foreign investors - buying or selling property

FOREIGN INVESTORS:

Buying or Selling Property

Presented on Friday, 27 November 2015 Legalwise Seminars

Conveyancing Practice and Procedure Master Class Intercontinental Melbourne

ANNE MARIE GASBARRO Partner – Property

Expert advice. Practical solutions. Personal service. Level 11, 575 Bourke Street, Melbourne Vic 3000 Australia GPO Box 38, Melbourne 3001 | DX 400 T 03 8621 2888 F 03 9614 0880 | www.mckeanpark.com.au

Expert advice. Practical solutions. Personal service. 1

Disclaimer: This update provides a summary only of the subject mater covered and is only meant as a guide. No person should rely on the contents as a substitute for legal or other professional advice. Recipients should take steps to inform themselves before acting on any information in this document.

Foreign Investors: Buying or Selling Property

Anne Marie Gasbarro – Partner, McKean Park

November 2015

Property lawyers and conveyancers have always had to have an understanding of the laws applicable

to the purchase of Australian real estate by foreign investors and of the policies and procedures of the

Foreign Investment Review Board (FIRB) but I think it is true to say that for the most part (except for

those of us with a practice involving a large number of foreign investors) we have not had to be too

concerned about this area of law which has remained largely unchanged since 1975.

Due to a number of legislative changes some of which have already come into operation and others

that are likely to come into effect between 1 December 2015 and 1 July 2016, property lawyers will no

longer be able to avoid foreign investor issues. Lawyers will have to make enquiries to determine

whether their client (and in some cases whether the other party) is a foreign person and if so,

consider what the legal and tax implications are in light of the transaction at hand.

This paper is divided into the following nine sections:

Overview of the changes to the foreign investment framework

Defining the limitations on foreign investment in Australian land

Navigating the approval process for purchasers

Obtaining advanced approval certificates for developers selling off the plan

Foreign purchaser additional duty

Absentee owner land tax surcharge

Proposed capital gains tax (CGT) withholding tax regime for foreign owners

Best practice when acting for a vendor

Best practice when acting for a purchaser



Overview of the Changes to Foreign Investment Framework

(i) Background

Foreign investment in Australia has been primarily regulated by the

Foreign Acquisitions and Takeovers Act 1975 (Cth) (the 1975 Act) which came into

force on 1 January 1976;

The Foreign Takeovers (Notices) Regulations 1975 and the Foreign Acquisitions and

Takeovers Regulations 1989 (the Regulations) and

Australia’s Foreign Investment Policy (the Policy).

The Foreign Investment Review Board (FIRB) is a non statutory body established in 1976 to

advise the Government and the Treasurer on the Policy and its administration. The FIRB

examines proposals by foreign persons to invest in Australia and makes recommendations to

the Federal Treasurer on whether those proposals are suitable for approval under the Policy.

As such the role of the FIRB is advisory only. The Treasurer has the authority to reject

proposals considered to be contrary to Australia’s national interest.

On 25 February 2015 the Government released a discussion paper entitled “Strengthening

Australia’s Foreign Investment Framework” which followed the recommendations contained in a

report by the Committee established to hold an inquiry into “Foreign Investment and the

National Interest”. After a series of consultations, the Government announced a revised foreign

investment framework on 2 May 2015 and advised it would introduce legislation into Parliament

to ensure the reforms commence on 1 December 2015.

The following legislation was subsequently introduced and the status of each Bill (as at the date

of writing this paper) is as noted:

Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (the Foreign

Acquisitions Bill) – awaiting final reading by the Senate

Foreign Acquisitions and Takeovers Fees Imposition Bill 2015 (the Imposition Bill) –

passed by both Houses on 11 November 2015 and awaiting assent

Register of Foreign Ownership of Agricultural Land Bill (the Register Bill) – passed by

both Houses on 11 November 2015 and awaiting assent

The existing Regulations will be repealed and replaced with the Foreign Acquisitions and

Takeovers Regulation (2015) (the new Regulations) which at the date of writing were still in

draft form (the consultation period having ended only on 31 October 2015) but expected to be

finalised in time to commence on 1 December 2015 together with schedule 1 of the Foreign

Acquisitions Bill, the Imposition Bill and the Register Bill. The Policy was also amended in June

of this year.

