more than A$100 million or having total (gross) assets exceeding A$100 million, becomes controlled by foreign persons. Again, the higher notication thresholds for US investors apply proposals to establish a new business involving a total investment of A$10million or more. Subject to policy requirements applicable to specic proposals, proposals by US investors (except a US government) do not require notication direct investment by foreign governments and their agencies irrespective of the size of the proposal (subject to the thresholds applicable to US governments discussed above) portfolio investments in the media of 5% or more and all non-portfolio investments irrespective of size.
FOREIGN PERSONS
A foreign person includes: a natural person not ordinarily resident in Australia a corporation in which a natural person not ordinarily resident in Australia or a foreign corporation holds a controlling interest a corporation in which two or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate controlling interest the trustee of a trust estate in which a natural person not ordinarily resident in Australia or a foreign corporation holds a substantial interest the trustee of a trust estate in which two or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest.
US INVESTORS
The Australia-United States Free Trade Agreement (AUSFTA) had the effect of increasing the notication and approval thresholds for eligible US investors. US investors beneting from the relaxed rules include nationals and permanent residents of the USA and US enterprises. A US enterprise includes various entities constituted under United States law and branches of other entities located and carrying on business in the USA. Importantly, the denition of US enterprise excludes an Australian entity (such as an Australian subsidiary established as an acquisition vehicle) owned by a US enterprise. Proposed acquisitions by such entities therefore continue to be subject to the A$100 million threshold applicable to non-US investors. In the case of investment proposals in certain prescribed sensitive sectors (including media, telecommunications, certain transport infrastructure and services, military equipment and technology, the extraction of uranium or plutonium and the operation of nuclear facilities) and by a US government (or entities controlled by it), the threshold is currently A$105 million. The thresholds applicable to US investors are subject to annual indexation. Accordingly, the thresholds prevailing from year to year should be checked.
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Key issues
The regulation of foreign investment in Australia is governed by a combination of FATA and Australian government policy. Specic legislation or policy also regulates foreign investment in real estate. Any foreign investment proposal therefore needs to be carefully considered having regard to its specic circumstances to determine: whether foreign investment restrictions exist whether foreign investment notication is required or advisable where notication is to be given, what documentation should be submitted to FIRB.
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Under the Torrens system, title or ownership right to real estate is created by the act of registration in a central register or record. Normally the person who is recorded as the owner of a parcel of land cannot have their title challenged or overturned. This concept is known as indefeasibility of title. There are some exceptions in limited
circumstances to this general rule which are discussed in the following section on registration of title. As Australia is a federation of sovereign states, each State has a different registration system but they are all based on the Torrens Title system. Real estate law in Australia is governed by relevant State or Territory legislation and case law.
There are many instances particular to real estate law, and common to many real estate transactions, that are not covered by legislation and so must be decided under common law. The Australian courts, in interpreting and applying the law of real property, have regard to the case law of other countries with similar or comparable legal systems.
EACH STATE AND TERRITORY HAS ITS OWN REAL ESTATE LEGISLATION. THE TWO MAIN CATEGORIES ARE:
Legislation dealing with general real estate matters. Examples: Conveyancing and Law of Property Act 1898 (ACT) Conveyancing Act 1919 (NSW) Property Law Act 1974 (QLD) Property Law Act 1958 (VIC). Legislation establishing and regulating a system of title by registration. Examples: Land Titles Act 1925 (ACT) Real Property Act 1900 (NSW) Land Title Act 1994 (QLD) Transfer of Land Act 1958 (VIC).
EACH Of THE OTHER STATES AND TERRITORIES HAS ITS OWN LEGISLATION IN THESE CATEGORIES.
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UNREGISTERED RIGHTS
The interests that can be registered vary between States and Territories but include transfers of land, life estates, leases, easements, mortgages, and restrictive covenants. Some rights that cannot be registered include options to purchase. Because an option is regarded as an interest in land, it may be protected by way of a caveat which is lodged against a title to give notice of the option. However, the option does not receive the full benets of indefeasibility with the registration of a caveat, and, for the purposes of resolving priority disputes, it is treated as being unregistered. Caveats are also used to protect the interests under dealings that are registrable but have not yet been registered, provided such interests in land are validly claimed. Further, most jurisdictions in Australia provide that trusts may not be noted on the title although the title or interest claimed is registered in the name of the trustee.
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THE REGISTRIES
Each State or Territory has its own real estate registry. The Torrens system is based on a States or Territorys guarantee of registered title. Legislation in all States and Territories, except the Northern Territory, provides for the compensation of persons who suffer loss as a result of the operation of the system in certain circumstances. The differences between the real estate registries are generally procedural. For example, there are differences regarding lodgement fees, the forms used, and the number of copies of a document to be lodged. Buyers are able to obtain all the information they may reasonably need regarding the title and the encumbrances registered on it. Title information is publicly available and can be accessed online in all jurisdictions other than the ACT. The authority responsible for recording and registering land titles provides a service whereby searches of information kept on the register can be made on the internet. Searches in the ACT can be requested by email, with the Land Titles Ofce returning the search results by email.
The principal rights over land which are recognised in Australia include the following:
FREEHOLD ESTATES
Fee simple this is an estate of unlimited duration in land and represents the most common form of ownership of land in Australia Life estates Australian law also recognises life estates although these are not common and grant a person exclusive possession of the real estate during their lifetime.
LEASEHOLD ESTATES
Four categories of leasehold interest are recognised in Australia: Fixed-term this is a lease for a xed term of years and is the most common form of leasehold interest for commercial leases. The dates on which a lease is to begin and end must be known, or at least be ascertainable, before it commences Periodic tenancies a periodic tenancy is created where land is leased from week to week, month to month or year to year, until one party terminates it by giving the appropriate amount of notice Tenancies at will a tenancy at will arises when a person occupies land on the terms that either party may terminate it at any time. It cannot be alienated Tenancies at sufferance a tenancy at sufferance will arise when the tenant remains in possession after the expiration of a lease without the landlords assent or dissent. Both tenancies at will and tenancies at sufferance may be converted into periodic tenancies by the acceptance of rent by the landlord.
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NATIVE TITLE
Native title was rst recognised in Australian law in 1992 by the High Court in the decision of Mabo v State of Queensland No. 2 (1992) 175 CLR1 where the High Court found that the Miriam People held native title to certain land that survived European settlement, subject to the sovereignty of the Crown. In response to this case the Commonwealth passed the Native Title Act 1993 (Cth) which came into force on 1 January 1994. The States and Territories also passed their own legislation to implement the national scheme. This legislation governs the validity of land dealings affecting native title and establishes a native title claims process. Native title law in Australia is still developing and as such, it is prudent to take native title into account in relation to most land dealings to ensure their validity. Native title is particularly relevant in relation to non-freehold land and land owned by the Commonwealth or State government related entities. Native title rights and interests cannot be transferred but can be compulsorily acquired or surrendered in certain circumstances.
CONTRACTUAL RIGHTS
The following rights are purely contractual between the parties: Licence a permission to do what would otherwise be unlawful, such as, for example, to enter upon or occupy the land of another Right of rst refusal to acquire land where the land owner agrees with a person not to sell the land without rst offering it to that person. Contractual rights such as those mentioned above cannot be registered on the title to the land.
Key issues
Central to Australian real estate law is the Torrens Title system. The Torrens Title system is based on a guarantee of registered title by the States and Territories. While all jurisdictions are covered by Torrens Title, registration requirements vary. When investing in Australian real estate foreign investors should ensure they are familiar with the registration requirements in the State or Territory in which they are investing. It is also important to understand the legal rights applicable to specic real estate investments. Native title law, for example, is a developing area and it is prudent to take this issue into account when considering land dealings, particularly in relation to freehold or Commonwealth or State government land.
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LEASES
THE GENERAL REAL ESTATE LEGISLATION REfERRED TO IN THE PREVIOUS SECTION APPLIES TO COMMERCIAL LEASES AND THE TORRENS TITLE LEGISLATION APPLIES TO THEIR REGISTRATION.
