Real Estate Law In
I INTRODUCTION TO THE LEGAL
i Ownership of real estate
Freehold Title is by far the most common form of
ownership for real estate in Australia. Houses, apartments,
commercial buildings, farms and vacant land are examples of
real estate with freehold title.
Freehold Title means that the owner (and their
beneficiaries) owns the real estate outright in perpetuity.
The owner is free to mortgage the real estate to secure a
loan, to lease the real estate to anyone, to gift the real
estate, to leave the real estate by will, and to sell the
real estate. The owner is free to build, add to and
demolish, subject to planning permits.
Strata Title is the other common form of ownership. It is
found in medium density and high-rise buildings where
self-contained parts of the building – strata apartments
(also known as home units or ‘lots’ in a strata plan) have a
separate title. Apartments, townhouses, strata offices,
strata shops and strata industrial units are examples of
real estate with strata title.
Strata Title gives the owner the same rights as the owner
of freehold title real estate, excepting that decisions upon
the building, such as repairs and maintenance, are made
collectively by all the owners of the building, and common
levies are raised for insurance, repairs and maintenance.
Some specialised forms of ownership in Australia are:
Crown Leases which is leasehold title found in farms and
rural properties; Community Title which is found in
residential developments ranging from low density to high
density, and retirement villages; Maritime and Foreshore
Leases of 99 years for land near waterways; Company Title
which is found in older residential apartment buildings; and
Native Title which is found in pastoral and mining leasehold
ii System of registration
Ownership of real estate is transparent in Australia.
There is a record of the name of the legal owner of the real
estate in the Land Titles Registry located in each State and
Territory in Australia. Not only is the legal owner
recorded, but also easements and covenants affecting the
land, mortgages which are secured by the land, claims of
interest (Caveats) made upon the land, and leases of the
land. The price paid to purchase property and the rental
payable on the lease are transparent, but not the amount
owed under a mortgage security.
The recordings are made on a Certificate of Title. A
separate Certificate of Title exists for every parcel of
real estate in Australia. This idea originated from Robert
Torrens who in 1858 introduced the system of transferring
title to property by means of the registration of a Transfer
of title on a Certificate of Title. This system is known as
‘Torrens Title’ and is used for all forms of ownership of
real estate in Australia.
Legislation in Australia confers statutory protection,
known as ‘indefeasibility of title’ upon the person who is
recorded as owner on the Certificate of Title at the Land
Titles Registry. The sole exception is if the transfer is
fraudulent. In practice, this means there is a state
guarantee of good title given to a purchaser when they
purchase a property.
iii Choice of Law
There is no choice of law available in Australia when it
comes to dealing with real estate.
The law which applies to dealings with real estate is the
law of the State or Territory in Australia in which the real
estate is situated. The exception is if the real estate is
owned by the Commonwealth of Australia, in which case the
Commonwealth Law (Federal Law) applies.
OVERVIEW OF REAL ESTATE ACTIVITY
These figures from the Australian Bureau of Statistics
paint the picture of a buoyant real estate market:
- The total value of residential dwellings in
Australia was $6,726,783.5m at the end of the June
- The mean price of residential dwellings in Australia
rose $12,100 to $679,100 at the end of the June quarter
2017 and was up by 10.2% in the year to June 2017.*
- The number of residential dwellings in Australia
rose by 40,000 to 9,906,100 in the June quarter 2017.
- Seasonally adjusted, approvals for private houses
rose 6.2%, and approvals for other private sector
dwellings (mainly apartments) rose 37.6% in the year to
- Seasonally adjusted, capital expenditure on
commercial buildings and structures rose 2.4% in the
year to September 2017.
- Lending to investors is falling, while lending to
owner occupiers is rising, partly as a result of an
interest rate premium being charged to investors
compared with owner occupiers, and partly as a result of
lending policy favouring owner occupiers.