(ii) The Key Changes

In brief the key changes relevant to real estate are:

the definition of “foreign person” is extended to include foreign governments.

the introduction of fees on all foreign investment applications.



the transfer of screening and compliance residential real estate functions from the FIRB

to the Australian Taxation Office (ATO) to improve compliance and enforcement of the

foreign investment rules by the ATO’s use of sophisticated data matching systems and

specialised staff with compliance expertise. The transfer of compliance functions

commenced in May this year but the ATO will begin the screening function from 1

December 2015.

stricter penalties to make it easier to pursue persons that breach the rules and to

ensure they do not profit from such breach:

substantial increase in existing criminal penalties

introduction of a civil pecuniary penalty and infringement notice regime

new criminal and civil penalties imposed on property developers who fail to

comply with the advanced approval “off the plan” conditions

the new penalty regime will only apply to breaches of the foreign investment

rules that occur on or after 1 December 2015.

new criminal and civil penalties imposed on third parties (such as accountants, lawyers,

migration agents and real estate agents) who knowingly assist a foreign person to

breach the rules.

increased regulation of investment in agricultural land. By amendment of the Policy, the

screening threshold for agricultural land was lowered from $252 million to $15 million

(cumulative) effective from 1 March 2015.

the establishment of a Register of Foreign Ownership of Agricultural Land. It is

expected that in time this will be extended to cover all land in foreign ownership

(including residential land).

introduction of a new $3 million limit on the acquisition of new dwellings by foreign

persons from developers using the advanced approval off the plan certificate (by

amendment to the Policy and effective from 1 July 2015).

removal of the lower threshold of $5 million for developed commercial land that is

heritage listed.

increase in the substantial interest (control) threshold for single foreign persons from 15

to 20%.

increase in the screening threshold for some commercial real estate from $55 million to

$252 million (non sensitive – such as accommodation facilities, office and industrial

buildings, but not mines and critical infrastructure).

Schedule 1 of the Foreign Acquisitions Bill repeals all the substantive provisions of the

1975 Act and represents a substantial rewrite of its provisions intended to modernise

and simplify its terms. Many key terms have been redefined and some abandoned for

new terms. It will be interesting to see what substantive and practical impact some of

these changes have.



(iii) The Amnesty Period

In May this year the Government announced a reduced penalty period (RPP) for all foreign

investors who voluntarily disclose breaches of Australia’s residential real estate foreign

investment rules.

The RPP is administered by the ATO for the FIRB and will end on 30 November 2015.

If a foreign person voluntarily discloses a breach of the rules by 30 November 2015 they may:

be given 12 months to resell the property, instead of the usual 3 month period

not be referred for criminal prosecution.

Disclosure must be made by completing the “reduced penalty disclosure form” which can be

found on the FIRB website [www.firb.gov.au] and submitting it electronically. The form can be

completed and submitted by Lawyers for their clients.

There is also provision for reporting a suspected breach of the foreign investment rules by

completing and submitting the “foreign investment breach reporting form” which can also be

found on the FIRB website. Persons reporting a breach can remain anonymous, if they wish.

Interestingly, one month after the Government announced its plans to strengthen the foreign

investment rules the then Treasurer Joe Hockey announced that the ATO were investigating

nearly 200 cases where the foreign investment rules for residential real estate may have been

breached and by August this year that figure had jumped to 462 cases under investigation due

to the Government’s crackdown. Only last week on 17 November the Herald Sun reported that

a Chinese tycoon had been ordered to sell his $5 million Hawthorn mansion (which he bought

in May this year at auction without getting FIRB approval), and that there were now 532 cases

being probed by the ATO.

If you are aware of a breach by your client of the residential real estate foreign

investment rules you should strongly advise your client to take advantage of the

amnesty before it ends on 30 November 2015.



Defining the Limitations on Foreign Investment in Australian Land

Please note that all references to “the Act” in this part and in the next two parts of my paper are

references to the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 assuming the

Bill will be passed by both Houses of Parliament and assented to as it presently exists and assuming

Schedule 1 will commence on 1 December 2015 as expected.

(i) Who is a Foreign Person?

The term “foreign person” is central to the Act.

A foreign person is

a. an individual who is not ordinarily resident in Australia;

b. a corporation in which an individual not ordinarily resident in Australia, a foreign

corporation or a foreign government holds a substantial interest;

c. a corporation in which two or more persons, each of whom is an individual not ordinarily

resident in Australia, a foreign corporation or a foreign government holds a substantial

interest;

d. the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign

corporation or a foreign government holds a substantial interest;

e. the trustee of a trust in which two or more persons, each of whom is either an individual

not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an

aggregate substantial interest;

f. a foreign government.

It is important to note however that for the purpose of acquisitions of interests in Australian

land the following are essentially excluded from the definition of “foreign person”

an Australian citizen living overseas;

a company incorporated in Australia that is a “foreign person” only because of direct

interests held in it by Australian citizens living overseas and

a trustee of a trust if the trustee is a “foreign person” only because of direct interests

held in the trust by Australian citizens living overseas.