Leases deal comprehensively with the rights and obligations of the landlord and tenant. However, a landlord will generally have few obligations under a lease. Typically, the landlord will have its own form of lease for the building or shopping centre and it will be difcult to negotiate substantial changes unless the tenant has bargaining power, either as a result of its position as an anchor tenant for a shopping centre or a key major tenant for a new development or project. Each Australian State except Tasmania has specic retail tenancy legislation which applies to specialty retail shops and is primarily introduced to protect the interests of small or specialty retail tenancies. In Tasmania, the Fair Trading (Code of Practice for Retail Tenancies) Regulation 1998 governs the relationship between retail tenants and landlords. In the ACT, the Leases (Commercial and Retail) Act 2001 also applies to commercial ofce premises if they are no more than 300 square metres in size. In Victoria, the Retail Leases Act 2003 applies also to premises used for the retail provision of services in some circumstances. The retail tenancy legislation generally includes a wide range of requirements and obligations which are required to be complied with by landlords, as well as provisions which override specic clauses in the actual retail leases. Commercial leases generally contain detailed clauses covering most aspects of the landlord/tenant relationship. In the absence of express agreement, the applicable legislation and the common law will imply some covenants into the lease such as a covenant for quiet enjoyment granted by the landlord in favour of the tenant or a covenant of nonderogation from the grant by the landlord. The case law of judicial precedent is therefore important in the area of leasing. However, in practice the subject of the implied covenants is usually expressly dealt with in the lease or is regulated by legislation.
as supermarkets and department stores, lease terms can exceed 15 years and include a series of options. For commercial premises (ofce and industrial), the lease terms vary depending upon location. For example, major commercial leases in the central or major business districts or industrial precincts would have terms exceeding ve years and of up to 10 years with or without further options to renew.
RENT INCREASES
Rent increases for specialty shop retail leases will normally have either xed annual percentage increases, increases annually linked to movements in the consumer price index or simply amounts nominated for each year. Commonly, a market rent review is applied upon exercise of the option of renewal. For commercial leases, if the lease is for a term of ve years or greater, then there are likely to be xed annual increases with a market rent review mid-term and then again if an option of renewal is exercised. It is also common to have market rent reviews every two years in lieu of xed annual increases. For ofce or industrial premises, it is common to have a clause applying to a market rent review which would prevent the rent from going down, commonly known as ratchet clauses. For major retail tenancies, rent is commonly also payable and increased by reference to the tenants turnover from those premises. For small retail premises, retail tenancy legislation applying to specialty shop tenancies in most States and Territories will prohibit or restrict the method, frequency and manner of rent increases that may apply and indeed will expressly require that rent increases tied to market or changes in the consumer price index should permit the rent to decrease as well.
TENANTS RIGHT TO ASSIGN OR SUb-LEASE
For specialty retail premises, the length of term typically varies from three to ve years with one option of renewal. For major retail tenancies such
Generally, the tenant may not assign the lease or grant a sub-lease without obtaining the landlords consent. Typically, as a condition of consent, the lease will provide that the landlord will need to be satised as to the ability of the incoming tenant to meet its obligations under the lease and will require the incoming tenant to enter into a deed with the landlord. The landlord may also require the incoming tenant to provide security in the form of a bank guarantee or personal guarantees by directors of the tenant.
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Generally, a landlord will not consent to the assignment of the lease to the buyer of the tenants business unless the tenant releases the landlord in respect of any presale non-compliance under the lease. On the other hand, the practice is for the landlord not to release the outgoing tenant so that the outgoing tenant remains liable for both its pre-sale non-compliance and for post-sale non-compliance by the incoming tenant. The outgoing tenant would require the buyer to indemnify it against post-sale non-compliance. For retail leases, retail tenancy legislation can regulate the process of the proposed assignment, as well as the terms upon which the parties may or may not negotiate.
CHANGES DURING TERM Of LEASE
commercial leases do not generally contain specic obligations on a landlord and it is usually difcult for a tenant to terminate a lease as a consequence of a landlords default. In this event the defaulting party is liable for damages. Rights for early termination of a lease by a tenant can be negotiated but will normally require the tenant to pay compensation to the landlord for such circumstances. However, compensation rights do exist for tenants of retail specialty shops under retail tenancy legislation in various jurisdictions, where those leases give the landlord an express right to terminate the lease if the landlord intends to demolish the premises or shopping centre for redevelopment.
Change of control of the tenant a change of control of the tenant generally requires the landlords consent as if it were an assignment of the lease Transfer of lease as a result of a corporate restructuring a transfer of lease as a result of a corporate restructuring such as a merger generally requires the landlords consent as if it were an assignment of the lease.
REPAIRS
TAXES ON LEASES
There are a number of taxes payable on leases.
GOODS & SERVICES TAX (GST)
The landlord is liable for GST on the rent and other consideration received from the tenant. Landlords are not able to seek reimbursement of GST from tenants unless the lease contains an express provision to do so. Therefore, the practice is to include provisions in leases requiring the tenant to pay GST on the rent, contribution to outgoings and other consideration for supplies under the lease as a separate additional obligation (see GST in the chapter on Tax on page 50).
LEASE DUTY
Generally the tenant must keep the premises in good repair excluding fair wear and tear and damage caused by events beyond the tenants control. Normally, the tenant is not responsible for work of a capital or structural nature unless the work is required because of the tenants default. Leases often contain a provision requiring the tenant to redecorate the premises at specied intervals (including on expiry or earlier determination of the term) and to make good the premises (by removing all items installed at the premises and returning the premises to their original condition) at the end of the lease. Some different forms of structured leases have been utilised typically for purpose-built specialised tenancy uses, or for purposes of securitisation and nancing of construction. This may involve placing the structural and capital maintenance obligations on the tenant rather than the landlord.
The grant of a lease at a premium generally attracts stamp duty in all States. The rate of duty is the same as for a transfer of land (see Stamp Duty in the chapter on Tax on page 50). In VIC, the grant or transfer of a lease for any consideration other than rent can attract duty by reference to the value of the leased property.
TERMINATION Of A LEASE
Commercial (major retail, ofce and industrial) leases usually terminate on their expiry. Generally, commercial and retail leases can contain one or perhaps more options to renew, giving the tenant the right to renew the lease for a further term on the same lease conditions. Commercial leases generally do not contain a provision for one party to be compensated by the other on termination of the lease except where the lease is terminated because of default. Most
Key issues
Leases deal comprehensively with the rights of the landlord and the rights and obligations of the tenant. The case law of judicial precedent is also important in the area of leasing. Each Australian State except TAS has retail tenancy legislation that applies to specialty retail shops.
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THE STAKEHOLDERS
BUILDING CONSULTANTS
There are many stakeholders involved in real estate transactions in Australia, other than the buyer and seller.
SELLING AND PURCHASING AGENTS
Buyers will generally engage a building consultant to give them a report on the condition of a building. This applies to both residential and commercial (retail, ofce and industrial) buildings. For major commercial buildings, it is not uncommon for the seller to provide the market with a comprehensive building condition report including the building structure, mechanical and engineering services, and compliance with the Building Code of Australia. This is in order to enable the market to more accurately price the real estate.
SPECIALIST CONSULTANTS
Real estate is generally sold through selling agents or real estate agents. Private sales are uncommon. The real estate agent advertises the real estate and introduces the buyer to the seller. Beyond this, the extent of the agents role depends on the States and Territories. Purchasing agents are used occasionally when a buyer wishes to acquire a specic piece of real estate or consolidate properties for a particular purpose such as land to make up a shopping centre site. Selling agents are generally remunerated by the payment of a commission following the completion or closing of the sale. In addition, the seller pays the agents expenses for advertising. The fees of a purchasing agent are usually based on a negotiated success fee.
LAWYERS
The involvement of other specialist consultants is determined by the issues or potential issues with a property. For example, a geotechnical engineers report would be obtained if the property was in a land subsidence area, or an environmental consultants report would be obtained if there were contamination issues with a property. Generally, consultants charge a negotiated fee based on the extent of their work.
SURVEYORS
In all jurisdictions, transactions involving commercial real estate involve lawyers. Lawyers are closely involved in the sale process for most residential and all commercial real estate asset classes as they prepare the contracts for sale, undertake legal due diligence, undertake negotiations and arrange for contracts to be signed and manage the transaction through to completion or closing.
In some jurisdictions such as in NSW, it is common practice for the seller to obtain a survey report to include in the contract showing the location of the buildings on the property in relation to the boundaries.
