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AS
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Hi everyone, I'm Andrew Steele and today I'm joined by Peter Feros. Peter is one of our tax partners here in Sydney. Today we wanted to share with you a little bit about what's happening with the real estate market here in Australia and importantly what are the tax considerations for a foreign investor in Australian real estate. First of all, what's happening in our market? Well, industrial is booming. We see the Blackstone portfolio of industrial assets on the block. Some 45 industrial assets with an area of 1.4million square metres. In office we've seen CIC acquire a 50% stake in Grosvenor Place for $925million and we also see the growth of Build to Rent. A slow start in Australia but following the lead of the UK and the US where it's a massive part of the real estate market. So Pete, if I was a foreign investor looking to invest in Australian real estate, what are the key considerations I should have in mind?
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PF
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Andy, I'd be thinking about 3 things: what's it going to cost me to buy from a tax perspective, what's it going to cost me to hold the asset from a tax perspective and thirdly if I do end up selling the asset, what's it going to cost me if I was to sell the asset and that obviously takes you to questions of structure, it takes you to questions of what are the underlying assets I'm acquiring and what is my underlying investor mix?
All of those will feature prominently in that three part analysis so if we start off with the acquisition phase, stamp duty is going to be a really key issue. That generally, is a State based or Territory based tax and so you can assume that at least 5.5% will be upfront cost of stamp duty. That can be increased quite substantially for residential acquisitions but again just repeating, stamp duty is going to be a key consideration in the acquisition phase.
We then look at what happens while I hold the asset, what kind of taxes could I reasonably anticipate, and land tax comes up which is again a State or Territory based tax based on the value of the land. But separately and importantly we've got the question of income taxes. How is the income from the investment taxed during the holding period? And so what really drives that outcome, as I mentioned before, investor mix, structure and the underlying assets. The typical kind of structure we see for Australian real estate, depending on what it is but what I'm talking about here is longer term holds rather than building to sell. We tend to see managed investment trust structures where they can be reasonably structured in that way and the type of rates we're looking at there are 15% on nett rental income generally, 10% for clean energy, clean building managed investment trusts and in the case of Build to Rent the rates aren't as concessional, they're around the 30% mark. Separately debt investors will have a different kind of tax profile, they'll be looking at a 10% rate of withholding but it could be as low as 0% if certain conditions are met but that's kind of the lay of the land as far as tax is concerned and there's a separate set of considerations if the asset is eventually sold that requires some careful consideration.
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PF
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So the tax authorities are very closely aligned with the FIRB process. It's like any other regulator, they're very focused on ensuring that there's nothing in the transaction mix that is, and from a tax perspective that is, and a federal tax perspective that could be contrary to the national interest and so there'll be a series of what I would describe as fairly routine conditions that are imposed on foreign investors in relation to the acquisition that have an immediate compliance obligation but then an enduring compliance obligation. Sometimes there are also specific conditions particular to the transaction structure but again we tend to see that these are quite manageable. I think the one takeaway I would put forward is that in looking at the investment structure, our tax authorities are quite focussed on the level of debt in the structure. Debt is a really important issue for our tax authorities because they see it as a means of depressing Australian tax payments and so it's just something to be aware of when considering the way you structure these transactions.
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AS
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It's encouraging that those tax considerations or conditions are manageable from a foreign investment perspective. The Australian real estate market continues to perform incredibly well, it's a robust market, great opportunities for onshore and offshore investors. We'll continue to give you updates throughout the year but in the meantime if you have any questions please do contact either Pete or myself.
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