A person is ordinarily resident in Australia if

their continued presence in Australia is not subject to time limits imposed by law (that

is, they can remain in Australia indefinitely, for example New Zealand citizens and

those holding permanent visas) and

the person has actually been in Australia for 200 or more days in the previous 12

months.

A substantial interest occurs with a corporation when a single foreign person holds an

interest of 20% or more, or several foreign persons hold an interest of 40% or more, in the

corporation.



A substantial interest in a trust occurs when a single foreign person (and any associates)

hold a beneficial interest of 20% or more, or several foreign persons (and any associates)

hold a beneficial interest of 40% or more, of the income or property of the trust.

It is important to note that

the definition of “substantial interest” has been changed by the Foreign Acquisitions Bill

and is now a more general definition which I suspect is designed to have greater reach.

The former concept of “controlling interest” has been essentially abandoned.

to determine whether a person holds a substantial interest, or two or more persons hold

an aggregate substantial interest, interests of associates of the person or persons are

also taken into account. The term “associate” is very broadly defined in the Act.

The concept of “substantial interest” is probably the most complex in the Act and

requires careful consideration of many other defined terms and sections of the Act that

relate to it. In a nutshell however it generally comes down to an analysis of who has

control of the voting power, who holds the shares or who controls the assets, that is,

who can influence financial and policy decisions.

(ii) What are the restrictions on foreign persons buying real estate in Australia?

Foreign persons must notify the FIRB and get prior approval to acquire “an interest” in

Australian land.

a. What is an interest

The most obvious interest is a legal or equitable interest acquired by buying Australian

land or acquiring a transfer of Australian land in some other way but also includes

shares (or other security) in a corporation that owns Australian land and which

entitles the holder to occupy a dwelling (e.g. company share flat).

a lease or licence which gives rights to occupy Australian land for a period

exceeding 5 years (e.g. a leasehold or licence based interest in a retirement

village unit or a caravan park lease).

income or profit sharing arrangements from the use of or dealings in Australian

land exceeding 5 years.

an agreement giving profit a prendre rights (that is, the right to take something off

another persons land or out of the soil of that land) for a period exceeding 5

years

shares or units in an Australian land corporation, agricultural land corporation,

Australian land trust, agricultural land trust or the trustee of such trusts if the

trustee is a corporation.

However, an interest in a time share scheme (up to a maximum of 4 weeks per year) is

not an “interest” for the purposes of the Act.



A person is considered to acquire an interest in Australian land even if

the person already has an interest in the land and the person increases their

interest

the person holds or acquires the interest jointly with one or more other persons

the person acquires an option or some other right to acquire such an interest

(whether an option or right is presently exercisable or subject to conditions).

A person who acquires an interest

by Will (inheritance) or

by operation of law (e.g. court order)

is not taken to have acquired an interest for the purposes of the Act.

b. What is Australian land?

Australian land is land in Australia which is

Agricultural land – land used or that could be used, for a primary production

business (includes land partially used for a primary production business or land

that could only be partially used for a primary production business).

Commercial land – all land except

land used wholly and exclusively for a primary production business

land on which there is at least one dwelling (except commercial

residential premises as defined in the GST Act) or

land on which the number of dwellings (except commercial residential

premises) that could reasonably be built is less than ten

Residential land – land on which there is at least one dwelling or on which the

number of dwellings that could reasonably be built is less than ten. It does not

include land used wholly and exclusively for a primary production business or

land on which the only dwellings are commercial residential premises. Hobby

farms and rural residential blocks are considered to be “residential land”

The term “land” includes a building or a part of a building.

The definitions above are not intended to be mutually exclusive.

c. How do the restrictions apply to each category of Australian land?

Agricultural Land

Foreign governments must seek approval before acquiring any interest.

Private foreign persons must seek approval before acquiring any interest of $15 million

or more (cumulative – including any agricultural land already held) effective from 1 March

2015.



Foreign persons who hold an interest in agricultural land, must by 30 December 2015

register that interest on the Register of Foreign Ownership of Agricultural Land (the

Register). The Register will be maintained by the ATO and submissions to the Register

must be made online through the ATO website. All acquisitions must generally be

registered within 30 days. Significant penalties apply for failing to comply.

Commercial Land

The restrictions depend on whether the commercial land is developed commercial land

(generally includes offices, factories, warehouses, hotels and retail premises) or vacant

land for commercial development.

A foreign person must seek approval to acquire an interest in

developed commercial land valued at $55 million or more except for a property

that is to be used immediately “as is” and solely for the foreign person’s existing

or proposed business activities in Australia.

vacant land for commercial development regardless of the value of the land.

Generally such proposals are approved subject to development conditions.

Foreign Governments must seek approval for all acquisitions regardless of value.

Residential Land

The Government’s general policy is that foreign investment in residential land should

increase Australia’s housing stock and it is this policy that underpins the restrictions and

decisions made by Treasury.

