GUIDELINES FOR FOREIGNERS TO BUY PROPERTIES IN AUSTRALIA
In general, foreigners are not allowed to purchase established or second hand properties in South Australia regardless of whether it will be their home or an investment property. They are only permitted to buy properties that are new or under construction and must be approved by the Foreign Investment Review Board (FIRB).
The FIRB do not give a general approval to individuals so you need to obtain an approval for every specific property that you intend to buy. Approvals can be applied for online via https://firb.gov.au/ and a response will usually be received within 30 days.
If you enter into a contract to buy a property it is essential that it has a Special Condition which states that purchase is subject to approval by the FIRB within 30 days. Without this condition you risk being liable to the Vendor for a sale that you are legally barred from.
Regulations surrounding the purchase of properties by foreigners are relatively complex and have become even more so since 1st December 2015 when the FIRB introduced application fees and compliance penalties. Adelaide South Property is also well equipped to give you all the assistance you need to find a property to buy in Adelaide.
WHO NEEDS FIRB APPROVAL?’
On a temporary visa such as a spouse visa, 457 work visa, a Temporary Skill Shortage (TSS) visa or student visa:
• You can only buy one established dwelling and it must be to live in, however you will be required to sell it once you do not live there anymore.
• You can buy an investment property, however it must be a new property or vacant land to build a new property.
• You don’t need FIRB approval if you’re buying the property with an Australian citizen as joint tenants and you’re in a spousal relationship. This means it doesn’t apply to other relationships like business partners, mother/father and child, siblings, friends or relatives.
• The investment property must be a new property or vacant land to build a new property.
• You can’t buy an established dwelling.
• You can buy a new property in your name and rent it out to your child if they have a temporary visa.
However you are exempt if:
• The property developer has obtained an exemption certificate for the new property that you are buying.
• You inherited the property.
• You were awarded the property by a court order.
• You were awarded the property in a divorce settlement.
Please refer to the government department website for the full details of who is and is not eligible.
This guide will cover only the purchase of residential property for foreigners; different rules apply to the purchase of commercial properties.
Type of Property
The reason foreigners can’t buy new properties/dwellings is because the government wishes to encourage the construction of new properties that will increase the housing stock and boost the housing construction industry and therefore create jobs for locals.
So what is considered a “New” Dwelling? It’s one that has not been previously sold by a developer and has not been previously occupied for more than 12 months. New dwellings also refer to those extensively refurbished buildings where they have undergone a change of use from non-residential to residential.
However there are two slight exceptions:
1. Foreigners may be given approval to buy established dwellings if they want to demolish it and carry out redevelopment works.
2. Foreigners who own substantial businesses in Australia may obtain approval to purchase established dwellings for the purpose of housing their Australian-based staff subject to specific conditions.
Foreigners who own substantial businesses in Australia may obtain approval to purchase established dwellings for the purpose of housing their Australian-based staff subject to specific conditions.
There are two types of property that are almost assured to receive approval without conditions. They are new dwellings and vacant land. However one should note that the vacant land will normally be subject to construction within 24 months.
BUYING OFF-THE-PLAN COMPARED TO BUYING A NEWLY COMPLETED PROPERTY
• Buying off the plan apartments has become very popular due to the major selling point of stamp duty savings as buyers will pay stamp duty only on the proportion of the property already completed. However we see no reason why foreign investors should restrict themselves to purchasing off the plan properties as opposed to properly researched individual purchases.
• One major problem with buying Off-The-Plan is that it is not always possible to be 100% sure that what you have ordered or will be getting in the ‘package’ will be what you like. On the other hand when you buy a newly built house what you see is what you get – no uncertainty.
• Depending on how you have arranged finance if your bank needs to do a valuation of the finished home before agreeing to a loan, or the final payment on a loan, there is always a possibility that it will fall short of what was promised by the developer which will cause no end of problems.
FIRB Application Fees
The Australia Government has introduced new application fees for FIRB approvals to manage foreign investment in residential real estate. The level of application fees are shown in the table below and will take effect from 1st December 2015.
Real Estate Investment Vale (AUD)
Application Fee (AUD)
Less than $1,000,000
$1,000,000 to $1,999,999
$2,000,000 to $2,999,999
$3,000,000 to $3,999,999
$4,000,000 to $4,999,999
$5,000,000 and greater
$55,700, then a estimated $10,000 incremental fee increase per additional $1M in property value
For more information about these fees, you can refer to the official FIRB application fees page https://firb.gov.au/2016/02/fees/
All foreigners who earn rental income in Australia have to complete a tax return every year with the Australian Tax Office (ATO). Generally you can claim deductions for expenses relating to maintenance and management of the property including the interest you pay on loans. There will also be depreciation expenses for the building and assets such as carpets, furniture and appliances. You need to engage a Quality Surveyor to establish a tax depreciation schedule for your tax advisor.
How you will be taxed will depend on the following:
• Your rental income exceeds your deductible expenses – “Positively geared”
• Your rental income equates to your deductible expenses – “Neutrally geared”
• Your rental income is less than your deductible expenses – “Negatively geared”
• Or don’t touch a thing
If your investment is positively geared then you will be subjected to non-resident tax rates at a minimum of 32.5% for the first $80,000 income for years 2015 and 2016. On the other hand, if your investment is negatively geared then any loss can be used to offset other income earned in Australia and if you have no other income or are unemployed, the losses can simply be accrued indefinitely and be available to offset income or any capital gains tax in the future.
Due to the relatively high rates of non-resident tax, and the access to tax losses in future years, most foreigners have investment properties which are either neutrally or negatively geared. It is also generally advisable to have a loan of some amount when it comes to purchasing Australian property because of the ability to claim the interest component as a tax deduction.
