The Real Estate Law Review: Australia

Introduction to the legal framework

i Ownership of real estate

Freehold title is the prevalent form of ownership for real estate in Australia. Houses, apartments, commercial buildings, farms and vacant land all have freehold title.

Freehold title means that the owner (and their beneficiaries) owns the real estate outright in perpetuity. The owner is free to sell, mortgage and lease the real estate without needing official permission. The owner can gift freehold title real estate by will. The owner is free to build, improve and demolish improvements, provided the planning rules are observed.

Strata title is a specialised form of freehold title that is found in buildings with multiple owners. The owner has exclusive title to their apartment, townhouse, strata office, strata shop or strata industrial unit, allowing them to lease, mortgage and sell. They are free to do cosmetic work, such as painting, carpeting and window coverings, but need permission from the strata owners' corporation (known as the body corporate) to renovate the kitchen, the bathroom and reconfigure walls.

Strata title owners share the common property, which means the building, the foyer, the driveways, the garden, the lifts and the stairs. Strata title owners hold an annual meeting to decide on upkeep of the common property, building insurance and strata levies.

Some specialised forms of ownership in Australia are as follows:

  1. Crown lease, which is leasehold title found in rural properties in remote areas;
  2. community title, which is found in residential developments such as apartments and communities such as retirement villages;
  3. maritime and foreshore leases of 99 years – for land near waterways;
  4. company title, which is found in older residential apartment buildings;
  5. 99 year leasehold title, which applies to all real estate in Canberra (the Australian Capital Territory); and
  6. native title, which is found in pastoral and mining leasehold land.

ii System of registration

Ownership of real estate is recorded in the land titles registry in each state and territory of Australia. The name of the legal owner of the real estate is recorded on the register. In some states, trusts are also recorded. Also recorded are affectations such as easements and covenants, mortgages that secure a loan, caveats (claims) and leases.

The owner's name, the transfer price and the affectations are searchable online for a fee.

Every parcel of real estate in Australia has its own certificate of title, which evidences ownership. This originated from Robert Torrens who in 1858 introduced the system of recording ownership of real estate and affectations in a land titles registry. This system is known as 'Torrens Title' or 'Real Property Act' title.

Legislation in Australia confers a state guarantee of good title, known as 'indefeasibility of title', upon the person who is recorded as owner of the real estate at the land titles registry.

iii Choice of law

The law that applies to dealings with real estate is the law of the state or territory in Australia in which the real estate is situated. Every state and territory has its own property law and conveyancing law. Each one has its own form of Contract for Sale of Land and conveyancing procedures. In Australia, real estate transactions are handled by lawyers (solicitors) and conveyancers.

Overview of real estate activity

These figures from the Australian Bureau of Statistics paint the picture of a very strong real estate market in 2021:

  1. the value of residential dwellings was A$7.283 trillion at the end of the September quarter 2021;
  2. the mean price of residential dwellings was A$689,500 at the end of the September quarter 2021;
  3. prices for residential real estate in the year to June 2021 increased in all capital cities. Prices rose in Sydney (+19.3 per cent), Canberra (+19.1 per cent), Melbourne (+15 per cent), Perth (+15 per cent), Brisbane (+14.6 per cent), Adelaide (+14.2 per cent), Hobart (+17.7 per cent), and Darwin (+12.8 per cent). The weighted average increase for all cities was +16.8 per cent;
  4. the number of residential dwellings rose by 116,700 to 10,679,500 in the year to June 2021;
  5. seasonally adjusted, the number and value of building approvals are rising. The total number of dwellings approved in Australia rose by 3.6 per cent and by value rose 8.5 per cent in November 2021 (seasonally adjusted). The total value of non-residential buildings approved in Australia rose by 14.8 per cent in November 2021 (seasonally adjusted);
  6. the value of new loan commitments was 32.2 per cent higher for housing, year on year to October 2021 (seasonally adjusted). It rose 3.6 per cent for business construction in October 2021 (seasonally adjusted); and
  7. covid-19 impact upon residential property transactions is fading. There was strong demand for owner-occupied detached housing during the first half of the year, which has now been supplanted by strong demand for investment properties. Year on year to October 2021, loans for owner-occupied housing are 15.1 per cent higher, while for investor housing are 89.6 per cent higher.

