The key issue facing foreign purchasers – the credit market

Emma Elsworth and Yuan (Nathan) Xu of Nevett Ford Lawyers Melbourne recently returned from Beijing, China after meeting with various parties involved in Australian real estate.  In their numerous discussions with various stakeholders, the key issue was not:

• the Victorian Government's increase on 1 July 2016 of the foreign purchaser stamp duty surcharge from 3% to 7% on the purchase price of a property,

but

• the lack of tier 1 lenders in the marketplace advancing funds to foreign purchasers of Australian real estate.

The lack of financiers is the number one concern for foreign purchasers, selling agents, brokers, developers and other stakeholders involved in new Australian residential property.  At present, the National Australia Bank (NAB) is the only tier 1 lender loaning monies to foreign purchasers, and its lending requirements have been tightened.  If the NAB exit the market, then foreign purchasers will need to source funds from tier 2 lenders.  The concern is the strain this will place on tier 2 lenders and the current lack of such lenders in the marketplace for foreign purchasers.

Nevett Ford Lawyers Melbourne acts for numerous foreign purchasers and small developers.   The changes in the credit market currently occurring are likely to impact new developments not yet constructed, or under construction. 

If you would like to know more, please contact Peter Lumb, Emma Elsworth, Yuan (Nathan) Xu, Yao (Chloe) Chen or Jianwen Hu of our China Conveyancing and Property Development Team. 

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Builders Warranties

Under the Domestic Building Contracts Act, statutory warranties as to quality of workmanship are deemed to be given by all builders carrying out domestic building work under domestic building contracts, and these obligations cannot be negatived by anything in the building contract.  Domestic building work includes the construction of a house or renovation or alterations to a house.  What is not always understood is that under the Domestic Building Contracts Act the benefit of these warranties is available to subsequent owners of the property (not just the original owner who had the work done) as if the subsequent owner had been a party to the original building contract.  Unfortunately, what the Act does not address is the position of a subsequent owner if the original owner, whether before or after selling the property, does a deal with the builder, perhaps in the context of some wider dispute, which involves releasing the builder from all liability under the building contract.  The outcome in such a situation is uncertain at the present time.

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Termites and New Homes

Termites cause more damage to Australian houses than fire, floods and storms combined.  Moreover, termite damage is usually not covered by home insurance.

All new houses built within areas designated by councils to be subjected to termite infestation, must have termite infestation protection measures in accordance with Australian Standard AS3660.1-2000 under Building Regulations 2006 (Vic).   You may find out whether your property is located within a designated termite infestation area by consulting your local council.

Before entering into a building contract, you should enquire with your builder what termite management system will be in place.  You may wish to consider changing the design and/or the material used for the building works, so that the risk of termite infestation and ongoing maintenance costs is further reduced.

You should also seek professional advice regarding the ongoing maintenance to your termite management system following the construction of your new home.

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Foreign resident capital gains tax withholding payments

On 25 February 2016 the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 (Cth) was enacted.  This Act introduces a 10% non-final withholding tax on payments made to foreign residents under contracts entered into on or after 1 July 2016 to dispose of certain taxable Australian property (Assets).


The Assets affected are:

• real property in Australia (excluding real estate with a market value under $2 million);
• lease premiums for Australian leases;
• certain mining, quarrying and prospecting rights;
• interests in Australian entities whose majority assets consist of such property or interests (excluding transactions listed on an approved stock exchange); and
• options to acquire such property or interests.

The obligation to withhold the tax rests with the purchaser, who must remit the tax to the ATO prior to or at settlement without delay.  The penalty a purchaser may incur for failing to withhold tax is equivalent to the amount that was required to be withheld and paid.

However, purchasers are not required to withhold tax if the vendor provides the purchaser a “clearance certificate” issued by the ATO or a declaration is provided which proves the resident is not a foreign resident before settlement.

Where the ATO determines a vendor is not entitled to a clearance certificate, the vendor may apply to the ATO for a variation requesting the ATO determine a withholding rate lower than 10%. The vendor must provide the notice of variation to the purchaser prior to settlement.

For further information please contact one of our property team members.

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SMSF related party borrowings under “Safe Harbour” guidelines

In recent years the ATO adopted the view that all loans by related parties to trustees of SMSF’s should be on arm’s length terms to ensure the income of the SMSF is not taxed at the top marginal rate.


In April 2016, the ATO issued Practical Compliance Guideline 2016/5 which contains the ATO’s approach to determining what are arm’s length borrowing terms for LRBA’s.


PCG 2016/5 sets out “Safe Harbour” terms on which SMSF trustees may structure their LRBA’s consistent with an arm’s length dealing.  Two Safe Harbour models are provided: one for borrowings to purchase real estate; the other for borrowings to purchase stock exchange listed shares or units.


The models set out various requirements (including interest rates, a maximum LVR of 70%, registered mortgages, 15 years maximum loan term and monthly repayment of principal and interest) which if adopted will assist SMSF’s to claim the borrowings are on arm’s length terms.


The Safe Harbour rules apply to existing and proposed LRBA’s established after the release of PCG 2016/5.


For existing LRBA’s with related parties, PCG 2016/5 states the ATO will not select an SMSF for income tax review for the 2014-15 year or earlier years purely because the SMSF has entered into an LRBA, however this is conditional upon the SMSF ensuring that any LBRA’s that their fund has are consistent with an arm’s length dealing by 30 June 2016.


We can assist with review and variation to existing LRBA’s and the preparation of new LRBA’s which comply with PCG 2016/5.

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Buy/Sell Agreements

It is commonly recognised that small proprietary limited companies and unit trusts are the most popular vehicles for parties to come together to establish and operate a business or to participate in an investment.  The most well managed of those vehicles are regulated by shareholder agreements (for companies) and unit holder’s agreements (for unit trusts).

In recent years a trend has developed where many of those agreements now contain provisions which require death and total permanent disability insurance for each shareholder/unitholder (participant).  The intention being that in the event of death or total permanent disability of a participant, the proceeds of those policies are to be used by the surviving participants to purchase the shares/units of the deceased participant.

The main effect of these provisions is twofold:

1.   to provide funds for the surviving participants to acquire interest of the deceased participant; and

2.   to provide funds to the family of the deceased participant in a situation where there may not be a ready market for the estate of the deceased participant to sell the shares/units. 

There are various ways to structure the required insurance cover and each has different taxation implications. There are also various ways to structure buy/sell clauses.  In this regard, one of several important matters to be taken into account is the need to ensure that the terms of the buy/sell clauses adequately provide for an annual review of the level of insurance cover against the value of the shares/units held by respective participants to ensure the proceeds of the policies is sufficient to acquire the interests .

We can assist with the preparation of shareholder and unitholder agreements containing buy/sell provisions.

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