The Purchase of Real Estate by Foreign Persons, and the Inadvertent Foreign Person Trust

Posted on Jul 28, 2020 by Liam Tobin   |   Categories: Building & Construction, Property & Conveyancing

Under the Australian Government’s foreign investment framework, foreign persons are required to apply for foreign investment approval before purchasing residential real estate in Australia.

The Government’s policy is to channel foreign investment into new dwellings. Consistent with this aim, different factors apply depending on whether the type of property being acquired will increase the housing stock or whether it is an established dwelling.

Limits for Purchasing Established Dwellings

Non-resident foreign persons are generally prohibited from purchasing established dwellings in Australia.

While temporary residents cannot acquire established dwellings to rent out or for use as a holiday home, temporary residents can apply for approval to purchase one established dwelling to use as a residence while they live in Australia. This is usually subject to the conditions that the person:

  • use the property as their principal place of residence in Australia;
  • do not rent any part of the property, including ensuring that it is vacant at settlement; and
  • sell the property within three months from when it ceases to be their principal place of residence.

A temporary resident is an individual who:

  • holds a temporary visa that permits them to remain in Australia for a continuous period of more than 12 months (regardless of how long remains on the visa); or
  • is residing in Australia, has submitted an application for a permanent visa and holds a bridging visa which permits them to stay in Australia until that application has been finalised.

New Dwellings and Vacant Land

Foreign persons, including temporary residents must obtain foreign investment approval before purchasing any new dwelling or vacant residential land for development.

A property is considered new if it has not been previously occupied, or if the dwelling is part of a development (50 or more dwellings) and was sold by the developer of that development, has not been previously occupied for more than 12 months in total.

Applications to purchase vacant land are normally approved subject to construction being completed within four years. Once new dwellings are built or purchased, they may be rented out, sold, or retained for the foreign investor’s own use.

Foreign non-residents are individuals not ordinarily resident in Australia (except Australian citizens), including a holder of a visa that permits the individual to remain in Australia for only a limited period.

When to Seek Approval

Foreign persons must have received foreign investment approval before they acquire an interest in residential real estate, including:-

  • signing an unconditional contract agreeing to purchase a dwelling or a share in a dwelling;
  • a security interest under a real property mortgage, even if the person that possesses the property is an Australian citizen or permanent resident;
  • a leasehold agreement that is reasonably likely, at the time the interest in the agreement is acquired, to exceed five years;

Exemption Certificates

A foreign person wishing to seek approval to purchase real estate may as a first step choose to apply for an exemption certificate. The exemption certificate allows a person to seek approval to purchase an unspecified dwelling up to a specified value. This exemption certificate is valid for 12 months.

Residential real estate – Australian trusts, Corporations and use of other persons

Australia’s foreign investment framework imposes strict rules around the purchase of residential real estate. The use of Australian corporations, Australian trusts, or trustees who are Australian citizens or Australian corporations, does not allow foreign persons to avoid these rules.

Foreign controlled companies are generally prohibited from purchasing established dwellings.

For the purposes of Australia’s foreign investment framework, trustees of a trust that meet the definition of a foreign person are also subject to the same treatment as a foreign non-resident when purchasing residential real estate and are required to seek foreign investment approval to acquire interests in residential real estate, assessed according to the normal rules.

Determining if a Corporation or Trustee of a trust is a foreign person

A corporation is considered to be a foreign person if an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest in the corporation.

A trustee of a trust is considered to be a foreign person if an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest in the trust.

A person holds a substantial interest in a trust (including a unit trust) if the person, alone or with one or more associates, holds a beneficial interest in at least 20 percent of the income or property of the trust.

Discretionary trusts as Foreign Persons

Under Australia’s foreign investment framework, the trustee of a discretionary trust where one or more foreign persons hold any beneficial interest in the trust is generally considered to be a foreign person in their capacity as trustee of the trust. This is because the trustee of a discretionary trust has the power to distribute the income or the property of the trust to one or more beneficiaries, such that one person, who may be a foreign person, can have all the income of the trust distributed to them or receive all the assets of the trust.

Further implications of foreign persons owning an interest in land are the requirements to pay Surcharge Purchaser Duty on the purchase of the land and Surcharge Land Tax following the purchase.

To avoid liability and prevent a discretionary trust from inadvertently attracting liability for surcharge duty and tax payable by a foreign trustee, the terms of the discretionary trust deed must:

  1. prevent a foreign person from being a beneficiary of the trust; and
  2. prevent any future amendment to the trust to allow a foreign person to be a beneficiary at a later time.

It is important to ensure that proper legal and taxation advice is obtained prior to purchasing any property, including as a foreign person or utilising corporate or trust structures, to be aware of the potential advantages and the potential limitations.