For the purpose only of residential land the following persons do not need to obtain

approval and are essentially excluded from the definition of “foreign person”

(i) a New Zealand citizen

(ii) a foreign national who holds an Australian permanent resident visa

(iii) a company incorporated in Australia that is a “foreign person” only because of a

direct interest held in it by a person described in (i) and (ii) above,

(iv) a trustee of a trust where the trustee is a “foreign person” only because of a

direct interest held in the trust by a person described in (i) and (ii) above,

(v) a foreign national buying a property with their Australian citizen spouse or de

facto partner, as joint tenants. [Note: the acquisition cannot be as tenants in

common].

The restrictions imposed depend on the type of residential real estate involved.

New Dwellings

Approval is required but is generally granted.

“New dwelling” is a dwelling purchased directly from the developer and not previously

occupied for more than 12 months in total.



Includes a dwelling in an extensively refurbished (but not new) building where the

building’s use has changed from non residential to residential (e.g. warehouse

conversions), but does not include renovated or refurbished existing dwellings.

Vacant land

Approval is required but is generally granted subject to the condition that continuous

construction commences within two years of FIRB approval.

This applies to vacant land acquired for the construction of a single dwelling or for

multiple dwellings.

Established dwellings

Non resident foreign persons cannot buy established dwellings.

A foreign company may apply for approval to buy an established dwelling to

accommodate Australian based staff only if it

carries on a substantial business in Australia and

undertakes to sell the property if it remains vacant for 6 months or more.

Temporary residents may apply for approval to acquire one established dwelling.

Such applications are generally granted on condition that

the property is vacant upon settlement

the property is used as the person’s residence in Australia

no part of the property is rented and

the property is sold when it ceases to be the persons principal place of residence

(that is, the earlier of when the person leaves Australia or vacates the dwelling).

A “temporary resident” is a person living in Australia and who

holds a temporary residency visa which allows them to remain in Australia for 12

months or more continuously or

has submitted an application for permanent residency and holds a bridging visa

allowing them to stay in Australia until the application has been finalised.

Established dwellings for redevelopment

A foreign person may acquire an established dwelling for the purpose of redevelopment

subject to approval.

“Redevelopment” means demolishing the existing dwelling and replacing it with multiple

dwellings (that is, the redevelopment must increase the number of dwellings on the land)

unless the dwelling is at the end of its economic life (that is derelict or uninhabitable). A

valuation and building report may be needed to prove that a dwelling has reached the

end of its economic life.

Approval is generally granted on the following conditions

existing dwelling cannot be rented out prior to demolition and

continuous construction commences within two years of approval.



Navigating the Approval Process

All foreign investment applications must be submitted through the online system on the FIRB website.

To use the online system you must first register as a user. Notwithstanding the transfer of residential

real estate functions to the ATO my understanding is that the application process will remain with the

FIRB.

There is an email service that can be used if you are unable to use the online system.

Once you have access to the online system you simply follow the prompts.

There are checklists on the website setting out the information needed to complete the application.

The process is not difficult to follow, the pain however begins on 1 December 2015 with the

introduction of application fees as follows:

Residential or agricultural land valued at $1 million or less $5,000.00

Residential or agricultural land valued greater than $1

million

$10,000.00 plus an additional

$10,000.00 for each additional

$1 million in property value

Commercial land $25,000.00

The FIRB are required to provide a decision within 30 days of lodgement of the application but may

extend this period by up to 90 days by issuing an interim notice (e.g. where further information is

needed). For applications lodged on or after 1 December 2015, if a decision is not provided within 40

days of lodgement of the application, the FIRB are deemed to have approved the application and the

foreign person can proceed with their intended acquisition.

In the last few years I have found that decisions are generally provided well before the end of the 30

day period.

Remember a contract must not be entered into until approval is granted, unless the contract is

conditional on FIRB approval.

WARNING: If you have instructions on your desk to submit an application to FIRB you must do so by

30 November 2015 if you are to avoid the application fees.



Obtaining Advanced Approval Certificates

A developer (whether a foreign person or not) may apply for prior approval to sell new dwellings in a

development to foreign persons.

Advanced approval is only available for

developments containing 100 or more dwellings that already have planning approval.

“Development” is defined as “one or more multi-storey buildings that are (or were) under one

development approval and contain at least the prescribed number of independent self-

contained dwellings (other than town houses)”

new dwellings – that is dwellings purchased directly from the developer and not previously

occupied for more than 12 months

apartments with a value of $3 million or less. If the price of a particular apartment in a

development is over $3 million the buyer cannot rely on the advanced approval and must

apply separately to the FIRB.

The application for the certificate must be submitted through the online system on the FIRB website.

