International investors looking towards the safe haven of Australian shores are increasingly entering into joint venture partnerships. Moore Stephens’ foreign investment specialist James Tng unpacks the obstacles and opportunities.
Anaemic growth and political uncertainty around the world, coupled with deteriorating bond yields, continue to propel investors towards Australia’s real estate market, with its consistently stable and high risk-adjusted returns.
According to the Department of Foreign Affairs and Trade, the United States remains Australia's largest foreign investor, accounting for around 28 per cent of total investment value. This is followed by the United Kingdom, with 16.5 per cent, Belgium (7.9%), Japan (6.6%) and Singapore (3.3%).
Real estate attracts 8.7 per cent of the investment pie, after mining and manufacturing.
“Australia continues to be seen as a safe place to do business, and the outlook for Australia is very attractive,” explains Tng, Moore Stephens’ director.
But foreign investors entering Australia’s market – and their local joint venture partners – must consider a range of issues, including funding, regulatory and tax implications, Tng adds.
“Australia’s tax regulations require a mix of debt and equity funding not typically required overseas. For a large commercial acquisition upwards of $40 million, this will mean 40 per cent equity.
“And even if the investor is borrowing from overseas – which often they will because the lending criteria may not be as rigorous as it is in Australia – they will still have tax obligations in Australia.”
On 1 July 2016, the Australian Government introduced a new withholding tax regime to encourage non-resident vendors to meet their capital gains tax obligations. When a non-resident sells property with a market value of $2 million or more, the purchaser is now required to withhold 10 per cent of the purchase price unless they are given a clearance certificate by the vendor. The purchaser must and remit this amount to the Australian Tax Office as a deposit on the capital gains obligations.
“This is a big change and may have implications for joint venture partnerships in Australia,” Tng adds.
Other commercial considerations include audit requirements and fees and charges specific to foreign investment.
“There is a requirement under the Corporations Act that foreign controlled companies must be audited, and this may mean additional costs.”
Foreign investors wanting to purchase residential property are also required to pay a minimum fee of $5,000 when they seek approval from the Foreign Investment Review Board.
“For any purchase over $1 million, the fee is $10,000 for every extra million dollars in the purchase price, which can add up,” Tng says, adding that the requirements around commercial purchases are not as stringent.
Cultural differences are also important considerations, Tng says.
“Australians are known for ‘saying it how it is’, while deals in Asia generally involve a long courtship. Investors from Asia may not necessarily say what they think around the table. Australians entering into joint venture partnerships need to understand these cultural differences and the impact it may have on the way they do business.”
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