Foreign investment

The real estate purchase policy laid down by the Foreign Investment Review Board (FIRB) is as follows:

Residential Real Estate
Under Australia's foreign investment framework, foreign persons generally need to apply for foreign investment approval before purchasing residential real estate in Australia.
Foreign investment applications are considered in light of the overarching principle that the proposed investment should increase Australia's housing stock (by creating at least one new additional dwelling).
Foreign persons who purchase residential real estate will be subject to an annual vacancy fee where the property is not residentially occupied or rented out for more than six months in a year.

As a result, purchasers of existing housing stock must have permanent residency status, but up to 50 per cent of the apartments in a new development can be sold to foreign investors without permanent residency or citizenship status.

A vacancy fee return must be lodged with the Australian Taxation Office. An annual vacancy fee is payable (A$5,600 for a property less than A$1 million in value) if the property was unoccupied for more than 183 days during a vacancy year. Vacancy years are unique to each property because each one is 12 months after the occupation day for the property. Currently, vacancy fee returns show that only approximately 5 per cent of property owners are liable to pay the annual vacancy fee.

Commercial Real Estate
Foreign persons may be required to notify and receive a no objections notification before acquiring an interest in commercial land in Australia. Different rules apply depending on whether the land is vacant or not, whether the proposed acquisition falls into the category of sensitive commercial land that is not vacant, and the value of the proposed acquisition.
Proposed direct interests in an agribusiness generally require approval with an exemption applying to investors from Australia's trade agreement partners.
Strict criminal and civil penalties may apply for breaches of the law, including disposal orders.

FIRB approvals for commercial properties can take up to six months.

The following statistics are sourced from the FIRB Annual Report 2019–2020:

  1. in 2019–2020, there were 7,056 residential real estate purchase transactions with a total value of A$17.1 billion and 410 commercial real estate purchase transactions with a total value of A$38.8 billion;
  2. an increase in applications for commercial real estate purchases was experienced, particularly for low-value small business premises given the reduction in threshold to A$0 introduced on 20 March 2020;
  3. since 2016–2017, foreign demand for residential real estate in Australia has declined for a variety of factors including a tightening of domestic credit and increased restrictions on capital transfers in home countries; state taxes and foreign resident stamp duty increases; and
  4. Victoria, New South Wales and Queensland represented 81 per cent of residential approvals.

Structuring the investment

Investors in real estate in Australia have a wide choice of structures and investment vehicles in which to make their investment.

The most popular forms for direct investment are personal name, a company, a trust or a joint venture. Each has relative advantages in terms of asset protection, taxation, ease of transacting and disclosure.

The most popular forms for indirect investment are a listed real estate investment trust (REIT) or an unlisted property scheme or syndicate.

i Personal name

Real estate held in a personal name is exposed to creditors and others who make legal claims unrelated to the real estate. If ownership is shared, the names of all owners are recorded on the title.

Why is it that most Australians own their family home in their personal name despite this exposure? The answer is that if the family home is used as a main residence, it is sheltered from many taxes – the sale proceeds are completely exempt from capital gains tax and no annual land tax is payable. These tax shelters apply to foreign owners in a more limited way.

No death tax or inheritance tax is payable in Australia when real estate is transferred to a beneficiary on death. If the value of the real estate has increased, no capital gains tax is payable until the property is sold ('death' is not treated as a sale).

When purchasing real estate, transfer taxes (known as stamp duty or transfer duty) are payable no matter if it is a family home or an investment property. Transfer duty surcharges apply to foreign purchasers.

ii Company

Real estate held in the name of a limited liability company protects shareholders and directors of the company from legal claims that arise from the real estate. The exceptions are director liabilities for personal guarantees such as for loans, payroll tax and environmental offences.

Real estate investment companies pay tax at the rate of 30 cents in the A$1 on profits if they are passive investors. If more than 20 cents in the A$1 of income is 'active' income, then the company may be treated as carrying on a business and the tax rate is 25 cents in the A$1. The term 'profits' includes capital gains.