There is an upfront fee payable as from 1 December 2015 of $25,000, with a reconciliation required

every six months based on actual properties sold to foreign persons and the relevant application fee

which would have applied if each foreign person was required to submit a separate application.

The advanced approval certificate allows the developer to sell 100% of the dwellings in the

development to foreign purchasers provided

the development is advertised both within Australia and overseas;

a report is provided to the FIRB six monthly of the actual sales to foreign persons and

a copy of the certificate is provided to each foreign purchaser.

For completeness I also wish to mention two other advanced approvals that are available to foreign

persons.

Annual program certificate – a foreign person who proposes to acquire one or more

interests in Australian land may apply for an exemption certificate for a 12 month period. The

purpose of this certificate is essentially to reduce the burden on developers who would

otherwise have to submit separate applications with respect to each interest they wish to

acquire.

The fee payable is $25,000 where the property value is $1 billion or less and $100,000

where the property value is above $1 billion.

Exemption certificate for established dwellings – a foreign person who proposes to buy an

interest in an established dwelling can obtain approval (lasting six months) to bid at multiple

auctions over the six month period while only paying one application fee.

The fee payable is $5,000.00 where the property value is $1 million or less and $10,000 for

properties over $1 million plus $10,000.00 per additional $1 million in value. Only one property

can be purchased and the foreign person must report back to the ATO once they have

purchased the property.

The fee paid for the certificate determines the highest bid the foreign person can submit at

auction.



Foreign Purchaser Additional Duty

A foreign purchaser who enters into an arrangement to acquire a residential property in Victoria on

or after 1 July 2015 must pay additional duty of 3% (Section 28A of the Duties Act 2000). For

properties with a dutiable value exceeding $960,000.00, the imposition of this additional duty

effectively means an increase in the duty rate from 5.5% to 8.5% for foreign purchasers.

(i) When does the additional duty apply?

The additional duty applies to any dutiable transaction that transfers an interest in

residential property. Therefore, if it is a transaction that is usually dutiable such as

a transfer of a land use entitlement (e.g. company share flats)

a transfer pursuant to a gift

a relevant acquisition in a landholder

it will also be subject to the additional duty.

Exemptions

The additional duty does not apply to transactions that are normally exempt from duty such as

transfers between spouses or de facto partners

transfers pursuant to a devise in a Will

transfers solely as a result of a change in trustee.

Concessions

Foreign purchasers are not entitled to a duty concession or a concessional rate of duty in

respect of the additional duty. For example, a foreign person who buys a residential property to

occupy as their principal place of residence is entitled to the concessional rate of duty if the

price is under $550,000.00, but the additional duty is payable at the full rate of 3% on the price.

The additional duty will have a significant impact on foreign purchasers acquiring apartments

“off the plan”. The foreign purchaser is still entitled to the “off the plan” concession on the

normal duty but the additional duty is payable on the full price. The impact of this can be seen

from the following examples:

Example 1:

Bill, a foreign purchaser bought an apartment “off the plan” for $1 million by contract dated

30 June 2015. The “off the plan” dutiable value of the property is $175,000.00. The duty

payable by Bill is $5,570.00.

Example 2:

Jane, also a foreign purchaser bought an identical apartment “off the plan” in the same

development for $1 million but her contract is dated 2 July 2015. The “off the plan” dutiable

value is $175,000.00. The duty payable by Jane is $35,570.00 calculated as follows:

Off the plan concessional duty $5,570.00

Additional duty (3% of $1 million) $30,000.00

$35,570.00



It will be interesting to see what impact this additional duty has on sales of “off the plan”

apartments to foreign persons and consequently on residential developments in Victoria.

Nominations

It is clear that the additional duty only applies to arrangements entered into on or after 1 July

2015. Contracts entered into before 1 July 2015 but that settle on or after 1 July 2015 are NOT

caught.

There is however some confusion as to whether the additional duty applies in respect of a

nomination made on or after 1 July 2015 pursuant to a contract entered into before 1 July 2015.

The State Revenue Office (SRO) position as stated on their website in the section headed

“Foreign Purchasers of Property”, is as follows:

a. If the nomination does not trigger a sub sale event (that is, no additional consideration and

no land development) the transaction will be deemed to have been entered into on the

date of the contract and not the date of the nomination and the additional duty will not

apply.

b. If the nomination triggers a sub sale event (that is, there has been additional consideration

or land development) the transaction is deemed to have occurred on the date of the

nomination and not the date of the contract; and the additional duty will apply.

c. With respect to “off the plan” contracts a sub sale event occurs upon nomination as there

has been land development and therefore the additional duty applies.

d. Whilst I can understand the reasoning set out in a) and b) it is the reasoning in c) that does

not make any sense to me. A nomination pursuant to an “off the plan” contract results only

in duty being payable by the nominee, not the named purchaser, on the basis that the land

development has been carried out by the vendor and is included in the price. Given this

why is the “land development” treated as a “sub sale” event for the purposes of the

additional duty?