THE LOCAL MUNICIPAL COUNCIL
The legality of the buildings on the property is established through enquiries at the local municipal council. In some jurisdictions this takes the form of inspecting the building le at the council, while in others it includes obtaining a certicate from the council that the building has been built in accordance with council-approved plans or, if it has not, that the council does not require any unauthorised building work to be demolished. The councils have fees for the inspection of building les and/or for giving certicates as to the legality of buildings and such fees vary between councils.
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In States and Territories (other than NSW and VIC) where disclosure material is not attached to the contract for sale, the normal practice is for the buyer to obtain title searches and other information including a planning certicate for the property, a building condition report and information as to the legality of the buildings before contracts are exchanged or entered into. Where tenanted commercial buildings are involved, this will also include as a minimum investigating the leases, service contracts and management agreements. In NSW and VIC title searches, zoning certicates and seller disclosure material are included in the contract, so these precontract searches are not always necessary but would be carried out in any event as part of the pre-contract investigations where the transaction involves a major commercial asset.
EXCHANGE Of CONTRACTS
lawyer. The deposit is generally 10% of the price. However this may alter depending upon the size and type of transaction. The deposit is sometimes invested and there are specic requirements regarding the manner in which the deposit is held, how it is invested and who will be entitled to the accrued interested on the investment of the deposit.
POST-EXCHANGE
After exchange of contracts, additional property information is obtained, including the amount of council rates, water rates and whether any land tax is charged against the real estate.
SETTLEMENT
The next step is exchange of a written contract for sale which identies the parties, the property, the price and when completion or closing is required to take place. There are standard form contracts in all Australian jurisdictions which deal comprehensively with the rights and obligations of the seller and the buyer. Some additional terms, conditions and warranties are included depending upon the type of the asset and the nature of the transaction. On exchange of contracts, the buyer pays a deposit to be held by the selling agent or another stakeholder such as the sellers
The usual completion or closing periods vary across different jurisdictions and according to the type of asset being transacted and the circumstances of the sale. Generally, these periods are between 28 days in the ACT to 42 days in NSW. Closing periods may be linked to the time it takes to get FIRB approval or to raise equity or debt nance. Following completion or closing of the sale, the buyers lawyer lodges the Torrens Title transfer of the real estate for registration in the applicable land registry. In some jurisdictions, the land registry noties authorities such as the council and the water rate authority of the transfer of ownership of the real estate, while in others, the buyers lawyer noties the relevant authorities.
... the normal practice is before contracts are exchanged to obtain title searches and other information including a planning certicate for the property, a building condition report and information as to the legality of the buildings.
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CONTRACTUAL WARRANTIES
In commercial real estate transactions contractual warranties by the seller are not uncommon and may include the following: where real estate is tenanted, warranties such as those stating that the leases are in force, the tenancy details (including rent) disclosed in the contract are correct and the seller has disclosed all material information where real estate may have had some industrial use or may have been exposed to contamination, warranties relating to the state of the property and existence of contamination. Remedies for breach of a contractual warranty are usually damages. The function of the warranties in this context is to give buyers comfort in relation to aspects of the information relating to the property which the buyer has relied on and which the buyer has not been able to independently verify through their own pre-contractual investigations. While in some cases, more extensive warranties from the seller can be negotiated, generally the sellers warranties are not a complete substitute for the buyer carrying out its own due diligence.
STATUTORY WARRANTIES
Some jurisdictions have statutory warranties. For example, in NSW, the Conveyancing (Sale of Land) Regulation 2005 contains warranties to the effect that the land is not subject to any adverse affectation. This could include such events as a road widening proposal, a proposal by the State government to compulsorily acquire the property, or an order to demolish or repair a building which has not been complied with. The statutory warranties will also cover other matters such as those relating to the zoning status of the land. The buyers remedy for a breach of a statutory warranty is the right to rescind the contract at any time before the contract is completed. Statutory warranties were introduced to shift the burden of disclosure on to the seller. The practice, particularly on the acquisition of residential real estate, is for the buyer to carry out searches after exchange of contracts to verify the correctness of the statutory warranties. Therefore the warranties are not a substitute for the buyer carrying out its own due diligence.
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LIAbILITIES
SALE bY LANDLORD
After the real estate has been sold, the seller/ landlord protects itself from ongoing liability by requiring the buyer of the real estate to indemnify the seller/landlord for any post-sale non-compliance. The practice is for the seller/landlord to remain responsible for pre-sale non-compliance.
RISK Of PROPERTY
The standard form contracts used in the different jurisdictions provide that on completion or closing the seller must give the buyer legal title to the real estate. In some jurisdictions the risk of the real estate on some asset classes passes to the buyer on exchange of contracts while in other jurisdictions the risk passes on completion or closing. Accordingly, the issue of insurance is important. In NSW the practice is to effect insurance from completion or closing as title and risk only passes at that time.
RATES
Council rates and water rates are adjusted on completion or closing between the seller and the buyer.
LAND TAX
If the seller is liable to pay land tax on the real estate, the general practice is for the land tax to be adjusted between the seller and the buyer on completion or closing even if the real estate will not be liable to land tax in the buyers ownership (see Land Tax in the chapter on Tax on page 51).
Key issues
In Australia the key parties involved in real estate transactions vary according to the type and complexity of the transaction. They include: purchasing and selling agents lawyers building consultants specialist consultants where necessary the local municipal council. The processes involved in real estate transactions are governed by a combination of legislation and commercial practice. However, disclosure requirements vary across the different States and Territories and it is important to be familiar with these variations.
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The most common choices of vehicles used to make direct and indirect real estate investments are: unit trusts a wholly or partially owned subsidiary company (where the Australian entity is nancially independent from its parent) direct foreign investment or a branch of a foreign company REITs including wholesale real estate fund structures. The choice of structure most suited to a foreign investors particular circumstances will depend on various factors including the commercial opportunity and the different legal, accounting and taxation implications (see chapter on Tax on page 47). Particular regulation also applies to the acquisition, issue and holding of securities in Australian public companies, wholesale real estate funds and REITs. This is discussed in the chapter relating to Australian Real Estate Investment Trusts on page 38.
UNIT TRUSTS
A unit trust is a trust in which the beneciaries interests are divided into units. As with all trusts, a trustee is necessarily involved and it is the trustee (invariably a company) which owns the legal title to the assets. The corporate trustee is often the manager of the investment as well. Otherwise the trustee appoints a manager to undertake and manage the investment. The unit trust deed provides the mechanics for the creation and transfer of the units and investment of the trust funds. The shareholders in the trustee and the management company can be the same parties as the unit holders in the unit trust. This is an attractive factor as it allows the parties to control the management of the investment business while at the same time affording them the benets of being beneciaries of the unit trust. These relationships and the management of the enterprise are governed by the unit holders agreement between the unitholders/ shareholders. This agreement will often also include the management company as a party.
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Generally, the business of investing in and owning units in a private unit trust is not governed by the Corporations Act 2001 (Cth). (The Corporations Act regulates investment in public unit trusts.) However, the management of the trust business is usually undertaken by a corporate vehicle and so the provisions of the Corporations Act with respect to the management of the business itself apply if the corporate vehicle is incorporated in Australia. The comforts and certainties discussed below regarding companies are therefore still available with respect to the conduct of the investment. The unit holders may be fully liable for the debts of a unit trust where recourse to the venture itself does not satisfy the debt. It is usual to include a provision in the unit trust deed seeking to limit the liability of the unit holders and the use of a corporate manager can assist in limiting this liability. Tax treatment of unit trusts is a mix of the tax treatment of companies and partnerships. Where income is earned by the trust and distributed to unit holders, the position is similar to a partnership. The various unit holders include the income in their individual tax returns. The trustee les a tax return but is itself not taxable on income which it has distributed to the unit holders. If the income is not distributed to the unit holders then the trustee is liable for tax on the income. In the case of losses, the position is the same as that with respect to a company: losses are not available to the unit holders but stay in the trust and may be carried forward for offsetting against the trusts income in future years. Many of the restrictions that exist in the case of a company carrying forward tax losses do not apply to trusts in a tax loss position.
