investing in australian real estate
Post on 15-Sep-2015
226 Views
Preview:
DESCRIPTION
TRANSCRIPT
-
Allens is an independent partnership operating in alliance with Linklaters LLP. 2013 Allens, Australia
Guide to Investing in Australian Real Estate
Allens is an independent partnership operating in alliance with Linklaters LLP.
-
The interest in Australian real estate is underpinned by:
Australiashigh-qualitystock
continuedeconomicgrowth
stablevaluations
accesstofunding
lowerinterestrates
higheryields
Overseas investors are facing challenges finding new growth opportunities in their own jurisdictions and need to look to stable countries like Australia to find appropriate, secure returns.
>
-
3TheAustralianrealestateindustryhasemergedinarelativelyhealthyconditionfollowingtheglobalfinancialcrisis.ThereisnowaweightofinboundcapitalfromoverseasinvestorsbeingdirectedintotheAustralianrealestatesectoratatimewhenthedomesticA-REITsectorisre-emerginginrecapitalised,acquisitionmode,andthenationsgrowingsuperannuationfundsaremoreoftenlookingtoinvestdirectlyinrealestate,ratherthanindirectlyviavariouslistedandwholesalefundsplatforms.Allofthisiscreatingintensecompetitionfortraditionalprimeoffice,retailandindustrialassetsbutisalsohighlightingopportunitiesinotherassetclasses.
InthisInvesting in Australian Real Estateguide,AllensrealestateexpertsidentifytheprimarylegalandregulatoryissuesthatoverseasinvestorswillfacewhenconsideringrealestateinvestmentopportunitiesinAustralia.Lookingatpre-saleissuessuchaslandownershipandduediligence,taxandregulatoryissues,thisguidewillassistoverseasinvestorsinplanningandsmoothlyimplementingtheirrealestateinvestmentsinAustralia.
> What you need to considerSomeofthekeymatterstodeterminebeforeinvestinginAustralianrealestateinclude:
Allensisabletoprovideinvestoranddeal-specificadviceonalloftheseareas.Ourexperienceisthatthisisbestdoneearlyinthedecision-makingprocess,inordertoensureanypossiblehurdlestoyourinvestmentareidentified,dealtwithindealterms,andprogrammedintodealtimetablesbeforecommitmentsaremadethatcannotbemet.
Whetheratruststructure(whichenablesredistributionofincometoothers)oracompanystructurewillbeused;
Ifacompanystructureisused,whethertoregisterasaforeigncompanyoperatinginAustraliaortoestablishlocalsubsidiaries;
Ifatruststructureisused,whetheritistobeamanagedinvestmenttrust(inordertotakeadvantageofconcessionaltaxrates)inwhichcasethenumberandcompositionofunitholderswillbeimportantandanAustralianfinancialserviceslicencemayberequired;
WhetherthecharacteroftheinvestororthenatureoftherealestatetobeacquiredwillrequireapprovalfromtheForeignInvestmentReviewBoard;and
Whattransactioncosts,dutiesandtaxeswillneedtobefactoredintothefinancialmodellingtoensureinvestmenthurdlesaremetbothatacquisitionstageandduringthelifeoftheinvestment.
> Overview
-
4> Pre-saleissuestoconsiderLand ownership in AustraliaEachAustralianStateandTerritoryhasitsownlandlaw,buttherearegeneralconsistencies.Whilemostinvestorswillpreferfreeholdtitle,insomejurisdictionsonlylongtermleaseholdtitleisavailable.
TheownershipofmostlandinAustraliaoperatesundertheTorrenstitlesystem,whichprovidesforregistrationoftitleatthelandregistryoftherelevantStateorTerritory.Eachregisterguaranteesanindefeasibletitletothoseregistered(withsomelimitedexceptions),whichmeansthatapersonstitletolandcangenerallybeconfirmedbyasearchoftheregister.FreeholdtitleisthemostcomprehensivetitlethatcanbeobtainedinAustralia,anditgivesanownerthemostrights.ItisalsothemostcommonformoftitleinAustralia.