In summary, nominations on or after 1 July 2015 with respect to “off the plan” contracts dated

before 1 July 2015 will trigger the additional duty, so beware.

(ii) What is a residential property for the purposes of additional duty?

Residential property is

land that has a building affixed that is designed or constructed solely or primarily for

residential purposes and that may be legally used as a residence or

vacant land upon which a foreign purchaser intends to affix a residential building.

What does this mean exactly?

is it vacant land zoned for residential purposes

is it vacant land with a permit to build



Change in use of land by foreign purchaser

A foreign purchaser who acquires a property that is not residential, but after the transfer

decides to develop it into a residential property must notify the SRO of their change in intention

within 14 days and pay the additional duty.

How is this going to be enforced?

(iii) Who is a foreign purchaser?

A foreign purchaser is a

a. foreign natural person – being a person who is not an Australian citizen or permanent

resident; or a New Zealand citizen entitled to reside in Australia (whether under a

temporary or permanent visa)

b. foreign corporation – being a corporation incorporated outside of Australia; or with a

controlling interest held by a

foreign natural person

another foreign corporation or

a trustee of a foreign trust

c. foreign trust – being a trust in which a substantial interest in the trust estate is held by a

foreign natural person

another foreign corporation or

another person that holds as trustee of a foreign trust

Broadly a controlling interest in a corporation is

more than 50% of the voting or potential voting power

more than 50% of the issued shares

the subject of a determination by the Commissioner taking into account the capacity

to determine or influence decisions about the corporation’s financial and operational

policies.

Broadly a substantial interest in a trust is

a beneficial interest in more than 50% of the capital of the trust (with discretionary

trusts – each beneficiary is taken to be entitled to the whole of the capital and

therefore one foreign beneficiary will result in the trust being a foreign trust)

the subject of a determination by the Commissioner taking into account the capacity

to control decisions about the administration and conduct of the trust.

The scope of this paper does not allow a detailed analysis of the definition of foreign

purchaser or foreign person but I do want to make the following brief comments:

The definition of “foreign person” in the Foreign Acquisitions and Takeovers

Legislation Amendment Act is not the same as the definition of “foreign purchaser” in

the Duties Act. Potentially a situation could arise whereby a person is a “foreign



purchaser” for the purposes of the Duties Act but not a “foreign person” under the

Foreign Acquisitions and Takeovers Legislation Amendment Act or vice versa.

When faced with a complex fact situation it is important to read the relevant legislation

carefully. Whilst policies and guidelines of the FIRB and the SRO are very helpful,

they are not a substitute for reading the legislation.

Assistance may be needed from accountants tax advisors and other professionals to

determine whether a corporation or trust comes within the definition of “foreign

purchaser” or “foreign person”.

Purchaser Statement

A Purchaser Statement (Duties Form 62) must be completed and lodged with the SRO for all

arrangements entered into on or after 1 July 2015, regardless of whether the transferee is a

foreign purchaser and irrespective of the type of property being acquired (that is, it is not limited

to residential properties).

A separate Purchaser Statement is required for each transferee.

Exemption by Treasurer

The Treasurer may exempt foreign corporations or trusts from the additional duty. There are

guidelines gazetted by the Treasurer setting out the basis upon which exemptions may be

granted. Applications must be directed to the SRO.

The exemption will only generally be available to foreign developers whose activities add to the

supply of housing in Victoria.

Penalties

Failure to identify as a foreign purchaser or to disclose the acquisition of residential property will

attract significant penalties.



Absentee Owner Land Tax Surcharge

From 1 January 2016 a 0.5% surcharge on land tax will apply to Victorian land owned by an absentee

owner (Land Tax Act 2005 as amended by the State Taxation Acts Amendment Act 2015).

As from 30 November 2015 there will be a portal available on the SRO website for persons to notify

the SRO that they are an absentee owner. Notification must occur by 15 January 2016 or substantial

penalties will apply.

The surcharge applies to all land (not just residential land). The surcharge does not apply if the land

is exempt from land tax (e.g. principal place of residence/primary production land) or if its unimproved

value is below the land tax threshold.

(i) Who is an absentee owner?

An absentee owner is an owner of land in Victoria and includes

a natural person absentee

an absentee corporation

an absentee trust

A natural person absentee is an individual who

is not an Australian citizen or permanent resident;

does not ordinarily reside in Australia; and

was absent from Australia on 31 December in the year before the relevant tax year or

was absent from Australia for more than 6 months (in total) in the calendar year

before the tax year.