The tax paid is an imputed to the shareholders. This means that dividends paid to shareholders can include a tax credit (called a 'franking credit'). Shareholders can use the tax credit against tax payable by them on other income.

Transacting is subject to full transfer taxes. Ownership interests are held as shareholdings.

iii Trust

If real estate is owned by a trust, the title is registered in the name of a trustee, which is usually a limited liability company. The trustee is usually able to deal with the real estate in its name, as owner, for the benefit of the beneficiaries of the trust.

The trustee must lodge a tax return for the trust. The trust pays no tax on the profit. Profit is distributed to the trust beneficiaries who declare the trust distributions as income and pay tax.

If the trust is a fixed trust, such as a unit trust or custodian trust, then the distributions made to the trust beneficiaries are fixed, according to their entitlements.

If the trust is a discretionary trust, then the distributions made to the beneficiaries are at the trustee's discretion. For this reason, a discretionary trust protects the trust assets if claims are made against beneficiaries personally: beneficiaries have no vested or fixed entitlement to receive a distribution. Their entitlement is to be considered for a distribution.

Transacting units in a unit trust is restricted, except in an REIT, and follows the rules found in the unit trust deed.

Interests in a discretionary trust are not transacted.

Transacting interests in a custodian trust is not restricted.

iv Joint venture

Joint ownership of investment real estate can be in any one of these three forms:

  1. in the name of a company. If so, it is an incorporated joint venture, and the commentary about companies and fixed trusts applies;
  2. in the names of the joint venturers personally. If so, it is an unincorporated joint venture and the commentary about personal names applies; or
  3. in the name of a nominee company or trustee company. If so, it is an unincorporated joint venture and the commentary about trusts applies.

v Property scheme

Property schemes must be registered as managed investment schemes with the Australian Securities and Investments Commission (ASIC). ASIC provides the following description:

A property scheme, also known as a property fund or property syndicate, is an investment where you, and other investors, buy 'units' in an investment operated by a professional investment manager. The scheme's money is invested in property assets which may include commercial, retail, industrial or other property sector assets.
The investment manager selects and buys investment properties and is responsible for maintenance, administration, rental collection and improvements to the properties.
Some property schemes invest in property development, which means there are extra construction and development risks.
Your money usually stays in the property scheme until it ends, when the properties are sold and the net proceeds are distributed to investors.
You may be able to withdraw your money early but there may be penalties. If the scheme is listed, you may be able to sell your units on the public market.
Depending on the type of property fund you invest in, you might get a regular income (distributions), usually quarterly or half-yearly, and a capital gain on your original investment, if the value of the scheme's underlying investment assets increases.

Listed property schemes are known as property trusts or REITs. They are listed on a public market, such as the Australian Securities Exchange. They are easy to value, easy to sell and are subject to listing (disclosure) rules.

Unlisted property schemes have limited liquidity and are less transparent in terms of disclosures to investors.

In terms of taxation, the commentary upon fixed trusts applies.

Real estate ownership

i Planning

Planning rules provide the legal framework for the way that land can be used and developed in Australia.

Planning rules are strictly enforced. Illegal development will be subject to 'stop work' orders and demolition orders. For that reason, checking permissible planning uses is an important part of the conveyancing process for a real estate purchase.

Common planning uses are residential (general, low density, medium density and high density), business, general commercial, industrial, mixed zoning, rural and environmental. Each planning use has rules for exempt development (which does not need a permit), complying development, permissible development (which needs a permit) and prohibited development.

For built structures, checking building compliance against the National Construction Code is an important part of the conveyancing process when purchasing real estate in Australia.

When developing real estate in Australia, complying with the planning rules requires expert assistance from specialists such as town planners, traffic consultants, environmental consultants, land surveyors, civil engineers and lawyers.

Local authorities (local councils and planning panels) determine applications for development permits or approvals, except for state significant applications, which are determined by the state planning authorities.

ii Environment

Each state has an environmental planning authority responsible for the investigation and remediation of contaminated land to safeguard community wellbeing. Planning policies determine what remediation is necessary to make contaminated land suitable for use.

