New, or near-new, exemption certificates for property developers

Generally, foreign persons require approval from the Foreign Investment Review Board (‘FIRB’) when entering into contracts for the purchase of Australian property. The purpose of obtaining FIRB approval is to ensure that the foreign person’s investment will benefit the Australian economy. However, foreign investors can now rely on a ‘New or Near-New Dwelling Exemption Certificate’ (‘the Exemption Certificate’) to purchase Australian property without obtaining FIRB approval.

For every new project, a property developer, or vendor, should consider whether they are able to secure the Exemption Certificate. Obtaining this certificate means that the developer’s foreign buyers do not need to seek their own individual foreign investor approvals, as long as the Australian property being purchased is covered by the Exemption Certificate. The FIRB has recently published guidelines on how a developer can obtain the Exemption Certificate, and also their obligations in applying for the certificate.

Eligibility for obtaining an Exemption Certificate

Australian and foreign developers may apply for the Exemption Certificate if the following applies to their project:

  • the development consists of fifty (50) or more dwellings;
  • development approval has been procured from the relevant government authority; and
  • the development has foreign investment approval (if applicable) for purchase of the land subject to development, and any conditions of that approval are being met.

Applications for the Exemption Certificate will be considered on a case-by-case basis to ensure they are not contrary to Australia’s national interest.

Approval conditions

Approvals for an Exemption Certificate are subject to the developer:

  • marketing the dwellings for sale in Australia;
  • selling no more than 50% of the total number of dwellings in the development to foreign persons under the certificate;
  • selling no more than $3 million worth of dwellings in the development to a single foreign person under the certificate;
  • providing a copy of the exemption certificate to each foreign purchaser;
  • reporting to the Australian Government, every six months (until all dwellings in the development are sold), on the dwellings sold to foreign persons under the certificate, including the purchaser details and the value of the sales;
  • notifying the Australian Government, within thirty (30) days, if the number of dwellings in the development is reduced to less than 50; and
  • paying a fee for each dwelling sold under the certificate. Note this fee is separate to the fee for applying for an Exemption Certificate.

Developers’ obligations when applying for the Exemption Certificate

Developers who have been granted an Exemption Certificate must report their sales every six months, until all dwellings covered by the Exemption Certificate are sold. As noted above, there is a separate fee per sale that is required to be paid to the ATO for each dwelling sold under the Exemption Certificate. This fee must be outlined in the sales report, and it must be paid to the ATO within 30 days of the end of the relevant six-month reporting period.

If developers are found to be non-compliant with their eligibility and approval conditions for the Exemption Certificate, it may be subject to strict penalties, including civil and criminal penalties, and also revocation of the certificate.

Relying on the Exemption Certificates will make it easier for foreign purchasers to purchase property in Australia from developers eligible for the Exemption Certificate. Without the certificate, foreign persons purchasing property in Australia will need to consider their requirement to obtain individual FIRB approval, or exemption, before entering into contracts for such purchase.

The main benefit for property developers would appear to be the ability to expand their range of purchasers to include foreign investors, though developers would need to also consider any limitations on their ability, or any other certificates required, to sell the dwellings on their development to foreign persons.

Should you have any questions or require any further information regarding this Exemption Certificate, please do not hesitate to contact JHK Legal Brisbane.

Jemerrie Golaw, JHK Lawyer

An Important Reminder for Property Purchases through your Self-Managed Superannuation Fund

If you are considering purchasing a property through your self-managed superannuation fund (‘SMSF’), it is essential that prior to entering into any contract of sale you determine whether you need to put in place a custodian arrangement. In this article we provide a brief overview of the Limited Recourse Borrowing Arrangements for SMSFs contained in the Superannuation Industry (Supervision) Act 1993 (‘the Act’).

If you are considering acquiring real property in your SMSF, we urge you to contact us to discuss the purchase terms before you take any steps.

What constitutes a Limited Recourse Borrowing Arrangement?

As a general rule, trustees of a SMSF are prohibited from borrowing money. Pursuant to section 67A of the Act trustees of a SMSF may only borrow money from a lender to fund the acquisition of an asset in certain circumstances.

