Foreigners still eyeing Aussie property despite eye-watering financial hurdles

Interest in Australian property from international buyers continues to soar despite some eye-watering financial obstacles thrown up by the government.

PropTrack’s latest Overseas Search Report – October 2023 revealed that since its July report searches from abroad have continued to increase, with purchase searches up 11.5 per cent in the last three months and rent searches up 7.8 per cent.

Chinese buyers are particularly keen. According to the Foreign Investment Review Board’s latest report, Chinese buyers increased their spending on Australian homes by $1 billion in the past financial year, outlaying a whopping $3.4 billion on Aussie property.

The allure of Australia’s economic stability, rule of law, lifestyle and relative affordability is clearly enough for foreign buyers to overlook, or at least contend with, some staggering financial hurdles placed in their way.

Most Australians bemoaning their own stamp duty and land tax burdens would be surprised at the level of additional taxes and surcharges imposed upon foreign buyers and outraged if they had to cough up even a portion of those sums.

Speaking to API Magazine in Singapore, Ravin Chatlani, Director of Taxation, Australasian Taxation Services, said foreign buyers looking to acquire property in Australia had significant additional costs to factor in that the average Australian would be unaware of.

Fees and taxes for foreign property investors

The fee and charges imposed on foreign buyers could be tens or even hundreds of thousands of dollars more than that incurred by local buyers.

Mr Chatlani said overseas buyers were indeed still hugely interested in foreign property but said the costs involved were a deterrent to many.

The first cost they were up for was the Foreign Investment Review Board (FIRB) fee that amounted to $14,100 for every $1 million of the purchase price.

Then there’s the Foreign Buyers Duty (FBD) that comes on top of the regular stamp duty (and goes under different names in some states). That is levied at 8 per cent of the property price in New South Wales and Victoria and 7 per cent in Western Australia, South Australia and Queensland, and 3 per cent in Tasmania.

For those foreign buyers still willing to cover those costs, there’s then the Absentee Land Tax Surcharge (ALTS) to place further strain on the budget.

“This varies from state to state but still costs the average international buyer tens of thousands of dollars,” Mr Chatlani said.

“While all land owners pay land tax, this is an additional one specific to overseas buyers.”

This tax is imposed on the land value, and in Queensland is 2 per cent with a tax-free threshold of $350,000, while in New South Wales (no exempt amount) and Victoria it is a more crippling 4 per cent.

This tax is not applied in Western Australia.

As of the start of 2024, Victoria will also be lowering the exemption threshold for all Australian and overseas landlords to just $50,000 from $300,000. The surcharge was 2 per cent for the 2020 to 2023 land tax years, 1.5 per cent for the 2017 to 2019 land tax years, and 0.5 per cent for the 2016 land tax year.

Mr Chatlani described said the added expenses were onerous and described the experience of a Singapore-based buyer.

“He was buying a $1.2 million apartment in Sydney and his land tax bill alone every year was $20,000, plus his strata fees and usual costs.

“The client said that even with the higher rental income, he felt he had nothing left at the end of it.”

But if regular stamp duty, plus the FIRB, FBD and ALTS weren’t spooky enough, there’s also the ghost tax, or vacancy tax as it is more formally known, to overcome.

For properties bought after 9 May 2017, a vacancy fee is applicable if the residential dwelling is not residentially occupied, genuinely available on the rental market, or rented out for six months or more in a 12-month period. The vacancy tax is usually the same as the FIRB application fee paid by investors when submitting a foreign investment application.

Why would any foreigner buy property in Australia?

So why is Australian property still so appealing to foreign buyers?

Mr Chatlani said every buyer had a different reason to purchase in Australia.

“Taking for example Singapore or Hong Kong buyers, with exception of perhaps parts of Sydney, buying in Australia is a smaller outlay.

“A townhouse in Melbourne or Brisbane, or even a house in Perth, for $1 million is a more attractive portfolio option than a small apartment in either of those cities.

“The richer investors from southeast Asia, from China, Taiwan, this is what they look at.

“For the investor in Shanghai where the average apartment price is A$1.5 million, they would gladly buy instead a $900,000 townhouse in Melbourne because it is cheap and they are expanding their property portfolio.”

The financial disincentives through Australian taxes and fees are also prevalent for foreigners in their own local markets.

“Here in Singapore for example, a local buying their second property is subjected to stamp duty of 20 per cent of the purchase price.”

Despite the various additional entry and holding costs, Mr Chatlani still felt the Australian property market was attractive to global investors due to the transparency of the market and stable rule of law that protects all parties within a property transaction.

“The way rental properties are managed in Australia is also very efficient and reliable and provides a complete service.

“Owning an Australian property can be a set and forget proposition.”

He added that education, potential retirement and migration, wealth preservation, relative affordability and potential currency advantages if the Aussie dollar was to rise against their own currency, were all key motivators for foreigners looking at property outside their home country.