* Price increases for residential real estate varied
considerably around Australia. The three capital cities
which exceeded the mean price increase of 10.2% for the year
to June 2017 are: Sydney – 13.8%, Melbourne – 13.8%, Hobart
– 12.4%. The other capital cities were more subdued:
Canberra – 7.9%, Adelaide - 5%, Brisbane – 3%, Perth – minus
3.1%, and Darwin – minus 4.9%.
III FOREIGN INVESTMENT
Australia is open to foreign investment in real estate in
new residential housing (up to 50% of an apartment
development can be sold to foreign investors), commercial
real estate and farms.
Investment in existing housing stock is restricted to
Australian citizens, permanent residents and holders of
student visas. The ‘existing house’ policy is directed to
housing affordability for the average Australian – that they
are not crowded out or priced out of the housing market.
This is the foreign investment policy as explained by the
Foreign Investment Review Board:
Under Australia’s foreign investment framework,
foreign persons generally need to apply for foreign
investment approval before purchasing residential real
estate in Australia.
Foreign investment applications are considered in
light of the overarching principle that the proposed
investment should increase Australia’s housing stock (by
creating at least one new additional dwelling).
Strict criminal and civil penalties may apply for
breaches of the law, including disposal orders.
Foreign persons may be required to notify and receive
a no objections notification before acquiring an
interest in commercial land in Australia. Different
rules apply depending on whether the land is vacant or
not, whether the proposed acquisition falls into the
category of sensitive commercial land that is not
vacant, and the value of the proposed acquisition.
Proposed direct interests in an agribusiness
generally require approval where the value of the
investment is more than $55 million, with an exemption
applying to investors from Australia’s trade agreement
partners and a $0 threshold applying to Foreign
In 2015-16 the Foreign Investment Review Board approved
41,000 purchases of residential real estate by foreigners
nationwide, with 44% in Victoria and 33% in New South Wales.
For various reasons, this represents a high water mark and
foreign purchases have declined. Most approvals are for
purchases of $1 million or less in price, which indicates
that the properties purchased are mostly strata apartments.
IV STRUCTURING THE
Investors in real estate in Australia have a wide choice
of structures and investment vehicles in which to make their
The most popular forms for direct investment are:
personal name, a company, a trust, and a joint venture. Each
have their relative advantages in terms of asset protection,
taxation treatment, ease of transacting, disclosure and
The most popular form for indirect investment is a
property scheme, which can be a listed real estate
investment trust (REIT) or an unlisted property scheme.
i Personal Name
Real Estate held in a personal name is exposed to
creditors and others who make legal claims.
Why is it that most Australians own their family home in
their own names with this exposure? The answer is that the
family home has many tax exemptions – the sales proceeds are
completely exempt from capital gains tax, the home is exempt
from annual land tax, and no inheritance tax is payable on
death. Investment property has no such tax exemptions.
Transacting is subject to full transfer taxes (known as
stamp duty) no matter if it is a family home or an
investment property. If ownership is shared, the names of
all owners are recorded on the title.
Real Estate held in the name of a limited liability
company protects the shareholders and directors of the
company from legal claims against the property. The
exceptions are director liabilities for personal guarantees,
tax and environmental offences. Companies are useful for
joint ownership of properties for investment.
Real estate investment companies pay tax at the rate of
30¢ in the $1. If more than 20¢ in the $1 of income is
‘active’ income, in which case the rate may be lower. The
tax paid is able to be distributed as a tax credit against
the Australian tax payable by the shareholder.
Transacting is subject to full transfer taxes, whether by
the company or by the shareholder. The ownership interests
are held as shareholdings.
Real Estate held in a trust is usually held in the name
of a limited liability company which acts as the trustee of
the trust. The trustee is usually able to deal with the real
estate in its name, as if it were the owner. The trust
protects the real estate assets against legal claims made
against the trust beneficiaries personally.
There is no tax payable by a trust – because the income
surplus is distributed to the beneficiaries annually. Tax is
payable by the trust beneficiaries on the trust
distributions according to their tax position.