In order to comply with the Act, the acquisition of an asset by a regulated superannuation fund via a borrowing must comply with the following criteria:

  1. the loan proceeds are used to acquire a single asset only which the trustee of the SMSF is not otherwise prohibited from acquiring.

This not only includes the purchase price under the contract of sale but also the expenses incurred in connection with the acquisition (such as loan establishment costs, legal costs and stamp duty) and expenses incurred in maintaining or repairing the asset to ensure its financial value is not diminished.

  1. the loan proceeds are not applied to improving the acquired asset.

This means that a trustee of a SMSF cannot enter into a Limited Recourse Borrowing Arrangement to purchase a single asset if that asset is:

a.   vacant land and you intend to use part of the loan proceeds to build a residential property on the land;

b.   vacant land and you intend to use money accumulated in the SMSF to build a residential property on the land;

c.   a property made up of a dwelling and land and you intend to use part of the loan proceeds to demolish the existing dwelling and build a new dwelling on the land;

d.   a property made up of a dwelling and land and you intend to use money accumulated in the SMSF to demolish the existing dwelling and build a new dwelling on the land.

If the trustee of a SMSF wishes to improve the property (i.e. through developing, demolishing, rezoning or building) then the loan must be repaid in full prior to the improvements being commenced.

  1. the acquired asset must be held on trust for the trustee of the SMSF by a separate entity, so that the trustee of the SMSF holds the beneficial entitlement to the asset.

This is where the trustee of the SMSF will need to ensure that it has a separate entity which agrees to enter into a custodian arrangement. The crux of the arrangement is that the separate entity will hold the legal title to the asset but the trustee of the SMSF will hold the full beneficial interest to the asset.

The separate entity is often referred to as a ‘custodian trustee’ or a ‘bare trustee’. To ensure that the requirements of section 67A of the Act are met, it is crucial to ensure that all relevant documents to evidence the custodian arrangement have been prepared correctly and duly executed. These documents can include:

a.    a resolution of the trustee of the SMSF;

b.    a resolution of the custodian trustee; and

c.    a Custodian Trust Deed (or Bare Trust Deed).

The custodian documents need to pre-date any contract of sale as the Buyer entity must be the custodian trustee.

  1. the trustee of the SMSF must have the right to acquire legal ownership of the asset from the separate entity by making one or more payments after obtaining the beneficial entitlement to the asset.

If the custodian arrangement is correctly recorded, the custodian trustee will act on the direction of the trustee of the SMSF at all times and will also transfer the legal title to the trustee of the SMSF on request.

Once the loan proceeds have been repaid in full, the trustee of the SMSF can be recorded on title of the property as the legal owner.

  1. the loan to the trustee of the SMSF must be limited recourse in nature, so that the lender’s rights to recourse on default of the loan are limited to rights to the asset being acquired.

This is to ensure that the lender only has a right of recourse against the property purchased and not any other asset of the SMSF. This limitation promotes the overall principle that superannuation funds are for retirement purposes and must be reasonably protected.

It is important to ensure that any loan documents are to the trustee of the SMSF as that is the entity that is borrowing the funds from the lender.

  1. the asset is not subject to a charge other than as provided in respect of the borrowing by the trustee of the SMSF

What is the purpose of the Limited Recourse Borrowing Arrangements?

The superannuation legislation was amended in respect of limited recourse borrowing arrangements so that:

  • superannuation fund assets are better protected in the event of a default on a borrowing;
  • the asset within the arrangement can only be replaced by a different asset in very limited circumstances specified in the Act;
  • superannuation fund trustees cannot borrow to improve an asset;
  • the borrowing is permitted only over a single asset or a collection of identical assets that have the same market value; and
  • the recourse of the lender or of any other person against the superannuation fund trustee for default on the borrowing is limited to rights relating to the acquirable asset.

What are the repercussions of not complying?

If the required conditions of the limited recourse borrowing arrangements are not satisfied, borrowing money under the arrangement will result in a contravention of one or more of the superannuation rules under the Act. A contravention may have civil or criminal consequences.

Practically, a lender may not agree to provide the trustee of the SMSF with a loan which would likely result in any contract of sale being terminated and the consequences of such termination will need to be dealt with. Alternatively, a trustee of the SMSF may be required to sell the acquired asset which could result in a substantial loss.

