Think before you sign!

We know the excitement when you are about to secure the house of your dreams or perhaps, owning your own home. All those months of inspections and talking to agents have finally led to this, and you eagerly anticipate signing your name on the dotted line.

Before you get carried away by your emotions, however, pause and consider some of the more practical aspects of your acquisition:

1. When are you required to effect settlement, and will you be able to secure funds in time?

If settlement is within a short period, ask yourself whether your loan will be ready. Anticipate that things take time: Approval takes time to issue and documents take time to be drafted and sent. Speak to someone in the bank, and ask them about realistic timeframes and allow yourself a bit more time in case things are delayed. If your settlement is not until a few years into the future, monitor changing lending conditions and be prepared for the unexpected.

 

  1. How much are you purchasing the property based upon your emotions?

Yes, that rug and sofa combination really bring out the ‘scandi’ vibe, but what is left when you take that away? Is the house secretly crumbling in places obstructed from view by those lovely fiddle leaf pot plants? The walk-in closet might be big, but the cost of buying a structurally unsound property is bigger. Look for things like water damage, cracks and other signs of damage. We don’t recommend you move sofas and furniture around during your inspection like a crazed person, however we do recommend getting a pest and building inspection report (or including it in your contract special conditions).

  1. Paying for things you do not need.

Sometimes buying a house is like buying a car, albeit a lot more expensive (unless maybe you drive a Pagani). You can get side-tracked by all the ‘bells and whistles’, things that you are paying for that you don’t need. Would you like to add in Hands-Free Access Power Tailgate? Panoramic sunroof? Built in vacuum cleaners? Maybe, maybe not, depending on your use. This is particularly the case in apartments. You might have a New Years’ Resolution to work out, but how often will you be using the gym or pool that you’re paying for through your Owners’ Corporation? Don’t get me wrong, having facilities and security are great (goodbye gym membership). However, you need to be honest with yourself and do a bit of your own cost-benefit analysis.

  1. Do your own homework.

It goes without saying that, no-one looks after your interests like yourself. Spend some time to research the area you are buying, the market trends, facilities, etc. Read up on your entitlements to stamp duty concessions and exemptions. Don’t be afraid to ask questions. It may seem boring, but there’s a saying that -Knowledge is Power-!

Are you really prepared for what happens next?

Common property disputes that may face property buyers before and after settlement

When buying a new or existing property, most buyers will generally expect that they will get the property they were promised in the contract. Unfortunately, it is quite common for buyers of new or existing properties to discover either before or after settlement that the house or land they got was not what they were promised in the contract, and as a result many buyers can end up in bitter disputes with the vendor or the neighbours over various issues. This article will discuss some of the most common types of property disputes that buyers may experience after settlement, and the ways that buyers can deal with them both before and after settlement.

Disputes with the vendor over defects in the property

These types of disputes happen all too often. Whether it is with a brand new off the plan development, or with an old house that has been renovated, there is always the chance that a buyer may end up discovering that there are defects with the property they purchased. These defects can relate to either the property’s title or to physical defects in the house, and they can result in the settlement of the property being delayed or cancelled, or the buyer being forced to sue the vendor after settlement.

Defects in a property’s title can include a Certificate of Title that has the wrong property owner or Volume and Folio details, encumbrances on the title such as a mortgage, charge or caveat, or hidden easements or covenants that give neighbouring properties or government bodies the right of access to the land. Most title defects will usually be picked up and resolved before settlement, as a faulty title cannot be transferred, however, encumbrances such as easements and covenants may not be spotted so easily, and they can cause a lot of problems for the new property owner.

Physical defects in a property can include obvious things such as problems with the design or construction of the house, missing furnishings and features that were promised in the contract, and failures with the plumbing and drainage systems. A buyer can spot most physical defects in a property by inspecting the property personally or by hiring an expert to conduct a professional building inspection.

Dispute with the neighbours over property boundaries

Disputes with the neighbours over property boundaries tend to happen after settlement, when a new home owner has moved into the property and discovers to their surprise that the physical boundaries of their property do not match the boundaries that were stated in the property’s title, or that part of a neighbour’s property has encroached upon their land.

These situations can arise due to a number of reasons, including errors in a previous land survey, the boundary fences being built or moved into a wrong position, or an intentional or accidental encroachment of a portion of land by a neighbour. They can result in a new home owner being caught up in a fencing dispute, or worse, having to make or defend against an adverse possession claim to a portion of their land.

To avoid getting caught up in a boundary dispute, we recommend that buyers should hire a professional surveyor to conduct a survey of the property boundaries. This survey will generally disclose to the buyer whether the physical boundaries of the property match the boundaries of the property on the title, and whether there are likely encroachments upon the property by a neighbouring property.

Who pays property taxes when using Vendor Finance?

Vendor Finance has been used in selling and buying real estate in Australia since the 1870’s. 

Vendor Finance throughout the Decades

Its popularity has fluctuated with changes in social and economic conditions and the availability of bank and non-bank finance.

In the late 1960s, 1970s & early 1980s, home builders became major users of Vendor Finance to sell house and land packages to young couples.

During the mid-1980s to the mid-2000s, the number of Vendor Finance transactions diminished significantly as increasing availability of home loan finance from the banks and the non-bank lenders led to growing competition and resulted in lenders offering Purchasers, with minimal savings records, loan finance of up to 95% of the property valuation.