Examples of contaminated land are found in localities where heavy industry or intensive agriculture are present, or individual sites that have been used for chemical storage, such as petroleum service stations, and sites with asbestos used in building materials or in the soil.

If a property is purchased for development, especially for residential development, obtaining an environmental clearance is an important part of the conveyancing process because the contract for the sale and purchase of land will normally preclude the purchaser from making any claim against the vendor. The purchaser should request that the contract be made conditional upon the issue of an environmental clearance certificate, at the vendor's cost.

If a property is purchased as an investment, then an asbestos clearance may be appropriate if the improvements were built before 1990. Asbestos might be found in eaves, internal and external wall cladding, ceilings (particularly in wet areas such as bathrooms and laundries), loose-fill asbestos insulation in roof cavities, asbestos lagging around pipes, asbestos roofing and in electrical board panels.

iii Tax

Transfer tax, commonly known as stamp duty, is levied on the transfer of real estate in Australia. It is payable by a purchaser either within a fixed period of time after the contract is entered into, or on completion of the contract.

Stamp duty is payable according to the price in the contract for the sale and purchase of the real estate, unless it is a gift or a transfer between related parties, in which case it is according to the market value of the real estate.

The rate of stamp duty varies between the states and territories. Exemptions can apply to first-home purchasers and sometimes to the purchase of new houses and apartments for investment.

Transfer duty surcharges apply to foreign purchasers of residential real estate in New South Wales, Victoria, Queensland and Western Australia. No surcharges are payable for commercial real estate. In all states except New South Wales, a person is a foreign resident if they are not an Australian citizen or a permanent resident (in New South Wales, permanent residents are foreign residents). This applies to companies, trusts and joint ventures in which a foreign resident has a specified interest.

In New South Wales and Victoria, an 8 per cent surcharge is payable.

In Queensland, Western Australia and South Australia, a 7 per cent surcharge is payable. In Tasmania, an 8 per cent surcharge is payable on residential land and 15 per cent on primary production land.

Surcharges are not confined to Transfer Duty. They apply to annual Land Tax assessments as well. Similar rules apply to land tax surcharges as to transfer duty surcharges except that in Queensland it applies to all freehold land, not only residential land. In New South Wales, Victoria and Queensland, the foreign owner and absentee owner land tax surcharge is 2 per cent. In the Australian Capital Territory it is 0.75 per cent and in Tasmania 1 per cent. The Land Tax surcharge is applied to land value (that is, the value of the improvements is excluded). For more details, see below.

iv Finance and security

Australian real estate is acceptable security for loan finance. Lenders require 'first mortgage' status, which is that their mortgage is the first ranking mortgage recorded on the title to the real estate. The reason is that in the event of default, the first mortgagee has the right to sell the real estate in its capacity as mortgagee exercising its power of sale. This power of sale is not as available to subsequent mortgagees recorded on the title to the real estate.

The availability of loan finance for Australian real estate is governed by the following four factors:

  1. the status of the borrower: are they a resident or non-resident? Are they purchasing for owner-occupation or for investment?
  2. loan serviceability: Australian lenders will only take into account Australian sourced income for meeting loan servicing requirements and take into account only part of the rent to be received from the property;
  3. the nature of the real estate: is it residential – a house or an apartment? Is it commercial – a hotel, retail, industrial or office? Is it agricultural – a farm or grazing property, and does it have water licences? If commercial, what is the remaining term of the lease and the quality of the tenant? and
  4. the place in which the real estate is situated.

These factors translate into whether or not loan finance is available, the loan-to-value ratio and the interest rate payable.