If the trust is a unit trust, then the distributions made
to the trust beneficiaries are fixed, according to the unit
holdings. If the trust is a discretionary trust, then the
distributions are made at the trustee’s discretion. If the
trust is a custodian trust (a bare trust), then the trust
beneficiary or beneficiaries are entitled to fixed
Transacting units in a unit trust follows the same rules
as transacting shares in a company, namely that the
requirements of the Unit Trust Deed must be followed.
Interests in a discretionary trust are not transacted
because the beneficiaries have no fixed entitlements, only
an entitlement to be considered for a distribution.
Transacting interests in a custodian trust follows the
same rules as transacting interests in a personal name.
iv Joint Venture
Real estate held in a joint venture can be held in any
one of three ways –
- In the name of a company. If so, it is an
incorporated joint venture and the commentary about
companies and unit trusts applies.
- In the names of the investors personally – the joint
venturers. If so, it is an unincorporated joint venture
and the commentary about personal names applies.
- In the name of a nominee company. If so, it is an
unincorporated joint venture and the commentary upon
custodian trusts applies.
v Property Scheme
This description is provided by the Australian Securities
and Investments Commission:
A property scheme, also known as a property fund or
property syndicate, is an investment where you, and
other investors, buy 'units' in an investment operated
by a professional investment manager. The scheme's money
is invested in property assets which may include
commercial, retail, industrial or other property sector
The investment manager selects and buys investment
properties and is responsible for maintenance,
administration, rental collection and improvements to
Your money usually stays in the property scheme until
it ends, when the properties are sold and the net
proceeds are distributed to investors.
You may be able to withdraw your money early but
there may be penalties. If the scheme is listed, you may
be able to sell your units on the public market.
Depending on the type of property fund you invest in,
you might get a regular income (distributions), usually
quarterly or half-yearly, and a capital gain on your
original investment, if the value of the scheme's
underlying investment assets increases.
Some property schemes invest in property development,
which means there are extra construction and development
Listed property schemes, known as property trusts or real
estate investment trusts (REITs), are property schemes
listed on a public market, such as the Australian Securities
Exchange (ASX). They are easy to value, easy to sell and are
subject to listing (disclosure) rules.
Unlisted property schemes give less liquidity for their
units, and are less transparent in terms of disclosures to
In terms of taxation, the commentary upon unit trusts
applies, because that is their structure.
V REAL ESTATE OWNERSHIP
Town planning schemes, land zoning and development
controls provide the legal framework for the way that land
can be used in Australia.
Planning rules are strictly enforced. Illegal development
will be subject to use prohibition orders and demolition.
For that reason, checking planning and building compliance
is a vital part of the conveyancing process for the purchase
Common land zonings are: Residential (low density, medium
density and high density), Rural, Business, General
Commercial, Tourist, Industrial, Mixed Zoning and
Environmental. Each zoning has rules for exempt development
which does not need a permit, complying and permissible
development which needs a permit, and prohibited
Checking building compliance is an important part of the
conveyancing process when purchasing real estate in
Complying with the planning rules to develop a property
in Australia requires expert assistance from specialists
such as town planners, traffic consultants, environmental
consultants, land surveyors and lawyers.
Local authorities (Local Councils) determine applications
for development permits or approvals, except for state
significant applications which are determined by the State
Departments of Planning.
Each State has an Environmental Planning Authority which
regulates the investigation and clean-up of contaminated
land to prevent pollution and safeguard community wellbeing.
The planning and development process determines what
remediation is necessary to make contaminated land suitable
Examples of contaminated land are land which is in a
locality where heavy industry or intensive agriculture is
found, or individual sites that have been used for chemical
storage, such as petroleum service stations, and sites with
asbestos materials in buildings or in the soil.
If a property is purchased for development, especially
for residential development, obtaining an Environmental
Impact Statement is an important part of the conveyancing
process because the Contract for the Sale and Purchase of
Land will normally contractually preclude the purchaser from
making any claim against the seller. If there is
contamination, the purchaser should request that completion
of the Contract be made conditional upon the issue of an
Environmental Clearance Certificate.
