Guide for overseas buyers

JAKARTA (JP): Indonesians have their own reasons for owning apartments, offices and houses in Australia.

The reasons may include accommodation for a child studying there, or for an employee working Down Under. Some wealthy Indonesians buy property there for investment, to earn the rent or sometimes to occupy during holidays.

Australian cities are considered relatively safe, politically stable, environmentally clean and have a mild climate.

Among the many advantages of owning Australian property is a trouble-free, secure freehold investment with the potential for capital gain and a regular income.

Whatever your reason for wanting to buy Australian property there are a series of legal, financial, governmental and tax issues to be looked at.

This article from Central Equity is a guide to the various steps overseas buyers must take to buy real estate in Australia.

Where to invest?

Although Australia is a huge continent, only small stretches of the coastline are populated and approximately 80 percent of the population lives in the southeast corner.

The bulk of the Australian population lives on the southeast coast and it is this area that is of most interest to overseas purchasers, particularly the cities of Melbourne (capital of the state of Victoria) and Sydney (capital of New South Wales).

Melbourne and Sydney are long established cities and are the centers of business, immigration, education, industry, manufacturing, financial markets, universities, transportation and arts and entertainment.

Brisbane and the Gold Coast in Queensland are newer areas with a focus on tourism and leisure. Although there is a lot of real estate development in Queensland, the area is subject to greater price fluctuations and is therefore a riskier proposition for investors than Melbourne or Sydney.

Australia's major capital cities have generally developed around a Central Business District (CBD) at their geographic center.

Surrounding the CBD are the "inner suburbs". These older suburbs have been rejuvenated with new homes, entertainment and leisure facilities. Surrounding the inner suburbs are the further outsuburbs that are characterized by individual detached homes on a block of land with a front and rear garden and not recommended for investment due to the higher upkeep, maintenance charges and costs.

Investors should note that generally speaking the closer a location is to the CBD the higher the historical rate of capital growth, even if the apartment size is smaller. Investors should note that in most cities Australian's prefer to live just outside the Central Business District and not right in the middle of the business center.

Generally speaking, smaller low-maintenance residential properties are easiest to let and provide the best potential for a good rate of return.

Such properties include one, two or three bedroom apartments which feature good security and common facilities such as a swimming pool, gymnasium and secured car parking. Houses will generally provide a lower net rental income than an apartment.

Overseas investors are strongly advised to proceed with caution if considering buying a house instead of an apartment if the purchase is for investment reasons.

The sales process

The most common way for an overseas purchaser to buy property is "off-the-plan", which means purchasing a property from a developer before construction has commenced.

On signing the contract of sale the purchaser is required to pay a 10 percent deposit which is held in a trust account until settlement, which is when legal freehold ownership passes from seller to buyer.

Settlement (completion) normally occurs 14 days after construction completion.

FIRB approval

Australia welcomes foreign investment, but like most countries has regulations that apply.

For an overseas investor purchaser to buy property in Australia they must have the Australian government's Foreign Investment Review Board (FIRB) approve them to buy the particular property.

The Australian government has laws which determine what Australian property foreigners can and cannot buy.

If you purchase a property without FIRB approval and are not subsequently granted approval, then the sale cannot proceed and you will forfeit your 10 percent deposit.

A better way

One of the most popular, as well as easiest, most reliable and least time consuming ways for a foreigner to enter the Australian real estate market is to purchase off-the-plan from a reputable developer.

The developer will normally already have obtained FIRB approval for overseas purchasers to buy into the project. You need only pay 10 percent deposit with no more payments until completion, which may be one to two years away.

It is important to select a developer with an established track record of good, completed properties, otherwise there is a risk that the project may never get started. This would mean your 10 percent deposit could be held up for some time with no property to show for it!

In the state of Victoria there is an additional advantage to buying off-the-plan. Only in Victoria can you save thousands of dollars in stamp duty (a state government tax) by purchasing before construction has commenced.

Solicitors

The seller or developer will have the contract of sale available for perusal for any property you are interested in purchasing.

It is important to make an initial check of the contract to see if there are any special conditions or restrictions on the property that you should be aware of.

Information in the contract will include: the names of the seller/s, the address of the property, a brief legal description of the property, the price, details of any chattels (these are items that are included in the sale such as light fittings, carpets, etc.) and local government zoning (which states what activities can be legally conducted from the property).

Contracts of sale can be very long, detailed and confusing, so it is recommended (and is the usual case) that the purchaser pays for an Australian qualified solicitor to examine the contract on the purchaser's behalf.

If you do not know a solicitor in the city where the property is, there are a number of ways to locate one.

Either ask the developer to recommend one, or ask a large law firm in your home city who they recommend in the Australian city, or contact the Law Society of Australia (in every Australian capital city).

It is not advisable to use the same solicitor as the developer uses.

If you decide to purchase, the next step is conveyancing. This is the process by which ownership of a property is transferred from the seller to the buyer.

Although it is legal for the purchaser to do his/her own conveyancing this is not recommended. As well as being very time consuming it is virtually impossible to do from outside Australia or without fluent English.

The costs

As well as the purchase price investors should note that there are "extras" and certain duties that need to be paid to state and local (municipal) governments.

The major extra charge is stamp duty, a tax levied as a percentage of the purchase price.

In Victoria, stamp duty can be reduced by as much as 90 percent by purchasing off-the-plan.

Other expenses might include:

* Solicitor's conveyancing fees (usually approximately A$1,000),

* Insurance on the building and contents,

* Body corporate fees if a body corporate is in place,

* Maintenance. The owner is responsible for structural repairs and ongoing maintenance (such as hot water, heating, etc.).

No payments are required to be made to the selling agent. The person selling the property (the vendor) pays a commission to the selling agent and not the buyer.

Tax deductions

There is virtually no tax to pay on a new property investment due to the large number of available deductions.

Rental income from the residential property is taxable at the owners Australian personal income tax rate or the company tax rate if the property is owned by a corporation.

Taxable income can be minimized by deducting the following: interest on the principle borrowed, loan fees, municipal rates, water rates, body corporate charges and agency fees.

All new buildings that were commenced after Sept. 15, 1987 qualify for a 2.5 percent depreciation allowance on the construction cost.

This benefit passes from owner to owner until 40 years after the property was built. Purchasers can appoint an Australian accountant to organize a yearly return for them. Foreign buyers need only declare Australian sourced income.

Capital Gains Tax

In Australia investors may pay a capital gains tax on the capital gain (profit) on the sale of real estate. This applies to property that was purchased after Sept. 19, 1985.

A person's primary residence is capital gains tax exempt provided it is not used for earning income.

When determining how much of the project is taxable, allowance is made for selling costs and improvements.

Half of the gain is totally tax-free, and only the balance is taxed at a sliding scale starting at just 17 percent.

Further exemptions are available through "negative gearing" or carrying forward "tax losses" on the property, further reducing any potential tax on the investment.

These are new capital gains tax laws recently introduced and are expected to provide a further stimulus to the market. (bsr)