investing in australian real estate

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Guide to Investing in Australian Real Estate Allens is an independent partnership operating in alliance with Linklaters LLP.

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  • 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 [email protected]

    NicholasCowiePartnerT+61 2 9230 4025M+61 405 154 [email protected]

    VictoriaHolthousePartnerT+61 2 9230 4303M+61 410 693 [email protected]

    Brisbane

    PaulNewmanPartnerT+61 7 3334 3514M+61 414 483 [email protected]

    AlisterFitzgeraldPartnerT+61 7 3334 3365M+61 403 137 [email protected]

    JohnBeckinsalePartnerT+61 7 3334 3520M+61 416 103 [email protected]

    TonyDaviesPartnerT+61 7 3334 3250M+61 408 763 [email protected]

    Melbourne

    DavidMcLeishPartnerT+61 3 9613 8954M+61 411 864 [email protected]

    MichaelGravesPartnerT+61 3 9613 8814M+61 407 235 [email protected]

  • Allens is an independent partnership operating in alliance with Linklaters www.allens.com.au 170419/13