If a property is purchased as an investment, then an
asbestos clearance may be appropriate, for loose fill
asbestos insulation in the roof cavities of houses, and for
asbestos lagging around pipes, asbestos roofing and in
electrical boards in commercial buildings.
Transfer tax, known as stamp duty in Australia, is levied
on transfers of real estate in Australia. It is payable by a
purchaser either within a fixed period after the Contract is
entered into, or on completion of the Contract, depending on
The rate of duty varies according to the price in the
Contract for the Sale and Purchase of the real estate,
unless it is a gift or a transfer between related parties,
when the rate is according to the market value of the real
The rate of duty varies between the States and
Territories. Exemptions can apply to First Home Purchasers.
Stamp duty surcharges apply to foreign purchasers in New
South Wales, Victoria and Queensland.
This is a snapshot of the current stamp duties payable –
- New South Wales – For an $800,000 property, the
stamp duty payable is $63,490. An 8% surcharge is
payable by foreign purchasers of residential property
which adds another $63,490. There is no surcharge for
- Victoria – For an $800,000 property, the stamp duty
payable is $43,070. A 7% surcharge is payable by foreign
purchasers of residential property which adds another
- Queensland - For an $800,000 property, the stamp
duty payable is $21,850. A 3% surcharge is payable by
foreign purchasers of residential property which adds
iv Finance and security
Australian Real Estate is acceptable security for loan
finance. Lenders require ‘first mortgagee’ status, which is
that their mortgage is the first mortgage recorded on the
title to the property. The reason is that in the event of
default, the lender has the right to sell the property in
its capacity as mortgagee exercising its power of sale. This
right is not restricted by subsequent mortgages or other
interests recorded on the title to the property.
The availability of loan finance for Australian Real
Estate is governed by two factors:
- The status of the borrower: Are they a resident or
non-resident? Are they purchasing for owner-occupation
or for investment?
- The nature of the property: Is it residential - a
house or an apartment? Is it commercial – a hotel,
retail, industrial or office? Is it agricultural – a
farm or other rural property? If commercial, the
remaining term of the lease and the quality of the
The factors translate into whether or not loan finance is
available, the interest rate payable and the LVR
(Loan-to-Value Ratio) that will apply.
VI LEASES OF BUSINESS
Commercial properties are usually sold subject to lease.
Evaluating the quality of the lease is essential The main
characteristics of leases of business premises in Australia
to look out for are:
Term Typical terms are 2, 3 or 5 years, with an
option to renew for the same term. Tenants with extensive
fit outs, such as restaurants, food outlets, retail shops,
cafes, prefer 5 year leases with at least one, if not two,
options to renew for a further 5 years. The option to renew
is exercised at the discretion of the tenant. Demolition
clauses are inserted into leases of buildings which are
intended for redevelopment, which enable the lease to be
Commencement If a tenant pre-commits to premises
in the course of construction, then an Agreement for Lease
is entered into as a precursor to the Lease. The Agreement
for Lease often contains the specifications, such as
services, air conditioning and configuration the tenant
requires. If the premises are existing, the tenant may
negotiate a rent-free fit out period before the lease term
Rent The rent is stated in the lease as either a
gross rent (inclusive of outgoings) or a net rent (outgoings
are added). Office rents tend to be gross rents; industrial
and retail rents tend to be net rents. For these purposes,
outgoings includes Council Rates, Water Rates, Strata
Levies, Land Tax, Building Insurance, Management fees,
Building repairs and maintenance. Outgoings do not include
services, such as electricity, gas, telecommunications,
water usage, waste and other garbage removal, which remain
the tenant’s responsibility.
Goods and Services Tax (GST) is payable on the rent (the
current rate is 10%). It is added to the rent. GST is
remitted quarterly to the Australian Tax Office.
Some shopping centre leases contain turnover rent
clauses. Turnover rent is payable in addition to normal
rent, based on a percentage of the rent.