CertainlandinAustraliacanonlybeheldunderaleasefromtheGovernment(knownasaCrownoraStateLease),particularlyintheACT,andinrespectofagriculturalareasinNewSouthWales,QueenslandandtheNorthernTerritory.Suchleasesareeitherinperpetuityorforalong-term,andgivethelesseemanyoftherightsthatafreeholdlandownerwouldenjoy.
Due diligenceLandinAustraliaiscommonlysoldonanasis,whereisbasisandtheprincipleofcaveatemptor(buyerbeware)applies.Thismeansthatyouwillgenerallyneedtoundertakeduediligenceofaproperty.Theextentoftheduediligencewillbedeterminedbythenatureoftheproperty,itslocation,andyourproposeduseanddevelopmentoftheproperty.
Whenyouareputtingtogetheryouracquisitiontimetable,youneedtoconsiderthetimerequiredforallrelevantdue diligence.
Legalduediligenceofapropertygenerallyincludes:
conductingasearchofthetitleatthelandregistry,todeterminetheownerandanyregisteredencumbrances(suchaseasements,mortgages,restrictionsonuseandagreementswithgovernmentbodiesrelatingtoworksortheuseoftheproperty);
applyingforsearchesfromvariousstatutoryauthorities,todeterminetheamountofgovernmentratesandtaxesapplicabletotheproperty,planningissues(suchaspermittedandprohibiteduses),proposedresumptionsandheritageissues;
reviewinganytenancydocumentsfortheproperty,toverifyincomeandidentifycapitalexpenditureandtenurerisks;and
consideringanyapprovalsorlicencesrequiredtoholdoroperatetheproperty.
Youmayengageotherconsultantstoundertakeavaluationoftheproperty,aphysicalinspection/assessmentofthepropertyanditsservicesandequipment,toidentifyfuturecapitalexpenditureandthelevelofcompliancewithbuildingcodesandenvironmentalduediligence.Financialinstitutionslendingmoneywilloftenalsoundertakeextensiveduediligenceonapropertyasapreconditionoffunding.
EachStateorTerritoryplacesdisclosureobligationsonapersonsellingrealestate,withconsequencesforprovidingfalseormisleadinginformation.However,thepotentialremediesdonotdisplacetheneedforyoutodothorough due diligence.
-
5> Issuestoconsiderwhenstructuring your deal
Acquiringrealestate
TherearevariouswaystoacquirerealestateinAustralia;forexample,adirecttransferfromoneentitytoanother,anacquisitionofthesharesorunitsheldbytheowner,acalloptionorputandcalloptionagreement,oralong-termlease.Therearelegal,regulatoryandtaxconsequencesforeachmethod,andconsiderationoftheseissueswillinfluencewhatisthemostappropriatemethodforyou.Forexample,theuseofaManagedInvestmentTrust,orofleasesandsubleasesofaproperty,mayhaveadvantagesforflowthroughorwithholdingtaxexemptions(seebelowinrelationtotaxissues).
Formsofownership
Australianlawsrecognisevariousformsofownershipofrealestate.Someofthemorecommonformsforcommercialrealestateinclude:
Trustatrusteeholdstherealestateontrustforthebenefitofoneormorebeneficiaries;and
Tenantsincommonwheretherearetwoormoreowners,andeachownerownsashareoftheproperty. That share can be dealt with separately.
Whileaforeignentitywilloftenuseacompanyasthetrusteethatownstherealestate,itislesscommonforaforeignentitytouseacompanytoowntherealestateinitsownright,asthisprovideslessflexibilityfortaxstructuring,incomedistributionandcapitalreturns.
Security structuring
Financialinstitutionswillrequirecertaintythattheyholdvalidandenforceablesecurityandwilloftenrequestoneormoreofthefollowingsecurities:
amortgageovertherealestate(includingthelandandimprovements);
achargeovertheassetsoftheowneroftheproperty;
achargeovertheassetsofanyotherentityintheborrowergrouprelevanttothebusinessortheproperty;or
guaranteesfromparententities.
ThestructureoftheborrowergroupisanimportantconsiderationinensuringthattheentitiesholdingAustralianassets can be isolated.