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PARTNERSHIPS
Partnerships are also unincorporated joint ventures. A partnership joint venture will be governed not only by the contract between the parties but also by both legislation and the common law relating to partnerships. As with other unincorporated joint ventures, the main advantage of this type of structure is that the partnership itself is not a taxable entity (although the partnership les a tax return). Both income and losses are included along with other income and losses each partner may have. A major distinction between partnership and non-partnership joint ventures is that with a partnership, each partner has unlimited liability for all of the partnerships debts. Further, a partner generally has power to pledge the credit of fellow partners within the scope of the partnership business. This can be limited by agreement between the partners but will not be effective against a third party if that third party does not know of the limitation. Partners have both common law and statutory duties to one another. A partnership is a duciary relationship of mutual condence and trust. A partner has no title to specic partnership assets. A partners interest is merely a right on the dissolution of a partnership to a proportion of the surplus remaining after realisation of all assets and payment of partnership liabilities. Forms of limited partnership are available in all Australian jurisdictions. They are intended to limit the liability of passive investor partners (known as limited partners). However, the limited partners lose the tax advantages otherwise enjoyed and income is taxed at the corporate rate.
INDIVIDUALS
Direct investment in real estate by an individual foreign investor would be unusual except for off the plan acquisitions of residential real estate, as an individual would not have limited liability or the potential for effective taxation structuring.
Key issues
When choosing an investment structure, you need to ensure that the structure will serve, rather than obstruct, your proposed objectives in Australia. Your choice of investment structure should only be made after you have also considered the taxation consequences of investing in Australia (see Tax chapter on page 47).
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AUSTRALIA HAS ONE Of THE LARGEST, MOST SOPHISTICATED AND TRANSPARENT REITs MARKETS IN THE WORLD WITH MORE THAN 80% Of INSTITUTIONAL GRADE REAL ESTATE SECURITISED. AUSTRALIAS fIRST LISTED REIT WAS ESTAbLISHED IN 1971 AND REAL ESTATE fUNDS NOW EXTEND ACROSS MOST REAL ESTATE ASSET CLASSES.
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Overlaid onto this general law is a detailed regulatory structure implemented through the Corporations Act 2001 (Cth). REITs are regulated under this legislation as managed investment schemes (MIS). They are required to be registered, to have a responsible entity to manage the fund, to issue a product disclosure statement when interests in the fund are offered for investment, and to comply with the ongoing management and disclosure requirements applying to managed investment schemes. MIS are also subject to the provisions in the Corporations Act concerning takeovers and related party transactions. Recent consolidation of funds in the industry has put particular focus on these aspects of the law. As listed entities, REITs are also subject to the rules of the Australian Securities Exchange (ASX). Aside from the general trust law aspects, special features which distinguish Australias REITs from REITs in other jurisdictions include: the principle of external management and its recent restructuring through stapled securities the impact of Australian takeovers law on the terms of underlying co-ownership and asset management agreements the impact of tax and stamp duty on the structure and activities of funds.
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The tax structure requires the real estate holding vehicle to be a passive fund and allows the fund to distribute 100% of the cash it derives from its assets. This allows Australian REITs to maximise their yields but it is in turn dependent on their ability to raise equity in the market for refurbishment and other management requirements. The regulatory structure supports this raising of equity through rigorous disclosure, licensing and registration requirements, all designed to promote transparency and investor condence. See also the section on taxation of REITs in the tax chapter on page 49.
NET INCOME, DEPRECIATION AND CASH DISTRIbUTIONS STAPLED SECURITIES PUbLIC TRADING TRUSTS
Under Australias tax laws, a trustee will not normally be liable to pay income tax on the income of the trust to the extent that unitholders are presently entitled to the income of the trust. Instead, the unitholders are taxed on the share of net income distributed to them. Signicantly for real estate funds, the deduction for depreciation allowed to owners of real estate is included in the calculation of the net income of the fund. Thus, from a tax perspective, investors in real estate funds effectively enjoy the same tax treatment for depreciation on real estate assets as direct owners of real estate. As a result, the cash available for distribution may be higher than the net income for tax purposes. If the amount distributed to unitholders is greater than the net income for tax purposes, it is treated for tax purposes as a distribution of capital and reduces the unitholders cost base in its investment (which is relevant only to non-resident unitholders if the investment qualies as taxable Australian property the capital gains in respect of which are taxable in the hands of the non-resident). Unitholders do not pay tax on this part of the distribution until they sell their units in the trust and then only at the concessional capital gains tax rate for individuals.
The stapled security structure allows the trust component of the stapled security to enjoy the tax treatment available to passive trusts. By contrast, that tax treatment would not be available to a single company holding and managing the real estate assets. In the case of REITs with stapled securities, the dividends derived from the shares in the responsible entity are subject to the usual tax treatment of corporate dividends, including franking credits.
DIVISION 250
Very broadly, capital allowance deductions available to a taxpayer may be denied or reduced under the new rules in Division 250 of the Income Tax Assessment Act 1997 (Cth) where (among other things) the relevant asset is being put to a tax preferred use by a tax exempt entity or a non-resident for an arrangement period greater than 12 months, and where the taxpayer who would otherwise claim capital allowance lacks predominant economic interest in the asset. (For example if an Australian trustee of a trust acquires Australian real estate with more than 55% limited recourse funding and leases the land to a non-resident it would be necessary to consider Division250.) Further advice should be sought on whether Division250 applies in the circumstances of the individual taxpayer.
This general tax treatment does not apply to public trading trusts which are treated as companies for income tax purposes. A public trading trust is a public unit trust which, at any time during the relevant year of income, either carried on a trading business itself, or directly or indirectly controlled the affairs or operations of another person who was engaged in a trading business. A trading business does not include a business consisting wholly of investments in land for the purpose (or primarily for the purpose) of deriving rent. For this reason, REITs are structured so that the trust holds the real estate as an investment in land for the purpose of, or primarily for the purpose of, deriving rent. However, certain excluded rent is treated as part of a trading business. If the rent is worked out by reference to prots of an entity using land, and such rent is under an arrangement that is designed to result in the transfer of all or substantially all of what would otherwise be the prots of the entity to another party to the arrangement, that rent is excluded rent.
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STAMP DUTY
State governments in Australia impose duty on conveyances of real estate at maximum rates of between 4% and 6.75% of the unencumbered value of the real estate. In addition, a land rich or landholder duty is imposed at the conveyance rate on certain acquisitions of equity interests in private corporations or trusts which, directly or indirectly, hold land. In some States, the landholder provisions apply to the takeover of a listed entity, as well as to the issue or transfer of interests in unlisted funds. In general, they do not apply to a transfer of units in a widely held REIT which does not involve a signicant change in interests, but they have had an impact on the preferred arrangements for wholesale funds and for the intermediary vehicles (such as sub-funds) through which a REIT may invest. See further details regarding the operation of the land rich duty provisions in the Tax chapter on page 51.
RESPONSIbLE ENTITY
The aim of the Australian legal and regulatory framework is to locate in one clearly identied entity (ie the responsible entity) full responsibility for the management of registered managed investment schemes on behalf of the members. This makes the responsible entity the pivotal entity in the legal and regulatory framework for registered managed investment schemes. It has strong decision making authority but this authority comes with heavy duties and obligations. These include: the responsible authority is obliged to operate (ie manage) the scheme and perform the functions conferred on it by the schemes constitution and the Corporations Act it holds the scheme assets on trust for the members, and thereby undertakes duciary obligations to them. In many (but not all) cases it is obliged to employ a custodian of the scheme assets. This is an additional layer of investor protection and does not replace the responsible entitys own duciary obligations it is personally liable to a member for any loss or damage suffered by the member because of conduct of the responsible entity that contravenes the relevant provisions of the Corporations Act. This general liability is supplemented by a series of specic duties which are noted in a following section.
REGISTRATION
All REITs, and some unlisted real estate funds, will need to be registered as managed investment schemes under the Corporations Act. In general, a managed investment scheme must be registered under the Act if: it has more than 20 members; it was promoted by a person, or an associate of a person, who was in the business of promoting managed investment schemes when the scheme was promoted; or it has been identied by the Australian Securities and Investments Commission (ASIC) as part of a group of closely related managed investment schemes that together have more than 20 members. If a person operates a managed investment scheme in breach of the registration requirement, ASIC, the operator or any member of the scheme can apply to the Court to have it wound up.