Rent is usually paid monthly in advance. The annual
outgoings are divided by 12 and are payable along with the
Typically, rent increases annually by either CPI
(Consumer Price Index) or by a fixed percentage, or by the
higher of the two. Rent is reviewed to market at the
commencement of the option term. The lease should contain a
‘ratchet’ clause which prevents the rent from falling below
the rent for the final year of the previous term when the
rent is reviewed to market.
A rent-free period is often negotiated for the first
term, the length of which depends on the tightness of the
rental market. It can be one month per year in a normal
Security Bond A cash security or bank guarantee of
three months rent is typical. The amount can be increased
every time the rent is reviewed. Cash bonds are held by the
landlord, except retail premises bonds which are held by a
rental bonds board. Personal guarantees are common, although
their usefulness is limited because a law suit is needed for
collection, or because the guarantors becomes bankrupt if
the business fails.
Use The use is specified in the lease either in
specific terms such as a café, or in general terms such as a
warehouse. Usually, the use must be approved by the local
planning authority. The use cannot be changed without the
Assignment and sub-letting The tenant has the
right to assign the lease and to sub-let the premises, with
the landlord’s consent. The landlord can require the
incoming tenant to have suitable experience and financial
Make Good At the end of the lease, the tenant is
required to “make good”. This means that the tenant must
hand back the premises in the condition and state of repair
that it was handed over to them, fair wear and tear
excepted. The tenant is to remove their fit out, and to
paint the premises. The tenant is to de-contaminate if their
use has caused contamination.
Insurance The landlord is responsible to insure
the building (except in strata properties, where the strata
corporation does so), and for public liability and for
fittings. The tenant is responsible to insure for public
liability, plate glass (if any) and worker’s compensation.
Energy Efficiency Owners of commercial office
space with a net lettable area exceeding 1,000 square metres
must provide an up-to-date Building Energy Efficiency
Certificate (BEEC) and provide it to tenants before leasing
and purchasers before selling the office space. The
Commercial Building Disclosure (CBD) Program requires BEECs
to contain a National Australian Built Environment Rating
System (NABERS) Energy for offices rating and a CBD tenancy
VII DEVELOPMENTS IN PRACTICE
i. Tax Clearance Certificates for Sale of
Properties now required
All real estate vendors must obtain a Foreign resident
capital gains withholding clearance certificate (a Tax
Clearance Certificate) from the Australian Taxation Office
(the ATO) if the sale price is $750,000 or more. Although
the title indicates Foreign residents, the requirement
applies to Australian residents, in fact to all vendors. The
term resident means a resident for tax purposes.
The Tax Clearance Certificate is given to the purchaser
on settlement of the sale, that is, when the price is paid.
Without it the purchaser is under a legal obligation to
withhold 12.5% of the price and remit it to the ATO. The
purpose is to protect the ATO’s claim for capital gains tax
payable on sale. Note: capital gains tax calculations are
made differently - they are based on profit on sale, not a
percentage of the sale price.
Australian resident vendors (for tax purposes) may apply
for a Tax Clearance Certificate online, or in a paper form.
Where there is more than one vendor, each vendor must lodge
a separate application.
They are issued if the ATO is satisfied that the vendor
has complied with their Australian tax obligations, that is,
if a tax return has been filed within the past two years and
there is no tax overdue. The ATO may issue a partial Tax
Clearance Certificate to cover unpaid tax.
Foreign resident vendors may apply for a Variation to
reduce or eliminate the withholding obligation. They must
prove to the ATO that they will make a capital loss on sale;
or a CGT roll-over applies; or they have carried-forward
losses or tax losses; or the proceeds of sale available at
settlement are insufficient after repayment of the mortgage
or other security interest; or they are selling their main
residence (if before 30 June 2019).
ii Purchaser declarations for transfer duty
All purchasers must complete a declaration when buying or
acquiring property in Australia. A new form was introduced
on 1 July 2017.
Information collected through the purchaser/transferee
declaration/statement is necessary to meet Commonwealth
Reporting Requirements and to meet the Revenue Office’s
responsibilities to administer the Duties Act, including the
identification of foreigners for purchaser surcharge duty
and land tax.