Regulatoryissues
Variousregulatoryissuescanflowfromthechoiceofownershipstructureused.Forexample:
AforeigncompanyacquiringrealestatemayneedtoberegisteredundertheAustralianCorporationsActasaforeigncompanyoperatinginAustralia.
Ifatrustisinvolvedinthestructure,itmayrequireanAustralianfinancialserviceslicence,ormayneedtobecomeregisteredasamanagedinvestmentschemeundertheCorporationsAct.
-
6> ForeignInvestmentReviewBoardForeignentities(ingeneralterms,anentitywhereasinglenon-Australianpersonorentityholds15percentormoreoftheentity,orwheretwoormoresuchnon-Australiansinaggregatehold40percentormoreoftheentity)arerequiredtoobtainapprovalfromtheAustralianTreasurerbymakinganapplicationtotheForeignInvestmentReviewBoard(FIRB)beforeacquiringaninterest(whichincludesfreeholdandleaseholdinterestsandinterestsincompaniesandtrusts)inAustralianrealestate(withsomelimitedexceptions).Theapprovalrequirementsareasfollows:
Fordevelopedcommercialrealestate(suchasfactories,offices,warehouses,hotelsandretailproperty)approvalwillberequiredifthevalueofthepropertyis$54millionormore(unlesstherealestateisheritagelisted;thena$5millionthresholdapplies).ForNewZealandandUSinvestors,a$1,078millionthresholdappliesinstead.Proposalsarenormallyapprovedwithoutconditions.
Forvacantlandforcommercialdevelopment,approvalisrequiredregardlessofthevalueoftheland,withapprovalsforproposalsusuallybeinggivensubjecttotheconditionthatacertainpercentageofthelandpricebeusedonconstructionofnewimprovementsandthatcontinuousconstructionofthedevelopmentcommenceswithinfiveyears.
Forruralland(beinglandusedwhollyandexclusivelyforthecarryingonofaprimaryproductionbusiness,andthatdoesnotincludelandusedforminingorstockagistment),approvalwillberequirediftheacquisitionisofaninterestinaprimaryproductionbusinesswherethetotalassetsofthebusinessexceed$248million(or$1,078millionforUSinvestors).Proposalsarenormallyapprovedwithoutconditions.However,thenewCommonwealthGovernmenthasforeshadowedareductionofthe$248millionthresholdto$15million.
IftheacquisitionisofsharesorunitsinacorporationortrustthathasinterestsinAustralianurbanlandthatmakeupmorethan50percentofthevalueofitstotalassets,thenanapprovalisgenerallyrequiredbeforemakingthatacquisition,regardlessofitsvalue.Proposalsarenormallyapprovedwithoutconditions.
Iftheentityacquiringtheinterestisasovereignwealthfundorotherforeigngovernmentinvestor(ingeneralterms,anentityownedorcontrolledbyaforeigngovernment,oranentityinwhichaforeigngovernmenthasmorethana15percentinterest),thenanapprovalisrequiredbeforepurchasinganyrealestate,regardlessofitsvalue.
Iftheacquisitionisofnewresidentialdwellings,thenanapprovalisrequired,regardlessofitsvalue.Proposalsarenormallyapprovedwithoutconditions.Forvacantlandforresidentialdevelopment,approvalisrequiredregardlessofthevalueoftheland,withapprovalsforproposalsusuallybeinggivensubjecttotheconditionthatcontinuousconstructionofthedevelopmentcommenceswithin24months.OwnersofnewresidentialdevelopmentsmayapplytoFIRBforpre-approvaltosellacertainnumberofthosedwellingstoforeignpersonswithouttheneedforthepurchaserofthedevelopeddwellingtoobtainseparateFIRBapproval.
Approvalsarenotnormallygrantedfortheacquisitionofdevelopedresidentialland,exceptinlimitedcircumstances.
FIRBhas30daysfromreceiptoftheapplicationtoprovidearesponse,butcanextendthisperiodbyupto 90 days.
Itispossibletoagreetoacquireaninterestinrealestatesubjecttoobtainingforeigninvestmentapproval.
-
7> TaxissuestoconsiderForeignentitiesintendingtoinvestinAustralianrealestateneedtoconsidertheAustraliantaxationconsequencesofsuchaninvestment.Inconsideringwhatstructuretoadopt,differentconsiderationsmayapplyforeachinvestorandeachinvestment.Consequently,theoptimalstructuremaydifferforeachinvestor.