Leases of business premises

The main characteristics of leases of business premises in Australia are as follows.

i Term

Typical terms are one, two, three or five years, with an option to renew for the same term. Tenants with extensive fit-outs, such as restaurants, food outlets, retail shops and cafes, prefer five-year leases with at least one, if not two, options to renew for five years. The option to renew is exercised at the discretion of the tenant. Demolition clauses are included in leases of buildings that have redevelopment potential, to enable the lease to be terminated early.

ii Commencement

If a tenant pre-commits to premises in the course of construction, then an agreement for lease is entered into as a precursor to the lease. The agreement for lease often contains the specifications such as services, air conditioning and configuration that the tenant requires. The tenant may negotiate a rent-free fit-out period or a fit-out allowance. The lease commences when the premises are certified for occupation.

iii Rent

The rent is stated in the lease as either a gross rent (inclusive of outgoings) or a net rent (outgoings are payable in addition to rent). Residential rents are always gross rent (by law). Office rents tend to be gross rent; industrial and retail rents tend to be net rent.

For these purposes, outgoings include council rates, water rates, strata levies, land tax, building insurance premiums, management fees, building repairs and maintenance expenses. Outgoings do not include services costs that relate to the tenant's use, such as electricity, gas, telecommunications, water usage, waste and garbage removal services. Services costs are the tenant's responsibility.

Goods and Services Tax (GST) is added to commercial rent (the current rate is 10 per cent). GST is remitted quarterly to the Australian Tax Office by what is known as a Business Activity Statement (BAS). Residential rent is exempt from GST.

Some shopping centre leases contain turnover rent clauses. Turnover rent is payable in addition to normal rent, based on a percentage of the turnover once turnover exceeds a specified threshold.

Rent is usually paid monthly in advance. Outgoings are apportioned into monthly instalments and are payable along with the rent, if the rent is a net rent.

Typically, rent is increased annually either by the consumer price index or by a fixed percentage, or by the higher of the two. Rent is typically reviewed to market at the commencement of the option term. The lease should contain a 'ratchet' clause, which prevents the rent for the new term from falling below the rent payable for the final year of the previous term.

A rent-free period is often negotiated for the first term, the length of which depends on the tightness of the rental market. It is one month per year in a normal market.

iv Security bond

A cash security or bank guarantee of three months' rent is typical for commercial leases. The amount is to be increased every time the rent is reviewed. Cash bonds are held by the landlord, except retail premises bonds, which are held by a retail bonds board. Personal guarantees are common, although their usefulness is limited either because a lawsuit is needed for collection or because the guarantor often becomes bankrupt if their business fails.

v Use

The use is specified either in specific terms such as a cafe, or in general terms such as a warehouse or office. Usually, the use must be approved by the local planning authority. The use cannot be changed without the landlord's consent.

vi Assignment and subletting

The tenant has the right to assign the lease and to sublet the premises, with the landlord's consent. The landlord can require the incoming tenant to have suitable experience and financial resources.

vii Make good

At the end of the lease, the tenant is required to 'make good'. This means that the tenant must hand back the premises in the condition and state of repair that it was handed over to them, fair wear and tear excepted. The tenant must remove their fit-out, goods, plant and equipment, and reinstate and repaint the premises.

viii Insurance

The landlord is responsible for insurance for the building (except in strata properties, where the strata corporation insures the building), for public liability and for fittings. The tenant is responsible for insurance for public liability, plate glass (if any) and worker's compensation.

ix Energy efficiency

Owners of commercial office space with a net lettable area exceeding 1,000m² must provide an up-to-date building energy efficiency certificate (BEEC) to tenants before leasing the office space. The Commercial Building Disclosure (CBD) Program requires BEECs to contain a National Australian Built Environment Rating System (NABERS) rating and a CBD tenancy lighting assessment.

Developments in practice

i Vendor Tax Clearance Certificates for sale of real estate

All vendors of Australian real estate must obtain a 'foreign resident capital gains withholding clearance certificate' (a Tax Clearance Certificate) from the Australian Taxation Office (ATO) if the sale price is A$750,000 or more. The purpose is to protect the ATO's entitlement to capital gains tax on sale.

The Tax Clearance Certificate is issued as a matter of course to vendors who are Australian residents (for tax purposes) and who have lodged a tax return within the previous two years.

The Tax Clearance Certificate means that the vendor will receive all of the proceeds of sale of a property. Without a Tax Clearance Certificate, purchasers have the obligation to withhold a fixed amount of 12.5 per cent of the sale price and pay it out of the proceeds of sale directly to the ATO on settlement or closure of the sale.