An absentee corporation is a corporation incorporated outside Australia; or a corporation in

which

a natural person absentee

another absentee corporation or

a trust of an absentee trust

has an absentee controlling interest.

An absentee trust can be a discretionary, unit or fixed trust, which has at least one absent

beneficiary as follows:

one specified beneficiary of a discretionary trust;

one unit holder of a unit trust;

one beneficiary of a fixed trust with a beneficial interest in the land of the trust.

Controlling interest

Broadly, an absentee person holds an absentee controlling interest in a corporation if the

absentee person (either acting alone or in association with another absentee person) can

control



the composition of the Board

50% or more of the votes

50% or more of the share capital

Exemption by Treasurer

If the Treasurer after having regard to

the nature and degree of ownership and control

the practical influence on a corporation’s financial and operating policies

any practice or behaviour that affects the corporation’s financial and operating policies

believes that an absentee person should not be taken to hold an absentee controlling interest,

the Treasurer may exempt that person from being regarded as such. The result being that the

corporation will not be considered to be an absentee corporation and the surcharge will not

apply.

The exemption is intended to exclude corporations with commercial activities in Australia that

make a significant contribution to the economy and community.

There are numerous complex provisions in the Land Tax Act dealing with how the surcharge is

to be administered and calculated particularly with respect to

absentee corporations grouped together for land tax purposes

joint owners

the relationship and interaction between the general trust surcharge and the absentee

surcharge.

If you have clients that you know or believe to be absentee owners it is important that

you advise them of their obligation to notify the SRO of such by 15 January 2016 or risk

the imposition of penalties in addition to the surcharge.



Capital Gains Tax (CGT) Withholding Tax Regime for Foreign Residents

(i) Background

In November 2013 the Government announced it would proceed with a 10% capital gains tax

(CGT) non-final withholding tax regime on the disposal of Australian real property by foreign

residents.

In October 2014 the Government released a discussion paper for consultation and submissions

closed in August this year.

The Tax and Superannuation Laws Amendment (2015 Measures No. 5) Bill 2015 (the Bill),

which proposes to amend the Taxation Administration Act 1953 to create this new CGT

withholding tax regime was introduced into Parliament on 15 October 2015. At the date of

writing this paper the Bill was still before the House of Representatives.

The purpose of the regime is to assist in the collection of foreign resident’s, CGT liabilities.

Foreign residents are subject to CGT on the disposal of Australian assets but according to the

ATO voluntary compliance is very low and compliance action difficult.

(ii) What are the key features?

The key features of the proposed regime are as follows:

it will apply in relation to the acquisition of any property made on or after 1 July 2016.

Purchasers are generally taken to have acquired a property for CGT purposes on the

date they enter into a contract. Accordingly, the regime will only apply to transfers that

are made pursuant to contracts dated on or after 1 July 2016.

a purchaser who acquires a property from a person who they know, or reasonably

believe to be, a foreign resident will be required to retain 10% of the price and remit it

to the ATO.

upon payment of the tax to the ATO, the vendor will become entitled to a credit for the

amount paid against their tax liability in Australia.

the purchaser is only required to withhold the tax if the purchaser

knows the vendor is a foreign resident

reasonably believes the vendor is a foreign resident or

reasonably believes the vendor is not an Australian resident and either the

vendor has an address outside of Australia or the purchaser has been

authorised to pay monies relating to the transaction to a place outside of

Australia.

In transactions involving one or more vendors the regime applies if one of the vendors is

deemed to be a foreign resident.

the purchaser will be entitled to rely on a declaration provided by the vendor that the

vendor is an Australian resident, unless the purchaser knows the declaration to be

false. Where there are multiple vendors a declaration will be required from each

vendor.



the regime will not apply to purchasers of a property consisting of, or containing,

residential premises where the market value is less than $2.5 million. “Residential

premises” has the same meaning given to it in the GST Act – essentially land or a

building that is occupied or intended to be occupied as a residence or for residential

accommodation. The exemption does not apply to vacant land.

the purchaser will be required to pay the tax to the ATO on the day of settlement by a

specified electronic payment method.

if the purchaser fails to pay the tax to the ATO, the purchaser will be liable for

penalties and interest but it is the vendor that remains liable for the CGT liability.

there are provisions to protect the rights of secured creditors (e.g. mortgagees) to

realise or otherwise deal with their securities particularly if exercising a power of sale

and the proceeds of sale are insufficient to cover the debt and the tax liability.

(iii) Who is a foreign resident?

A “foreign resident” is broadly defined as a person other than an Australian resident.

An individual is generally an Australian resident if domiciled in Australia or present in Australia

for 183 or more days in the relevant financial year.

