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TAXING TIMES AHEAD FOR FOREIGN RESIDENTIAL OWNERS
Melbourne, like most Australian cities, is in the midst of a severe rental crisis with the vacancy rate now 0.9%, half of that of a year ago. Demand, driven by a dispersion of share houses during the pandemic and now a population boom, combined with the much-discussed supply constraints and interest rate rises, ultimately resulting in unsustainable rental growth.
Faddy Fan Associate Director KordaMentha
The pressing issue is exacerbated by a significant scarcity of rental apartments to meet this escalating demand. Currently, ownership of rental apartments in Melbourne is predominantly composed of individual investors, both from domestic and foreign origins. The desire to acquire and retain a rental apartment is heavily influenced by its financial outcomes, which is being tested to the absolute limit.
article is that foreign owners cannot buy established dwellings, only new dwellings. Case study one – the escalating acquisition costs from 2014 to 2023 for off-the-plan apartments in Melbourne. 2014 2015 2019 2023 Contract price $550,000 $550,000 $550,000 $550,000 Stamp Duty* (Investor) $1,600 $1,600 $28,070 $28,070 Foreign N/A 3% 7% 8%
Over the past decade, Melbourne experienced a notable wave of foreign investors seeking to acquire apartments as investment assets, driven by the allure of stable income and potentially the ability to occupy in the future. This surge in demand was encouraged by Government policy and led to an increase in the supply of rental apartments, as developers exhibited a willingness to develop large scale apartment projects based on robust market confidence in successful apartment sales. Foreign Investment Review Board (FIRB) data shows that the approvals for residential purchases increased rapidly between 2010 to 2016 and peaked in 2015-16 (with total value of $72.4 billion). Challenges to holding the investment property As the property market boom attracted more foreign investors, they’ve become an easy tax target. In response to concerns about housing affordability and the impact of foreign investment on the local market, state and federal government introduced several policies aimed at “cooling down” house prices, even though foreigners couldn’t compete for the established dwellings that saw the bulk of price escalation. These policies directly affected the acquisition and holding costs for foreign investors, putting a handbrake on the large-scale “investment grade”, highly lettable apartment supply. Case study one shows the changes in total acquisition costs for a foreign investor buying an off-the-plan apartment in Melbourne between 2014 and 2023. For the same contract value, the total acquisition costs have increased from $1,600 to $86,170. Critical to note in this
Purchaser Additional Duty FIRB Application Fee Total Acquisition Costs
($16,500) ($38,500)* ($44,000)
N/A
$5,000
$5,500
$14,100
$1,600 (0.3%)
$23,100 $72,07
$86,1700 (15.6%)
(4.2%)
(13.1%)
*Victoria government removed stamp duty concessions for off-the-plan sales to investor in July 2017. With each increase in duties and fees we saw significant reductions in FIRB approvals, with a notable decline from 2016-2017 and 2019 to 2020. FIRB approvals for residential purchasers are now almost one tenth of the levels seen in 2015-2016. Whilst geopolitical tensions, cost and planning issues have also been significant, tax deterrents have no doubt been a factor in halting the supply of lettable high-rise apartments.
8 – August / September 2023
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