The information collected includes:
- Property details, including if it is residential or
commercial, whether it is owner-occupied or an
- Transactional information, including the
transfer price, contact date and settlement date.
- Identity information of the vendor/transferor and
purchaser/transferee including name, address, date of
birth (for individuals) and Australian Company Number /
Australian Business Number (for non-individuals).
- If the purchaser/transferee is the trustee of a
trust, information about the trust.
- Nationality and immigration details of the
vendor/transferor and purchaser/transferee.
The Commonwealth Reporting Requirements relate to foreign
investment. The information is provided to the ATO for the
purpose of information-matching and ensuring compliance with
the taxation laws of the Commonwealth. The ATO can impose a
‘vacancy fee’ on residential real estate that is left
unoccupied for more than 183 days per year.
The Duties Act requirements are directed to raising
revenue. The information collected is used to identify
whether a foreign purchaser surcharge is payable for
transfer tax/stamp duties purposes. The information
collected is also used for imposition of the annual land tax
surcharge for foreign owners of residential real estate.
The land tax surcharge for foreign person ownership is
2.0% in New South Wales. In both Victoria and Queensland,
the surcharge is 1.5% and is known an absentee owner
surcharge (known as a ‘ghost tax’) which is levied on
unoccupied properties. For example, if land tax is levied at
the rate of 1.6% on the land value in New South Wales, then
the surcharge will mean that land tax is levied at the rate
of 3.6% on residential land in foreign ownership.
iii Tax deductions for travel to visit investment
real estate and some depreciation abolished
From 1 July 2017, the Government has disallowed
deductions for travel expenses related to inspecting,
maintaining or collecting rent for a residential rental
property. This was an integrity measure taken to address
concerns that many taxpayers have been claiming travel
deductions without correctly apportioning costs, or have
claimed travel costs that were for private travel purposes.
From 1 July 2017, the Government has limited plant and
equipment depreciation deductions to outlays actually
incurred by investors in residential real estate. Plant and
equipment items are usually mechanical fixtures or those
which can be ‘easily’ removed from a property such as
dishwashers and ceiling fans. This was an integrity measure
taken to address concerns that some plant and equipment
items were being depreciated by successive investors in
excess of their actual value.
VIII OUTLOOK AND CONCLUSIONS
The outlook and conclusions are well described in these
extracts from a paper presented by Jonathan Kearns - Head of
Financial Stability, Reserve Bank of Australia at a
conference of Aus-China Property Developers, Investors &
Financiers held at Sydney on 20 November 2017:
Purchases and financing by foreigner investors and
banks have been prominent in the current commercial
property cycle. We have seen this before and are well
aware of the impact this can have on the cycle. The
increased purchases of dwellings by foreign buyers,
particularly for investment purposes, are a more recent
phenomenon and so their impact on the housing cycle is
Conditions in the housing market have eased,
particularly in Sydney where prices had experienced
strong growth and are particularly high, possibly giving
lending restrictions greater impact in Sydney. In
Melbourne, conditions remain stronger than in other
capital cities. On the other side of the country, and at
the other end of the spectrum in terms of housing market
conditions, the Perth housing market remains weak.
Prices have fallen gradually over the past two to three
years, with rents also falling as the rental vacancy
rate has increased to its highest level since 1990.
Commercial office markets have been strongest in
Sydney and Melbourne with low vacancy rates and rising
prices. In contrast, conditions have been weaker in
Perth where vacancy rates increased sharply with the
downturn in the state economy from the decline in mining
Purchases by foreign buyers do not, on the whole,
reduce the supply of dwellings available to local
residents and in fact may actually contribute to
expansion of the housing stock. Foreign buyers in
Australia for work or study would have been renting if
they did not purchase. Other foreign buyers rent the
property as an investment and so contribute to the
rental stock. Also, there are some new developments that
only proceed because they get high pre-sales from
The strength of the Australian property market, and
the participation by foreign buyers, has also enticed
some foreign developers to Australia for specific
projects, but overall they remain a small part of the
market. Foreign banks also have a very small role in
residential property lending in Australia.