A corporation is a resident of Australia if it

is incorporated in Australia or

it carries on business in Australia and either its central management and control is in

Australia or its voting power is controlled by shareholders who are Australian

residents.

If the Bill is passed in its present form, the CGT withholding tax regime will have a huge

impact on how property lawyers conduct property transactions. Given this, I urge you to

familiarise yourself with the proposed regime. The Explanatory Memorandum to the Bill

is particularly helpful.



Best Practice When Acting for a Vendor’

1. Identify your client when instructions are first received (which of course you should now be

doing anyway given the commencement of the verification of identity rules) and determine by

asking the appropriate questions whether your client is a foreign person. [This will be

particularly important if the CGT withholding tax regime is introduced.]

2. If your vendor is a foreign person and you become aware that the vendor breached the

foreign investment rules when it acquired the property, or has failed to comply with tax

obligations in any federal or state legislation you must advise the client in writing of the

consequences and advise them that the breach should be reported.

3. If the CGT withholding tax regime becomes law it will become important to consider what

special conditions (if any) should be included in the contract to protect the vendor against tax

being withheld at settlement by the purchaser (where the purchaser is not a foreign resident)

or what options may be available in the event the vendor is a foreign resident.

4. If the vendor is a developer and is selling apartments “off the plan” consider whether the

developer is entitled to obtain advanced “off the plan” approval to sell apartments to foreign

persons and advise the vendor accordingly.

5. Advise developer clients who have obtained approval to sell apartments “off the plan” to

foreign persons of the conditions of the pre approval and of the consequences of not

complying. Substantial civil and criminal penalties will apply from 1 December 2015.

6. Include in your precedent standard contract of sale a special condition whereby the purchaser

warrants that FIRB approval is not required to purchase the property.

7. Where a contract is being prepared after a sale has been negotiated and you know or have

reason to believe the purchaser is a foreign person you should advise your client that the

contract should be conditional on FIRB approval or that the contract should not be entered

into until the purchaser has obtained FIRB approval. Advise of the consequences of each

course of action.



Best Practice When Acting for Purchasers

1. Identify your client when instructions are first received and determine by asking appropriate

questions and making appropriate enquiries whether your client is a foreign person.

2. If your client is a foreign person consider carefully the type of property they wish to purchase

and provide advice as to whether FIRB approval is required. Seek instructions to make an

application to FIRB if relevant.

3. Advise your client that they must not sign a contract until FIRB approval has been obtained,

unless the contract is made conditional upon FIRB approval. Carefully draft any “subject to”

clause to ensure that the contract cannot become binding until approval has been obtained.

4. If your client has already entered into a contract to purchase a property in breach of the FIRB

requirements advise your client immediately of the consequences of the breach and that the

FIRB must be notified. Provide advice also as to the consequences of a breach of any

warranty contained in the contract and consider whether a retrospective application for FIRB

approval is possible.

5. Advise your client of the liability for additional duty and the land tax surcharge before any

contract is entered into.

6. Consider all relevant laws and ensure that your client has been properly advised.

7. Be mindful that foreign investment and tax laws applicable to foreign persons are complex

and wide reaching.

If you are unsure of the application of the relevant laws advise your client that it would be

prudent to seek further advice from another lawyer or other professional specialised in this

field.

8. Remember, that a foreign person who enters into a contract without first obtaining FIRB

approval is guilty of a criminal offence, however, the contract they have entered into to

purchase the property is not invalidated by the illegal act and therefore the vendor can retain

the deposit and sue the purchaser for breach of contract.

9. Always err on the side of caution and do not try to find creative ways around the foreign

investment rules and tax obligations.

According to the Legal Practitioners Liability Committee (LPLC) [see their website]

claims relating to foreign investment laws since 2010 have arisen due to three

reasons

Not asking the client whether they are a foreign person – identifying your

client is a must.

Not knowing the relevant law – reading the legislation is a must, there is no

substitute for it even though there are very useful guides and other information

on the FIRB, SRO and ATO websites.

Trying to find a way around statutory requirements – don’t do it.



if you become aware of a breach of the foreign investment rules and your client does

not accept your advice that the breach should be reported, you must terminate the

retainer. There is also a suggestion that you should consider carefully whether there

is any obligation upon you to notify the relevant authority of the breach,

notwithstanding the termination of your retainer.

WARNING: – the Foreign Acquisitions and Takeovers Legislation Amendment Act imposes

severe criminal and civil penalties on third parties (including lawyers) who knowingly assist a

foreign person to breach the rules, including fines of $42,500.00 (for individuals) and

$212,500.00 (for companies). Similarly the tax laws have broad anti-avoidance provisions

which impose substantial penalties on third parties involved in tax avoidance.

foreign investors - buying or selling property

Documents