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LICENSING REqUIREMENTS
The responsible entity must be a public company that holds an Australian nancial services license authorising it to operate a managed investment scheme. To obtain a license the applicant company will need to satisfy nancial requirements and a series of non-nancial criteria administered by ASIC. The nancial requirements for a licensed operator of a real estate fund include: risk management systems positive net assets, solvent, sufcient cash resources for three months (including cover for contingencies) net tangible assets of up to A$5 million surplus liquid funds of A$50,000. The non-nancial criteria focus on systems, supervision, training and adequate staff, IT and other resources.
DISCLOSURE REqUIREMENTS
INITIAL OffER Of INTERESTS
Where an interest in a managed investment scheme is offered to a retail client, a product disclosure statement (PDS) must be given to the retail client. The PDS must include certain information and statements about the product as reasonably required for the purpose of making a decision as a retail client whether to acquire the product. This includes information about benets, risks, costs, commissions, signicant characteristics, signicant tax implications, dispute resolution, cooling off periods, and the extent to which labour, environmental, social or ethical standards are taken into account in the investment decisions of the scheme. This obligation does not apply where the offer or issue is made to a professional investor or a person with net assets or gross income above the prescribed threshold (currently A$2.5 million and A$250,000 respectively) who is not acquiring it for use in a business, or in other circumstances that do not constitute an offer or issue to a retail client. There are also exemptions for small scale offerings, takeovers and other specic situations.
ONGOING DISCLOSURE
There are ongoing disclosure requirements applying both in relation to the managed investment scheme and also to the PDS. Annual audited nancial and directors reports as well as the usual nancial reporting obligations of the responsible entity as a public company are required for managed investment schemes. The responsible entity must also provide an annual report to members and a statement as licensee to ASIC. A REIT (and any other registered managed investment scheme which is a disclosing entity) must also provide half-yearly audited nancial reports and directors reports. In the case of ASX-quoted managed investment products, such as units in a REIT, there are further obligations which essentially require disclosure of information that is not generally available and that a reasonable person would expect to have a material effect on the price or value of the REIT units. REIT units, where they are enhanced disclosure securities, also attract periodic reporting obligations.
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The regulatory structure supports raising of equity through rigorous disclosure, licensing and registration requirements, all designed to promote transparency and investor condence.
Key issues
REITs are a very important aspect of real estate investment in Australia, with more than 70% of institutional grade real estate securitised. The Australian legal and regulatory framework for the REIT market: is investor focused and investor friendly allows exible investment structures requires rigorous disclosure and corporate governance is responsive to cross border investment. These features have allowed the market to meet investor criteria such as: liquidity security of title tax pass through treatment expert management transparent and responsive corporate governance.
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Australias efcient State and Territory based Torrens Title systems also provide a security for both buyers of real estate and nance providers. A real property mortgage can be granted by the relevant landowner in favour of a nancer and registered with rst ranking priority over the title to the corresponding real estate. A combination of a sophisticated banking sector, secure titles systems and a robust legal system creates a highly efcient commercial and legal environment structure for nancing real estate, thus boosting investor condence and facilitating real estate investment.
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REGULATORY fRAMEWORK
Regulation of the banking and nance system in Australia is split between the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). Whilst there is a certain degree of overlap in functions performed, ASIC has primary responsibility for market integrity and consumer protection, while APRA is primarily responsible for the prudential supervision of deposit-taking institutions (banks, building societies, credit unions and friendly societies), life and general insurance companies and superannuation funds. The Reserve Bank retains its central banking functions including responsibility for payment systems. APRA has issued capital adequacy guidelines for banks following consideration of the Basel guidelines. All nancial institutions regulated by APRA are required to report on a periodic basis to APRA. Financial intermediaries, such as merchant banks and investment banks (which do not otherwise operate as banks or deposit-taking institutions) are neither licensed nor regulated under the Banking Act and are not subject to the prudential supervision of APRA. They are required to obtain licences under the Corporations Act 2001 (Cth) or other Commonwealth or State legislation, depending on the nature of their business activities in Australia. Most, if not all, of the merchant and investment banks are registered under the Financial Sector (Collection of Data) Act 2001 (Cth). This Act requires registered nancial corporations to provide statistical information to APRA.
To protect themselves from default by the borrower a lender for real estate investment would also typically: obtain or require a valuation of the real estate and only lend up to a certain percentage of its value obtain a registered mortgage over the real estate as security, preferably from a priority perspective, a rst registered mortgage if the borrower is a special purpose vehicle, obtain an ASIC registered all assets xed and oating charge and, if the structure of the transaction permits, a registered equitable mortgage of the shares in the borrower (assuming it is a corporate entity acting in its own capacity) and / or an equitable mortgage of units over the units in a Unit Trust (if the borrower is established as trustee of a special purpose unit trust) undertake stringent credit checks and assessment of borrower and other security providers (for example, guarantors) and / or project which the real estate lender is seeking to nance. This could include cash ow, interest cover, loan to value ratio and similar analyses obtain or require personal guarantees from the directors/ principal shareholders if the borrower is a private company.
Key issues
Australias banking system and debt and derivatives markets provide a secure basis for investor opportunities, offering a wide range of sophisticated products. Australias efcient and secure real estate titles systems also provide security for both buyers of real estate and nance providers. When making the decision to invest in Australian real estate you will need to consider your nancial management strategy including funding options and typical requirements of lenders.
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Tax
AUSTRALIAS THREE LEVELS Of GOVERNMENT fEDERAL, STATE AND LOCAL ALL IMPOSE TAXES ON REAL ESTATE TRANSACTIONS AND INVESTMENT. IN ORDER TO fACILITATE CROSS bORDER INVESTMENT THE AUSTRALIAN GOVERNMENT HAS ALSO ESTAbLISHED TAXATION AGREEMENTS WITH NUMEROUS fOREIGN GOVERNMENTS TO SIMPLIfY THE TAXATION Of fOREIGN INVESTORS AND AVOID DOUbLE TAXATION.
The main taxes that apply to real estate investment and transactions for both local and foreign investors in Australian real estate include: Income tax which encompasses capital gains tax (CGT) and withholding tax for foreign investors Goods and services tax (GST) Stamp duty Land tax.
INCOME TAX
Income tax is imposed by the Australian government and is levied on individuals, companies, superannuation funds and, in some circumstances, trustees. The income of partnerships (other than limited partnerships) and trusts (other than certain public unit trusts) is generally taxed in the hands of partners or beneciaries. Income tax is levied on taxable income, being assessable income less allowable deductions. Assessable income includes net capital gains under the capital gains tax (CGT) rules. Taxable income is generally calculated for an income year, which is the year ending 30 June, unless the taxpayer has been given leave by the Commissioner to adopt a substituted accounting period. Leave will usually be granted for an entity with a foreign parent to adopt an accounting period that ends at the same time as its parents, or a few months earlier. The taxpayer will then be treated as completing its income year up to six months earlier or later than other taxpayers. A tax loss may arise for an income year if the allowable deductions exceed the total assessable and exempt income for the year. Such losses may be carried forward and deducted in future years, subject to satisfying certain tests in the case of companies and trusts.
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Non-resident individuals are taxed on their Australian source income (apart from dividends, interest and royalties, which are subject to withholding tax) at the above rates. In some situations a non-resident individual may be relieved from Australian tax under an applicable double tax agreement (see page 50).
beneciaries, whether individuals or companies, are required to include in their assessable income the share of the net income of a resident or nonresident trust estate equal to the share of the trust income to which they are presently entitled, and are subject to tax on their share of the net income at the rates generally applicable to them. Non-resident beneciaries who are presently entitled to a share of the trust income are subject to tax on their share of the net income of the trust estate that is attributable to sources in Australia, at the rates applicable to non-residents.
COMPANIES
TAXATION Of AUSTRALIAN RESIDENTCOMPANIES
RATE*
An Australian resident company is liable for tax at the rate of 30% on its worldwide taxable income. A company is dened for tax purposes as including all bodies corporate and unincorporated but excluding partnerships (other than limited partnerships, which are generally taxed like companies). Certain public unit trusts are also taxed like companies.
TAXATION Of NON-RESIDENT COMPANIES
Income averaging applies to certain classes of special professionals (eg authors, inventors, performing artists and sportspersons) to prevent them from being pushed into higher tax brackets when their professional income for a year exceeds their average professional income. Higher tax rates apply to certain income of minors.
