Is your lender from another country?
If you are borrowing funds from overseas lenders to purchase property, and they are not in the business of lending money, you will most likely need to seek approval from the Foreign Investment Review Board (FIRB).
FIRB is an Australian government advisory board that reviews the purchase of, or investment in, residential or commercial real estate by someone who is not an Australia citizen or permanent resident.
Generally FIRB approval for a foreign lender is required where:
The foreign person/entity obtains an interest in residential real estate – The lender usually obtains an “interest in residential real estate” when lending money in the form of security over the property by way of a mortgage, to secure repayment of the loan.
The purchasers are borrowing a portion of the purchase funds from a foreign lender;
The foreign lender is not an authorised deposit-taking institution (or subsidiary of one) as listed on the Register of authorised deposit-taking institutions maintained by APRA (www.apra.gov.au/register-authorised-deposit-taking-institutions)
The requirement to obtain FIRB approval for the lender applies even if the purchasers are an Australian citizen or resident for tax purposes. The foreign lender must obtain FIRB approval before they acquire the interest in the residential land. Accordingly, approval would be required before the loan and mortgage documentation are signed by the purchaser and lender.
Conditions on the FIRB approval are dependent on the case itself, and the case officer assessing the application will advise the applicable conditions. However conditions generally include that the foreign lender must:
advise the Australian Taxation Office within 30 days if they gain possession of the residential property;
divest of their interest in any property within six months if it comes into their possession; and
not earn any income from the property by way of capital gain, rent or lease returns.
Unlike when a foreign entity/person is buying the residential premises, there is no restriction on the use of the residential premises when it is being purchased by an Australian citizen or resident for tax purposes.
If the property is an existing residential premises and being purchased by a foreign person/entity, then, in addition to the lender applying for FIRB approval, the purchaser must also make a separate application to FIRB for approval. This is because there are two separate transactions which require separate notification to the Australian Taxation Office.
Generally, in order for the foreign entity to obtain FIRB approval to the purchase, the foreign purchaser will have to either:
Use the property for staff accommodation;
Use the property as their principal place of residence; or
Redevelop the property to create additional dwellings.
There are other uses which are industry specific and the Australian Taxation Office will look at each case based on its merits and the property in question.
If you are purchasing property using foreign funding and the lender is not an authorised deposit-taking institute (or subsidiary of one), there can be significant penalties for you if the lender does not obtain FIRB approval.
This is due to the broad anti-avoidance provisions which provide penalties for persons who undertake a transaction on behalf of, or for the benefit of a foreign person who has not received approval or who would generally be ineligible to obtain an interest in the property.
McKays’ expert Commercial Property team can provide advice on property investment and FIRB approval.