ManagedInvestmentTrusts(MITs)InamovespecificallydesignedtoenhancethecompetitivenessoftheAustralianfundsmanagementindustryandtoincreaseitsabilitytoattractforeigninvestment,theAustraliantaxsystemwasamendedin2008tointroducegenerouswithholdingtaxconcessionstoforeigninvestorsparticipatingininvestmentstructuresqualifyingasMITs.
Forinvestors,thekeytaxbenefitoftheMITregimeisthatitgenerallyentitlesforeigninvestorsinaMITproducttoaconcessionalwithholdingtaxrateof15percent(downfromthestandard30percentratethatwouldotherwiseapply)inrespectofeligibledistributionsmadefromtheMIT.
InorderforatrusttobeanMIT,therearefourbroadrequirementsthatmustbesatisfied:
eitherthetrusteeofthetrustmustbeanAustralianresident,orotherwisecentralmanagementandcontrolofthetrustmustbeinAustralia;
thetrustmustbeamanagedinvestmentschemeoperatedbyafinancialserviceslicensee(asdefinedintheCorporationsAct);
thetrustmustsatisfycertainrequirementsaimedatensuringthetrustiswidelyheld;and
thetrustmustnotbeapublictradingtrustfortaxpurposes(whichgoestothenatureofthetrustsinvestmentsandbusiness).
InterestandotherwithholdingtaxesThiscanbeofconcern,firstwhereoverseasentitieshaveenteredintoloanswithAustralianfinancialinstitutionsandareobligedtowithholdtaxinthejurisdictionoftheirincorporation,and,second,whereoverseasfinancialinstitutionsareprovidingloanstoentitiesestablishedinAustralia.Themannerinwhichfinanceisrequestedisanimportantconsiderationinensuringthatawithholdingtaxexemptioncanbesoughtinrespectoftheloan,ratherthanaborrowerbeingobligedtogross-uppayments.
GoodsandservicestaxAustraliahasagoodsandservicestax(GST)regime.Itissimilartomanyvalue-addedtax(orVAT)andGSTregimesinotherjurisdictions.GSTinAustralia(currentlyattherateof10percent),althoughstrictlypayablebythevendorofrealestate,isgenerallypassedontoapurchaser.However,thesaleofapropertywillnotgiverise toGSTwhereitissoldasagoingconcern,whichisgenerallyapplicableforoccupiedcommercial,retailandindustrial properties.
DutyDuty(alsoknownasstampduty)ispayablebyapurchaseronatransferofland(withsomeexemptionsandconcessions)withthedutiablevaluegenerallycalculatedonthegreaterof:(a)themarketvalueoftheproperty; and(b)theconsideration(thepricepaid),inbothcasesincludingGST.
-
8EachAustralianStateadministersitsowndutysystem,withvaryingrates,exemptions,concessionsandtimingforpayment.Thelocationofthepropertywilldeterminetheapplicableregime.ThefollowingtableprovidesanexampleofthedutypayableineachStateorTerritorybasedonapropertywithadutiablevalueof$10million.
Dutypayableonpropertywithdutiablevalueof$10m*
NSW VIC QLD SA WA TAS NT ACT
$535,490 $550,000 $555,525 $543,830 $508,915 $445,185 $545,000 $550,000
* Ratesapplicableasat19July2013,andwiththeassumptionthatGSTisincluded.noadditionalpremiumsorsurchargesapplyandnoconcessionsorexemptions arerelevant.
IncometaxAustraliaimposesataxonthetaxableincomeofresidentsandnon-residents.Theincometaxrateforbothresidentandnon-residentcompaniesis30percent.
Generally,foreignentitiesinvestinginAustraliauseacompanyasthevehiclethroughwhichtheinvestmentismade.Incertainspecialcircumstances,atrustoralimitedpartnershipmaybeusedinsteadofacompany.CompaniesthatareresidentinAustraliaforAustraliantaxpurposesareliableforincometaxontheirAustraliansourcetaxableincomeandoncertainforeignsourceincome.CompaniesthatarenottaxresidentinAustraliaaregenerallyliableforAustralianincometaxonlyontheirAustraliansourceincome.