A non-resident company is taxed on its Australian source income (apart from dividends, interest and royalties, which are subject to withholding tax) at the same rate as resident companies. A non-resident company may be relieved from Australian tax under a relevant double tax agreement. Certain foreign hybrid entities may be treated as companies or partnerships for tax purposes at the election of the Australian shareholder or partner.
TRUSTS
Investors in a resident trust are generally taxed on the share of the net taxable income equal to the share of trust income they are presently entitled to receive. If no beneciaries are presently entitled to receive income of the trust estate the trustee must pay income tax (potentially at the top marginal rate for individuals). The net income of a trust estate is generally the difference between its assessable income (including net capital gains) and all allowable deductions, calculated as if the trust was a resident taxpayer. A net loss of a trust is not deductible to beneciaries. Resident
* Non-residents do not pay the Medicare levy, nor are they entitled to rebates.
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the foreign resident is a resident of a country with which Australian has an exchange of information agreement, the following rates will apply: 22.5% (non-nal) for payments of the rst income year after the enabling legislation receives Royal Assent (2008-09) 15% (nal) for payments of the second income year (2009-10) 7.5% (nal) for payments of the third and later income years. Residents of jurisdictions without an exchange of information agreement with Australia will be subject to a 30% nal withholding tax. The new rates will apply from the rst income year in which the enabling legislation receives Royal Assent. Please refer to the chapter on REITs on page 38.
permanent establishment, as dened in the Tax Acts, in Australia. Foreign investors are generally liable for a nal withholding tax as follows: franked dividends no withholding tax is payable unfranked dividends (ie dividends paid out of prots on which no company tax has been paid) withholding tax is payable at the rate of 30% interest is subject to withholding tax at the rate of 10% royalties are subject to withholding tax at the rate of 30%. The double tax agreements generally reduce the tax on unfranked dividends to 15% (and in some cases to 5% or nil under the US and UK agreements) and on royalties to 10% (5% under the US and UK agreements). The tax on interest is generally not reduced below 10% (although it may be reduced to nil in some circumstances under the US and UK agreements).
TRANSfER PRICING
International transfer pricing rules are contained in both Australian domestic law and double tax agreements. These rules allow the Commissioner to determine and substitute an arms length price for Australian tax purposes if the Commissioner is satised that the parties are not dealing at arms length in relation to an international transaction. Parties will broadly be dealing at arms length with each other if they deal with each other as if they were independent persons entering into transactions at market value. In order to satisfy the Commissioner that an acceptable arms length pricing methodology has been adopted in relation to such a transaction (in accordance with OECD guidelines), sufciently detailed documentation must be maintained.
FOREIGN INVESTORS
A foreign investors Australian assessable income in a given year of income can include any capital gains and losses from an investment in taxable Australian real estate. Taxable Australian property includes shares or other interests in Australian land-rich companies or entities with 50% or more (measured by market value) of its assets consisting of Australian property holdings. The foreign resident will only be taxed however if two additional conditions apply: rstly, the foreign resident must hold more than 10% of the shares or interests in the Australian land-rich company or entity secondly, the 10% plus holding test must be satised at the time of the disposal or the CGT event, or alternatively must have been satised throughout a 12month period that began no earlier than 24 months prior. Other items of taxable Australian real estate include direct holdings in Australian real estate. It also includes any property that the foreign resident had used at any time in carrying on a business through a
FOREIGN EXCHANGE
Comprehensive rules for translating foreign currency amounts into Australian currency for income tax purposes, and for taxing foreign exchange gains and losses, took effect from the rst income year beginning on or after 1 July 2003 (subject to a transitional election). They replace the old rules.
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and the price received when selling. Where the seller acquired the real estate after 1 July 2000 (when GST was introduced), this price difference, or margin, is calculated by using the actual selling price. Where the seller acquired the real estate prior to 1 July 2000, the margin is generally calculated by reference to the value of the real estate as at 1 July 2000. The margin scheme can only be applied on their sale where the margin scheme was applied to their acquisition. While the margin scheme can reduce the GST payable, the buyer cannot claim input tax credits for GST paid if the margin scheme applies. Because of this, in practice, the margin scheme is generally only applied where the real estate will (or may be) ultimately redeveloped and sold as new residential premises (as buyers of new residential premises will generally not be entitled to claim input tax credits and so GST will need to be absorbed into the end sale price). Transfers of farm land and grants of vacant land by government can be GST-free if specic conditions are satised. Land transferred as part of a sale of an enterprise (including an enterprise of leasing the land) can also be GSTfree under an exemption for the supply of a going concern. Transfers of residential premises, other than new residential premises or commercial residential premises, are input taxed and so do not attract GST (but input tax credits are generally denied for GST paid on acquisitions in respect of such input taxed supplies). A transfer of shares or units is also input taxed and so does not attract GST.
More than A$1,000,000 More than A$1,000,000 More than A$525,000 More than A$980,000 More than A$500,000 More than A$225,000 More than A$960,000 More than A$500,000
1 The categories of dutiable property differ among the States and Territories but typically include certain estates and interests in land, goods transferred with land and, in jurisdictions other than VIC, ACT and TAS, intellectual property andgoodwill. 2 Residential land with a dutiable value exceeding A$3,000,000 attracts a premium rate of 7% on the excess over A$3,000,000.
STAMP DUTY
Australian States and Territories impose stamp duty at varying rates on land and certain other property transferred with the land. This may include goods and certain business assets sold with land. The rate of stamp duty is charged on an increasing scale. As an example, the rates in NSW start at 1.25% and gradually increase to a top rate of 5.5% for land with a dutiable value in excess of A$1,000,000. The rate may also vary depending on the characterisation of the land. For example, the purchase of a principal residence may be subject to concessional rates. Stamp duty is usually payable by the buyer, although in some States both parties to the transaction are liable. It is normal commercial practice for the buyer to bear the duty. Stamp duty is payable from one to three months after the contract for sale (or in the case of VIC, the transfer) is signed, depending on the States and Territories. Penalties can apply for late payment. In VIC there are extensions of time for payment of duty on off-the-plan purchases. The land transfer can not be registered until duty has been paid.
Some States and Territories do not impose stamp duty on transfers of shares or units, or impose duty at rates below the rates applicable to transfers of land. To prevent stamp duty on the transfer of land being avoided by interposing an entity, all jurisdictions apply land rich or landholder duty to the acquisition of shares in a private company, or units in a private trust which owns land. The acquisition of an interest in a landholding entity, whether by way of direct transfer or, for example, by means of the issue or the redemption of units or buy-back of shares, can result in a liability for land rich or landholder duty, which is calculated by reference to the proportionate interest in the underlying land at the land transfer rates. The land rich duty provisions vary considerably from State to State. However, in general, the provisions only apply to changes in signicant interests in private companies and trusts where land represents a substantial part of the entitys total property. For example, the provisions in VIC apply to changes of interests of 50% or more in an unlisted company or wholesale unit trust (20% or more in a private unit trust) where land held by it, or entities linked to it, represents at least 60% or more of the value of all property. However, in NSW, Western Australia, ACT and Northern Territory, the 60% land rich threshold has been removed. Under the landholder duty model, duty will apply to the acquisition of a signicant interest in an unlisted entity which holds land with a value in excess of A$2,000,000 (A$500,000 in NT and of any value in Act) regardless of whether it is land rich. In NSW, Western Australia and NT, the provisions have also been extended to the acquisition of a 90% or greater interest in a listed company or trust. The table on page 51 summarises the current land rich/landholder duty thresholds.