How can JHK Legal help?

Please contact us as soon as possible if you are considering a purchase through your SMSF. We can provide advice as to the limited recourse borrowing arrangements rules and all other requirements under the Act and also prepare the necessary custodian documentation.

We also assist clients with establishing their self-managed superannuation funds so please reach out if you are wanting to set up your own SMSF.

In addition, our conveyancing subsidiary MKP Property Lawyers, can provide their excellent services to act in the purchase of the property from the initial contract review up until settlement has been effected. Please do not hesitate to give us a call to discuss further!

Simone Wilson, JHK Lawyer

Buying a Property in Australia: FIRB Approval

Buying a property in a new country can always come with its challenges. The FIRB regime is a complex area that needs to be considered when foreign persons begin the property process. This article will provide an overview of FIRB and aspects to take note of.

The Foreign Investment review board is a regulatory framework that oversees foreign investment in Australia. The Foreign Investment Review Board (FIRB Board) is a non-statutory government department that evaluates application from foreign individuals who intend to invest or buy property in Australia. The main purpose of FIRB is to provide guidance to foreign persons on the policy and the Act. The Government overlooks foreign investments to ensure they remain consistent with community interests. The general stance of this policy is to welcome foreign investments. The policy is comprised of the following legislations:

  • the Foreign Acquisitions and Takeovers Act 1975 (Cth) (“the Act”)
  • the Foreign Acquisitions and Takeovers Regulations 2015 (Cth) (“the Fee Regulation”)
  • the Foreign Acquisitions and Takeovers Amendment (Exemptions and Other Measures) Regulations 2017 (Cth)
  • the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth)

The decisions under the above framework are made by the Commonwealth Treasurer, who is advised by the FIRB Board.

Who does and doesn’t require FIRB Approval?

The FIRB administration applies to foreign persons (including holders of TSS visa, work visa or student visa or a corporation or trusts in which foreign person hold a substantial or controlling interest) seeking to invest in Australian land or entities. Prior to entering into relevant transaction an application for an approval of the proposed transaction is required.

As regards residential property, foreign persons would usually be granted approval to purchase already established dwelling provided that the property is to be used as their primary place of residence and further that they dispose of the property when they leave Australia. Investment in existing residential land by foreign persons is otherwise generally prohibited.

If investment is residential property is intended by a foreign person, approval will only generally be granted for new dwellings or vacant land.

Fees apply for any application for approval and additional duty is usually also payable for any foreign acquisition in residential land.

Some exemptions are applicable for foreign individuals, such as, if a relevant property has been inherited, was granted via a court order or if purchasing a vacant land, the property developer obtained an exemption certificate for the property being purchased.

There are also exemption for acquisitions by foreign persons who acquire land with a spouse who is an Australian citizen or permanent resident and the property is acquired by them as their principle place of residence as joint tenants. This exemption does apply to de-facto relationships but does not apply to business partners, longtime friends, parents/child or siblings.

What’s the costs and how do you apply?

Foreign persons are required to pay a fee for each application made under the Act.

The fee for an application will generally depend on the value of the purchase price of the property.

Fees are paid when the application is lodged and the application process does not begin until the correct payment is received.

For residential land, fee tiers increase every 1 million of consideration; fees start at $6,530.00 for purchases of $1,000,000.00 or less rising to a maximum of $500,000 for purchases of more than $40,000,000.00.

Under section 53 of the Fee Regulation, a lesser fee of $2,000.00 will apply where the purchase price is less than $75,000.00.

For further information about these fees, we would recommend referring to the official FIRB application fees page.

The FIRB regime is complex and requires careful consideration. If you need any assistance determining whether any proposed acquisition of land is or would be subject to the FIRB regime, please contact us for appropriate advice.

How we can help you?

If you are seeking to purchase property and are concerned about FIRB, we can assist. JHK Legal’s subsidiary MKP Property Lawyers pride themselves in advising and assisting their clients to ensure they have a smooth process and are available via phone, email or face to face to discuss your concerns.

Christine Cherian, Lawyer