TheincometaxtreatmentofAustralianbranchesofforeigncompaniesandAustraliansubsidiariesofforeigncompaniesissimilarinmostrespects,andthereisgenerallynoadvantagefromanAustraliantaxperspectiveinusing a branch, rather than an Australian subsidiary.
CapitalgainstaxNon-residentsaretaxedoncapitalgainsarisingfromthedisposalofAustralianrealpropertyorondisposalofcertainnon-portfoliointerestsinentitiestheassetsofwhich,directlyorindirectly,consistprincipallyofrealpropertyinAustralia.Thisliabilitycanarisewhereonenon-residententitydisposesofitsinterestinanothernon-residententityiftheunderlyingassetsofthatotherentitydirectlyorindirectlyconsistprincipallyofrealpropertyin Australia.
Non-residentsarealsotaxedoncapitalgainsonthedisposalofassetsusedbythemincarryingonbusinessthrough a branch in Australia.
FundingtheinvestmentAninvestmentinAustralianrealestatemaybefundedbydebt,equityoracombinationofthetwo.Taxconsiderationsintheforeigninvestorscountryofresidence,aswellasAustraliantaxconsiderations,may berelevantindetermininghowtheinvestmentistobefunded.
WhereanAustralianresidentcompanythatiscontrolledbynon-residentsborrowstofinanceitsactivities,adeductionisgenerallyallowedforAustralianincometaxpurposesforinterestincurredinrespectoftheborrowing.
However,theamountofinterestthatisdeductiblemaybelimitedunderthincapitalisationrules.Underthoserules,iftheamountofacompanysdebtexceeds75percentofthevalueforthincapitalisationpurposesofitsassets,interestdeductionsmaybedeniedinrespectoftheexcessdebt.Insomecircumstances,itispossibletohavealevelofgearinghigherthan75percentifitcanbedemonstratedthattheamountofdebtrepresentsanarmslengthlevelofdebt.
-
9> AnnualratesandtaxesTherearevariousratesandtaxesincurredannuallybyanownerofrealestateinAustralia.TheyareleviedbytherelevantState,Territory,localgovernmentandStategovernmentauthority.Themaintypesare:
council(localgovernment)ratesgenerallybasedonthecapitalimprovedvalue(valueoflandandbuildings)orunimprovedvalue(landonly)oftheproperty,theratescontributetowardsthecostofrunningthecouncilandcommunityservices(eggarbagecollectionanddisposal,development,repairandmaintenanceofcommunitycentres,libraries,parksandgardensandlocalroads).Eachcouncilimposesadifferentrateforcalculatingtheratespayable;
waterratesusedfortheinstallation,repairandmaintenanceofwaterassets;and
landtaxcalculatedbyreferencetothetaxablevalueofaproperty(beingtheunimprovedorsitevalueoftheland).ThetaxablevalueofallpropertyofanownerwithinaStateorTerritoryisaggregatedtodeterminetherateoflandtaxpayable.ThefollowingtableprovidesanexampleoftheannuallandtaxpayableineachStateorTerritorybasedonacommercialpropertywithataxablevalueof$10million.
Annuallandtaxpayableonpropertywithtaxablevalueof$10m*
NSW VIC QLD SA WA TAS NT ACT
$183,676 $182,475 $175,000 $341,770.50 $139,650 $146,587.50 N/A+ N/A++
* Ratesapplicableasat1July2013,andwiththeassumptionthatasingle-holdingbasisandnoadditionalsurchargesapply.
+ NorthernTerritorydoesnotimposelandtax.
++CommercialpropertiesintheACTarenotsubjecttolandtax(since1July2012).
Ratesandtaxesaregenerallyabletobepaidbyquarterlyinstalmentsandarepassedontoatenantthroughtheoutgoingsprovisioninalease;however,thismaybeprecludedbylegislationforsomechargesforexample,landtaxinVictoriaandQueenslandisnotabletobepassedontoaretailtenantundereachofthoseStatesretaillease legislation.