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ACT NSW NT
50% or more for unlisted companies and wholesale unit trusts, 20% or more for private unittrusts 50% or more for private companies and private unit trusts, 90% or more for listed companies and listed trusts and widely held trusts 4 50% or more for private companies, private unit trusts and certain mergers of listed companies, 90% or more for listed companies and listed unit trust schemes 5 50% or more for unlisted companies and public unit trusts. No thresholds for changes in interests in private trusts which hold dutiable property in Qld. 50% or more for unlisted companies and private unit trust schemes. No thresholds for changes in interests in certain trusts which are connected with SA. 50% or more for unlisted companies and private unittrusts. 50% or more for companies and registered wholesale unit trusts, 20% or more for private unit trusts 50% or more for unlisted companies and trusts, 90% or more if listed
1 Total land-holdings of the corporation within and outside Australia as a percentage of all of its property excluding certain liquid assets. 2 With effect from 1 July 2009. 3 However, if duty applies, it is calculated on value of land and dutiable goods from 1 July 2009. 4 With effect from 1 October 2009, duty is applied at a concessional rate of 10% of the duty ordinarily payable. 5 These thresholds have effect from the date of introduction into the Legislative Assembly being 6 May 2009. 6 Separate rules apply for trust acquisitions and trust surrenders in private trusts which hold Qld dutiable property. 7 Separate rules for trusts that are not registered managed investment schemes, approved deposit funds or pooled superannuation trusts.
LAND TAX
If the seller is liable to pay land tax on the real estate, the general practice is for the land tax to be adjusted between the seller and the buyer on completion or closing even if the real estate will not be liable to land tax in the buyers ownership. In all States and the ACT, land tax is payable on an annual basis on the unimproved value of land, subject to certain exemptions eg for a principal place of residence or land used for primary production. Except in the ACT, tax free thresholds apply. These thresholds and land tax rates vary. In NSW the rate is 1.6%, while in VIC the top rate is 2.25% with a surcharge of 0.375% for landholdings held by certain trusts with an unimproved land value of between A$20,000 and A$3 million.
Key issues
Australias three levels of government Federal, State and Local all impose taxes on real estate transactions and investment. A foreign investors Australian assessable income in a given year of income can include any capital gains and losses from an investment in taxable Australian real estate. Foreign investors are generally not liable to pay income tax on dividends, interest and royalties derived in Australia. Rather, they are liable for a nal withholding tax. Australia has double tax agreements with other countries which will vary the amount of tax paid by foreign investors.
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These controls regulate activity in the following areas: development and planning regulation pollution and waste disposal impact on threatened species water access and usage European and Aboriginal heritage native title contaminated land and associated health impacts.
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Generally, to nd out what uses may be permitted on land, it is necessary to review the applicable environmental planning instruments. In NSW these are local environmental plans, regional environmental plans, and State environmental planning policies. The local environmental plans are the primary instrument for most developments. Typically they provide that the land will fall within a zone dened on a map and then prescribe what development may or may not be carried out on that land with or without development consent. Development control plans may also be in place which contain guidelines for development within a particular local council area or zone. In some cases, these include a requirement that the project be commenced within a prescribed period. There may be further approval requirements before a project can proceed, such as the grant of mining leases or environment protection licences. While assessment and approval of smaller developments is usually the responsibility of local councils, the relevant State or Territory government will usually be involved in the process of considering and approving large projects, and projects with regional signicance. For example, in NSW, the Minister for Planning has extensive powers to assess and approve major projects of State or regional signicance and to override other assessment and approval requirements. For example, in NSW the Environmental Planning and Assessment Act 1979 (EP&A Act) regulates development through two main processes: The development consent process under this process land is zoned by planning instruments and further controls are specied in development control plans. A consent authority, generally the local council, assesses development applications to determine whether the development should be permitted. The construction of the development is then regulated by a certication process and occupation is not permitted until an occupation certicate has been issued.
A process of major project approval under this process the Minister may declare types of projects or particular projects to be major projects. The Minister then becomes the approving authority. The State Department of Planning species assessment requirements and the assessment is carried out so that the Minister can determine whether to approve the carrying out of a project. For complex and multistage projects there are processes for assessment of concept plans. Projects that are likely to have a signicant environmental impact may require a detailed Environmental Impact Assessment (EIA). This may take the form of an Environmental Impact Statement (EIS). The level of detail required for an EIA is steadily increasing. For example, an EIA for a signicant mining or infrastructure project typically runs to several volumes and is compiled by a team of planners, ecologists, engineers and other technical experts. The requirements for environmental impact assessment under the Environment Protection And Biodiversity Conservation Act are becoming increasingly relevant to major projects. It is a common requirement that development must not be carried out without planning approval from the appropriate authority. There are exceptions to this where development might be exempt or complying under particular policies. Typically a planning approval is site specic, which means that successive owners and occupiers can rely upon it. There are also concepts of existing use rights recognised in some jurisdictions. For example, in NSW these apply where a development was lawfully carried out prior to controls being imposed or where a development had a development consent and subsequently the planning controls were amended. Specic advice would need to be sought for the application of existing use right principles. It would not be wise to rely upon any implied permission being obtained from long use unless it is able to be clearly demonstrated that the use was lawful when commenced. It is an offence to carry out development without the appropriate approvals and signicant penalties may apply.
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The length of time taken for approval depends upon the complexity of the development. A straightforward application to local council should be determined within 40 to 80 days (but often takes longer). A more complex application may take signicantly longer. Major projects will often be in the assessment and approval process for in excess of 18months.
INfORMATION ON LAND USE AND OCCUPATION
construction certicates to permit the commencement of the construction re safety certicates occupation certicates. The names of these approvals, permits and licences will vary from State to State. There are stringent requirements in respect of re safety prior to the occupation of buildings and certication processes in each State require assessment of re safety issues and structural matters as part of the approval process. Typically there are requirements for occupation certicates to be issued and a key element of the process for issuing the occupation certicate is the assessment of re safety. Other permits and licences may be required depending on the locality, site issues and title scheme. As approvals can be granted subject to conditions, it is often necessary to prepare further plans and seek further permits or consents under the conditions of the planning approval. For example, it is frequently necessary to prepare an environmental management plan and a health and safety plan and have these reviewed and accepted by relevant authorities. For other works such as industrial works there may be a range of other licences required including: licences to pollute licences to discharge trade waste licences to connect to services and utilities water licences. Depending on the location it may be necessary to get other licences such as: licences to disturb relics approvals under heritage legislation excavation permits licences to clear or pick vegetation. In addition, approvals may be required under the Commonwealth EPBC Act in respect of specic matters dealt with by that Act.
FEES AND LEVIES
In Australia the primary source of information regarding controls on land use and building and the controls and occupation of buildings is the local council. There are processes for making applications for certicates and the provision of information from a local council. For example,in NSW a certicate under section149 of the EP&A Act can be obtained from the local council. That certicate species all of the environmental planning instruments that apply to the relevant land and other matters such as whether the land has been declared to be in a ood prone land. These certicates are commonly known as zoning certicates. There are also separate regulatory agencies for the environment such as an environment protection agency or department of environment. In NSW there is the Department of Environment and Climate Change. These agencies and departments often keep registers and records of specic environmental matters such as contaminated land and licences that have been issued. The requirements for registers and the contents of the registers differ from State to State because of the different regulatory regimes that apply. The contaminated land registers are not comprehensive. The simplest way for buyers to obtain information is to make the relevant applications to the local council. If there are particular concerns regarding the types of buildings, contamination or the impact of threatened species on development potential, then specialist advice may need to be obtained either from a planning or environmental consult or your legal advisors.
PERMITS AND LICENCES fOR bUILDING WORKS AND USE Of REAL ESTATE
For a building such as an ofce building or residential building the planning and environmental permits and licences that will need to be acquired will generally fall into the following categories: planning approval (such as development consent for a local council)
Fees are payable when applications are made. The fee varies with the application. It may be necessary to pay multiple fees including, for example for the planning approval and for each certicate required.
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A schedule of fees for lodging planning applications can be obtained from the relevant authorities, in particular through local councils where they are the approval authority or from the relevant government departments where they are the approving authority. The schedule may be varied. Approvals can impose requirements that the applicant pay levies or contributions towards the provision of public services, infrastructure and amenities.
If an incident occurs which poses a risk to the safety of people, or harm to the environment, then notices can be served by an appropriate authority requiring the cleaning up of the incident and prevention of the incident in future. The approval authority will differ depending upon the incident. Typically: local authorities will have powers in respect of dangerous circumstances, for example, on building sites and to protect public safety a State Department or EPA will have power to issue prevention notices and clean up notices in respect of pollution incidents a State Department or EPA will have powers to issues clean up notices in respect waste or contaminated land. A specic provision of a licence may require prevention and clean up as well. Each State has reporting obligations for certain incidents.
