investing in australian real estate
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investing in australiaTRANSCRIPT
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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> 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.
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> 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]
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Allens is an independent partnership operating in alliance with Linklaters www.allens.com.au 170419/13