Waterconsumptionisgenerallypaidbytheoccupierofapropertyandchargedseparately.
> PlanningapprovalsandheritageEachAustralianStatehasitsownsystemforadministeringplanninglaw,whichrelatestotheuseanddevelopmentofland.Ingeneralterms,eachparceloflandisallocatedazonethatwillspecifywhichusesarepermitted,permittedwithapproval,orprohibited.
Generally,planninglawisundertakenatthelocalgovernmentlevelinconsultationwithvariousgovernmentauthorities(egwater,powerandroadauthorities)butlargerprojectsmaybedealtwithatStatelevel.Interestedparties(suchasadjoiningowners,neighboursandthelocalcommunity)mayalsobeentitledtobeheardbeforeadecisionismaderegardingplanninglaws.Decisionsofthelocalgovernmentaresubjecttoreviewbytribunalsand courts.
PropertiesconsideredbytheStatetohaveculturalorhistoricalsignificance,includinginrespectofIndigenousculturalheritage,mayhavecertainrestrictionsontheiruseordevelopment,orobligationsimposedinrelationtotheirmaintenance.Heritageissuesareordinarilyconsideredaspartoflegalduediligence.
-
10
> ContaminationAlthougheachAustralianStatehasitsownlawsrelatingtothecontaminationofland,generallythepolluterpaysprincipleisapplied,whichmeansthepersonwhocausedthecontaminationisresponsibleforanyrequiredremediation.However,thevariousStateauthoritiesresponsiblefortheenforcementofenvironmentallawsinAustraliamayalsohaverecoursetotheowner,occupierormortgageeoflandincertaincircumstances(egwherethepolluternolongerexistsorcannotbefound).
Itisusualforindustrialproperties,orpropertieswherecontaminationissuspected,thatapurchasercommissionanenvironmentalconsultanttoprepareanenvironmentalreportaspartoftheduediligencefortheacquisitionor,atleast,reviewavailablereportsprovidedbyavendor.Thisinformationcanthenbeusedtoconsiderappropriateallocationofliabilitygoingforwardandanyindemnitiesthatmayberequired(includingwhetherthereisaneedforanysecurityinsupportoftheindemnities).
Thepotentialforongoingliabilityforcontaminationmayberelevantwhendecidingwhethertoproceedthroughanacquisitionofsharesoradirecttransferoftheasset.
> NativetitleAustraliarecognisesthatitsIndigenousinhabitantsmayretaintraditionalrightsoverland,andtheseareknownasnativetitlerights.
Alargenumberofgovernmentactionshavecompletelyextinguishedanypotentialnativetitlerightsoverland,andthisisthecaseforallregisteredfreeholdland,andformosttypesofleaseholdinterest.Consequently,nativetitleisusuallynotanissueforabuyeroflandinAustralia.
However,wherenativetitlemaynothavebeenextinguished,furtherinvestigationsmayberequired.
-
11
> ContactsSydney
MarkStubbingsRealEstateSectorLeaderT+61 2 9230 4257M+61 414 223 925Mark.Stubbings@allens.com.au
NicholasCowiePartnerT+61 2 9230 4025M+61 405 154 025Nicholas.Cowie@allens.com.au
VictoriaHolthousePartnerT+61 2 9230 4303M+61 410 693 038Victoria.Holthouse@allens.com.au
Brisbane
PaulNewmanPartnerT+61 7 3334 3514M+61 414 483 514Paul.Newman@allens.com.au
AlisterFitzgeraldPartnerT+61 7 3334 3365M+61 403 137 755Alister.Fitzgerald@allens.com.au
JohnBeckinsalePartnerT+61 7 3334 3520M+61 416 103 520John.Beckinsale@allens.com.au
TonyDaviesPartnerT+61 7 3334 3250M+61 408 763 590Tony.Davies@allens.com.au
Melbourne
DavidMcLeishPartnerT+61 3 9613 8954M+61 411 864 182David.McLeish@allens.com.au
MichaelGravesPartnerT+61 3 9613 8814M+61 407 235 221Michael.Graves@allens.com.au
-
Allens is an independent partnership operating in alliance with Linklaters www.allens.com.au 170419/13
top related