CONTAMINATED LAND
Where there is contaminated land, regulatory authorities will generally require clean up where there is risk to the health of people or to the environment. Generally, the process will include a process of consultation prior to the service of a clean up notice (except in the case of emergencies or where there are other factors to mitigate against the consultation process). Where clean up and prevention orders are served it is an offence not to comply with them. The costs of complying with such orders may in some cases be recovered from the original polluter, if they can be located. Contaminated land issues are particularly relevant where residential development is taking place on land previously used for commercial or industrial uses or for certain agricultural or institutional uses. In those circumstances, particular care needs to be taken to understand the history and condition of the site. Legislation in most States and Territories regulates the use of contaminated land. The relevant EPA may have power to issue investigation or remediation orders in relation to contaminated land. Typically, the EPA can serve orders on the original polluter or on the owner or occupier of the contaminated land. Remedial standards vary across jurisdictions. Numerous occupational health and safety issues arise in relation to work on a contaminated site, and State and Territory legislation deals with such matters. Risk and liability containment issues become important where contaminated land is concerned, necessitating careful drafting of contracts for the purchase and sale of contaminated land.
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NATIVE TITLE
Native title has become an area of major signicance since the rights of indigenous groups to certain land were recognised by the High Court of Australia in the 1988 Mabo decision. Commonwealth legislation was introduced in 1993 to regulate dealings in land that may affect native title and grant procedural rights to those claiming native title. Native title has an impact on many mining and infrastructure projects. In many cases, a project developer must negotiate a suitable agreement with the indigenous groups claiming native title before the project can proceed.
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GREEN bUILDINGS
In Australia, sustainable building design is regulated at a State and Federal level. The Building Code of Australia (BCA) sets out minimum energy efciency requirements for all new buildings and major refurbishments in Australia. At a Federal level, the Energy Efciency Opportunities Act 2006 aims to improve the identication, evaluation and implementation of energy efciency opportunities by large energy using businesses. Also, from 2010, energy efciency disclosure obligations will apply to commercial ofce buildings. Some States also regulate sustainable building design. For example, in NSW, there is a program known as the Building Sustainability Index (BASIX) which assesses a residential buildings energy efciency and water reduction achievements. Every development application for a new home or residential at building must be submitted to the local council with a BASIX Certicate. The design of residential buildings must meet minimum targets before a BASIX Certicate can be issued. There are also a number of voluntary environmental rating tools that have been developed to assist in quantifying and comparing the sustainability of buildings, such as the NABERS Energy and Green Star rating tools. Increasingly, sustainability targets for commercial buildings are being imposed by consent authorities based on the NABERS Energy and Green Star rating tools.
Key issues
There is an increasing awareness and demand for sustainable real estate development in Australia which presents both opportunities and increased regulation. There are stringent land use controls in place to protect the health of the population and of the environment. When planning to invest in Australian real estate it is essential to be aware of environmental laws and regulation of these laws.
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Useful websites
BLAKE DAWSON AUSTRALIAN SECURITIES EXCHANGE (ASX)
www.blakedawson.com The Blake Dawson website includes information about our rm, updates on recent legal developments, partner proles and contact details.
jONES LANG LASALLE
www.joneslanglasalle.com This website includes information for real estate owners, occupiers and investors, as well as details about Jones Lang LaSalles advisory services.
PROPERTY
www.ato.gov.au The Australian Taxation Ofces website includes information for business, large corporates and multinationals.
ENVIRONMENT
www.propertyoz.com.au The Property Council of Australia is the peak industry body for the Australian commercial real estate sector.
FOREIGN INVESTMENT
www.environment.gov.au The Environment Portal provides access to services and information provided by Federal, State and Local Governments.
AUSTRALIAN BUREAU Of STATISTICS (ABS)
www.rb.gov.au The Foreign Investment Review Board examines proposals by foreign interests to undertake direct investment in Australia.
GOVERNMENT INfORMATION
www.abs.gov.au The ABS website provides statistics for a wide range of economic and social indicators.
AUSTRALIAN LEGAL MATERIALS (LEGISLATION AND CASE LAW)
www.gov.au The Government Entry Point provides access to Australian Federal, State, Territory and Local Government websites. www.business.gov.au The Business Entry Point is a government resource for business.
CORPORATE REGULATION
www.law.gov.au An online resource providing information about the Australian legal system and relevant government organisations. www.austlii.edu.au This website provides access to Australian legal materials.
TOURISM AUSTRALIA
www.asic.gov.au The Australian Securities and Investments Commission regulates Australias companies.
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ADELAIDE
LIVERpOOL
NORTH SYDNEY
Level 22 Grenfell Centre 25 Grenfell Street Adelaide SA 5000 t 61 8 8233 8888 f 61 8 8233 8836
BRISBANE
Suite 5 Level 5, 33 Moore Street Liverpool NSW 2170 t 61 2 8777 5533 f 61 2 8777 5566
Level 27 North Point 100 Miller Street North Sydney NSW 2060 t 61 2 9936 5888 f 61 2 9957 5126
PARRAMATTA
MASCOT
Level 33 Central Plaza One 345 Queen Street Brisbane QLD 4000 t 61 7 3231 1311 f 61 7 3231 1313
BROOKVALE
Level 3 Sydney Airport Centre 15 Bourke Road Mascot NSW 2020 t 61 2 9693 9800 f 61 2 9313 5384
MELBOURNE
Level 8 79 George Street Parramatta NSW 2150 t 61 2 9806 2800 f 61 2 9633 9923
PERTH
Level 21 Bourke Place 600 Bourke Street Melbourne VIC 3000 t 61 3 9672 6666 f 61 3 9600 1715
Level 3 St Georges Square 225 St Georges Terrace Perth WA 6000 t 61 8 9483 8403 f 61 8 9481 0107
SYDNEY
CANBERRA
MONA VALE
Level 9 15 London Circuit Canberra ACT 2601 t 61 2 6257 3099 f 61 2 6248 6038
GLEN WAVERLEY
Suite 501 20 Bungan Street Mona Vale NSW 2103 t 61 2 9979 8844 f 61 2 9979 4488
NEWCASTLE
Level 18 400 George Street Sydney NSW 2000 t 61 2 9220 8500 f 61 2 9220 8555
Ground Floor Brandon Ofce Park 540 Springvale Road Glen Waverley VIC 3150 t 61 3 9565 6666 f 61 3 9562 1725
Corner Hunter and Auckland streets Newcastle NSW 2300 t 61 2 4929 1205 f 61 2 4929 2437 www.joneslanglasalle.com.au
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Les Koltai
pARTNER, SYDNEY REAL ESTATE t 61 2 9258 6113 les.koltai@blakedawson.com
Michael Ryland
PARTNER, SYDNEY CORPORATE t 61 2 9258 5627 michael.ryland@blakedawson.com
ADELAIDE Level 4 151 Pirie Street Adelaide sa 5000 t 61 8 8112 1000 f 61 8 8112 1099 BRISBANE Level 36 Riverside Centre 123 Eagle Street Brisbane qld 4000 t 61 7 3259 7000 f 61 7 3259 7111 CANBERRA Level 11 12 Moore Street Canberra act 2601 t 61 2 6234 4000 f 61 2 6234 4111 MELBOURNE Level 26 181 William Street Melbourne vic 3000 t 61 3 9679 3000 f 61 3 9679 3111 PERTH Level 32 Exchange Plaza 2 The Esplanade Perth wa 6000 t 61 8 9366 8000 f 61 8 9366 8111 SYDNEY Level 36 Grosvenor Place 225 George Street Sydney nsw 2000 t 61 2 9258 6000 f 61 2 9258 6999
PORT MORESBY Mogoru Moto Building Champion Parade (po box 850) Port Moresby Papua New Guinea t 675 309 2000 f 675 309 2099 SHANGHAI Suite 3408-10 34th Floor, CITIC Square 1168 Nanjing Road West Shanghai 200041, prc t 8621 5100 1796 f 8621 65292 5161 SINGApORE Unit #14-00 Level 14, ASO Building 8 Robinson Road Singapore 048544 t 65 6438 7886 f 65 6438 7885
ASSOCIATED OFFICE JAKARTA Soebagjo, Jatim, Djarot Plaza DM 17th Floor Jalan Jenderal Sudirman Kav 25 Jakarta 12910, Indonesia t 62 21 522 9765 f 62 21 522 9752 www.blakedawson.com
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