Foreign resident vendors may apply for a Variation Certificate to reduce or eliminate the withholding tax obligation. In such application, they may prove to the ATO that they will make a capital loss on sale; or a capital gains tax rollover applies; or they have carried forward losses or tax losses; or the proceeds of sale available at settlement are insufficient after repayment of the mortgage or other security interest.

ii Purchaser declarations for transfer duty, vacancy charge and land tax

All purchasers must complete a purchaser declaration when buying or acquiring property in Australia.

Information collected through the purchaser declaration is used to meet Commonwealth Reporting Requirements for foreign purchases and to meet the State Revenue Office's responsibilities to administer the Duties Act, including the identification of foreigners for purchaser surcharge duty and foreign owners land tax surcharge.

The information collected includes:

  1. property details, including if it is residential or commercial, whether it is owner-occupied or an investment property;
  2. transactional information, including the transfer price, contract date and settlement date;
  3. identity information of the vendor or transferor and purchaser or transferee, including name, address, date of birth (for individuals) and Australian Company Number (for non-individuals) or Australian Business Number;
  4. nationality and immigration details of the vendor or transferor and purchaser or transferee;
  5. if the purchaser or transferee is the trustee of a trust, information about the trust; and
  6. if the purchaser is a foreign person or a foreign person holds a substantial interest in a trust that is purchasing the property.

The Commonwealth Reporting Requirements relate to foreign investment. The information is provided to the ATO for the purpose of information-matching and ensuring compliance with the taxation laws of the Commonwealth.

Foreign owners of residential real estate are subject to an annual vacancy charge levied by the ATO where the property is left unoccupied for more than 183 days per year. In Melbourne, the state government levies a vacancy tax on vacant homes and apartments of 1 per cent of the land value each year if the real estate is left unoccupied for more than six months in a year.

The Duties Act requirements are directed to raising revenue. The information collected is used to identify whether a foreign purchaser surcharge is payable for transfer tax or stamp duties purposes. The information collected is also used for imposition of the land tax surcharge for foreign owners of residential real estate.

The land tax surcharge for foreign ownership is 2 per cent in New South Wales. In both Victoria and Queensland, the land tax surcharge is 1.5 per cent and is known an absentee owner surcharge (known as a 'ghost tax'), which is levied on the land value of unoccupied properties. For example, if land tax is levied at the rate of 1.6 per cent on the land value in New South Wales, then the surcharge will mean that land tax is levied at the rate of 3.6 per cent on residential land in foreign ownership. Land tax is levied annually.

iii Tax deductions for inspections and some depreciation no longer available

The ATO does not allow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property to be claimed for income tax purposes.

The ATO limits deductions for plant and equipment depreciation to outlays actually incurred by investors in residential real estate, except when purchasing new real estate when depreciation of items installed by the seller is allowed. Plant and equipment items affected are usually mechanical fixtures or those that can be 'easily' removed from a property such as dishwashers and ceiling fans.

Outlook and conclusions

The outlook for the coming year is described well in the extracts below from a speech on The Housing Market and Financial Stability given by Michele Bullock (Assistant Governor, Financial System, Reserve Bank of Australia), on 22 September 2021:

After initially declining a bit at the onset of the pandemic, housing prices have recovered strongly. Despite some moderation during the recent lockdowns in NSW and Victoria, the strength has been broad based across states and across metropolitan and regional areas and particularly in detached housing.
In this environment it is unsurprising that housing credit growth has picked up and the rapid rebound in loan commitments suggests some further pickup in growth to come. Growth in housing credit is currently running at an annualised rate of around 7 per cent. Recent data on commitments, combined with several assumptions, suggest housing credit growth could peak at an annualised rate of around 11 per cent early next year.
The strength in the housing market is positive for the economy, and indeed an important channel for monetary policy to support the economy through housing construction, home improvements and purchases of household items. In fact, strongly rising housing markets and housing credit have been a feature of many other countries over the past 18 months as monetary policy has lowered lending rates and governments have provided fiscal support.

Footnotes

1 Anthony J Cordato is the principal at Cordato Partners Lawyers.

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