When you make a profit from selling a property in Australia it is subject to Capital Gains Tax but this tax can simply be added to your taxable income which is taxed at the same rates ranging from 32.5% to 47% for non-residents. Since 1 July 2016, foreign investors were subject to a Capital Gains Tax (CGT) (withholding tax) of 10% when they sold their own residential home. However, this only applied to properties worth $2 million or more. From 1 July 2017 this threshold will reduce to $750,000 and the withhold tax rate will increase to 12.5%. This change will affect those foreign investors buying in Adelaide metro areas where the median house price is much higher than $750,000. Having said this, it may be better to purchase properties through an Australian resident, trusts or companies instead to reduce the tax rate payable.
There is also another “Ghost Tax” introduced in 2017 Federal Budget. Foreigner property owners will be slugged with a minimum $5,000 per year levy for property they either fail to occupy or lease out for at least 6 months of the year.
We recommend you engage a professional tax advisor regarding investment taxation for foreigners.
Other Costs in Purchasing a Property
The most direct additional cost of purchasing a property in Australia is stamp duty. Stamp duty can be calculated easily via this online link http://www.realestate.com.au/blog/stamp-duty-calculator/.
For any transaction for foreign property buyers and temporary residents after 1 January 2018 in South Australia you now pay a ‘Foreign Owner Surcharge’ which is an additional 7% on top of stamp duty. This compares New South Wales (8%), Victoria (7%), Queensland (3%) and Western Australia (4%).
There are also a number of other costs attaching to a property purchase which have to be taken into consideration and these include legal & conveyancing fees, loan application fees, insurance cover and pro-rata adjustments for council or water rates, and building or pest inspection fees.
To complete any real estate purchase you need to engage a Conveyancer or Solicitor to process all the necessary government paperwork to record the sale and register the property in your name. A Conveyancer may charge about $700 for their services. Although a solicitor does the same work they do tend to charge a bit more.
We have had considerable dealings with the following 2 conveyancers;
Arranging Mortgage Finance
Foreigners have two broad options when it comes to arranging property finance. They can choose either to arrange a foreign currency loan, probably in the currency which they earn their income or arrange an Australian dollar mortgage to purchase a property.
The advantage of a foreign currency loan is that it will usually be available at a lower interest rate. However you will face exposure to foreign currency fluctuations so when there is a significant reduction in the value of the Australian dollar versus the currency in which your loan is made the lending bank may request a capital injection to ensure that the loan to valuation ratio does not exceed the agreed maximum. You will also normally be limited to a variable rate mortgage with no access to fixed interest rates which can save you money.
There was a significant increase in the number of foreign investors wanting to buy in Australia since 2005. But many of the Australian loan applications since that time contained false documents or were used to launder money earned illegally overseas which resulted in most banks stopping to lend to foreign investors or temporary residents of Australia and, in some cases even Australians living overseas.
In today’s market, very few Australian banks will lend to foreign investors as this is a complex and high risk area of lending. Foreigners who eventually qualify for a mortgage here often end up paying higher interest rates of 6.50% to 8.00% with high setup fees.
However the advantage of an Australia dollar loan is that a foreigner may borrow up to 70% of the valuation of the property and there is no foreign currency exposure. Interest rates are generally higher than many overseas loans although the difference has reduced very significantly recently. There is greater flexibility in the type of loans available and interest rates can be fixed if you anticipate that rates may go up in the future.
It is recommended to always engage an independent, licensed mortgage broker with wide accreditation and they should be able to cover virtually every bank and lending institution in Australia and be experienced in drafting up loans for foreign investors. Also note that using an Australian mortgage broker is usually free of charge in most cases as the bank will pay the broker a commission for organizing finance and it will not affect your loan.
Adelaide South Property has a number of creditable mortgage brokers. You may wish to contact Wendy Perry from Smartline.
Choosing your property
Most foreigners who are looking to purchase property in Australia will not have the luxury of living in the area in which they wish to buy so we strongly recommend that you use a Buyers’ Agent to both shortlist and purchase properties on your behalf especially if you are looking for an investment property.
We believe that no foreigners, except for those who have substantial living experience in Australia to familiarize themselves with the market, should purchase any property without expert advice from a Buyers Agent. Before purchasing you need thorough market research and assistance.
There are 3 main things that you need to determine before you buy.
1. A genuine market price. This is the most obvious question but so many foreign buyers pay far more than the fair market value for properties.
2. Is the building of sound construction? This is perhaps the easiest one to solve because we can engage a range of professional builders, pest control companies, plumbers and electricians to investigate the building.
3. Is it suitable for a tenant and what would the rent be? This can potentially be the most difficult and critical. It is important to buy a property that will appeal to local tastes or be in demand by that portion of the market you are hoping to attract as tenants. If you judge poorly you could have a financial disaster and could make a loss.
To do all of these things on your behalf a Buyers Agent may need to search through many dozens of properties before you find the right one. The Agent would introduce you to many properties and eventually make a short list of the ones you like. They would all be inspected and you would receive many photos and a full report on each one. Once you have decided on a property the Agent would negotiate a price and, if you wish, you can authorise the Agent to sign all contracts on your behalf.
Engaging Adelaide South Property as your Buyers Agent
The fee for a Buyers Agent will vary depending on the exact nature of the services required by the buyer. You should bear in mind that the cost of a Buyers’ Agent can be included in the expenses you claim against Capital Gains Tax when you eventually sell.
There will be no obligation or cost for any initial discussion.
If you would like to discuss your situation with us then please ring us on 8186 2777 or send us your details by completing the Contact Form below and we will be in touch.
(Contact Adelaide South Property to be your Buyer’s agent now)