 

The Resurgence of Vendor Finance

Over more recent years, Vendor Financing has slowly been regaining popularity as it is able to meet the largely unsatisfied demand of Australians who want to ‘escape’ from the rental market and purchase their own home but who for some reason are unable to obtain, or do not qualify for, loans from the banking/non-banking system.

These are generally Purchasers with low deposits, who have their own business or trades, or whose credit rating is impaired. Alternatively, it is used when the property being purchased is of a type for which bank or non-bank finance is not easily obtained by anyone.

 

What is Vendor Finance?

With Vendor Financing, the Purchaser takes possession of the property and pays the Vendor in installments, typically of principal and interest, until the purchase price of the property is paid off.

Arrangements between the parties are subject to negotiation, however, the Purchaser typically becomes liable, whether directly or indirectly by way of reimbursement paid to the Vendor, for property insurance premiums, fees, levies, rates, taxes and maintenance and repair upon taking possession of the property.

If you are considering entering into an Vendor Financing arrangement, contact the Property Team at Nevile & Co. to discuss how to best protect your interests.

 

Discretionary Trusts and Beneficiary Entitlements

The establishment of a Trust creates a relationship between a Trustee and the Beneficiaries of the Trust, in which the Trustee is under an obligation to hold property for the benefit of the Beneficiaries.

The Trust Deed sets out the terms of the obligation and establishes the Trustee as the legal owner of the Trust property, with the Beneficiaries holding a beneficial rather than proprietary interest in the Trust property.

In a Discretionary Trust the Beneficiaries do not have a fixed entitlement or interest in the Trust property. Rather the Trustee has the discretion to determine the nature, extent and recipient of any distribution of the capital and/or income of the Trust.

The Trustee’s discretion is not absolute. The Trust Deed sets out the Beneficiaries within a nominated class to whom the Trustee can distribute.

As a general rule, Beneficiaries will not have an interest in the Trust property until an entitlement is created by the Trustee. That entitlement, often referred to as a ‘present entitlement’, can either be distributed or retained in the Trust for investment or other purposes. If retained, it is referred to as an ‘unpaid present entitlement’.

The advantage of the Trustee being able to exercise discretion in relation to the distribution of Trust capital and income is the flexibility it affords the Trustee and the Beneficiaries.

Care should be taken however when dealing with Beneficiary entitlements to ensure the dealings are properly recorded in the Trust accounts and legally effective as well as tax effective. While seemingly obvious, taking such simple steps can help the Trustee to avoid potential adverse consequences should there be a breakdown in the relationship between the Trustee and the Beneficiaries, or when a Beneficiary faces demands from its creditors.

Strategies such as forgiving or releasing beneficiary entitlements, in appropriate cases, can also be utilized to mitigate risk.

While Discretionary Trusts offer the benefits of asset protection, tax savings and greater flexibility in estate planning, making sure the Trustee deals with Trust property properly is vital.

Regardless of whether you are a Trustee, or a Beneficiary of a Discretionary Trust, if you are at all uncertain as to the efficacy of any proposed dealings with the property of your Trust, we recommend that you take the time to discuss the practical, and legal issues you will need to consider with us, before giving the Beneficiaries entitlements to trust income or property.

For further enquiry, please contact us.

Capital Gains Tax (“CGT”) and the Foreign Resident Capital Gains Withholding (“FRCGW”) Tax

What is Capital Gains Tax (“CGT”)?

When you sell a property, you may make a capital gain to the extent that the capital proceeds you receive are more than the cost base of the property.

The capital gain is the difference between what it cost you to purchase and hold the property, and what you got when you sold it.

Capital Gains Tax (“CGT”) is payable on the capital gain.

Exemptions

Your ‘main residence’ (your home) is generally exempt from CGT unless you were not a resident of Australia for tax purposes while you were living in the property. If you are a foreign resident for tax purposes at the time the sale contract is entered into, you may no longer be entitled to claim the main residence exemption. In the 2017-18 Budget, the government announced that foreign tax residents will no longer be entitled to claim the main residence exemption when they sell property acquired by them on or after 9 May 2017 in Australia.

The change means that, only Australian residents for tax purposes at the time of the disposal (contract date), can access the exemption. Please note that the Australian Taxation Office (“ATO”) generally deems overseas students enrolled in a course that is more than six months long at an Australian institution, Australian residents for tax purposes.

Despite the name, Foreign Resident Capital Gains Withholding (“FRCGW”) applies to ALL Vendors disposing of Australian property where the contract price is $750,000 and above.

Clearance Certificate

In those circumstances, the Purchaser is required to withhold 12.5% of the purchase price from the sale proceeds as FRCGW tax, and pay it to the ATO, unless the Vendor can provide proof that they were not a foreign resident for tax purposes at the time the transaction was entered into. This is achieved by applying for the Clearance Certificate online from the ATO. This must be initiated early enough so that settlement can take place on time, as the ATO can take up to 28 days to issue a Clearance Certificate. Clearance Certificates are normally valid for 12 months, and can be used by the same Vendor for the sale of multiple properties while valid.

Substantial penalties apply in circumstances where a Purchaser does not withhold and remit the relevant amount from the purchase price if they do not receive a valid Clearance Certificate.

The total CGT payable will be calculated when you submit your next tax return, and any difference between the total CGT payable and that withheld as FRCGW, will be payable (or refundable) at that time.

We invite you to contact us if you require further information and/or assistance with identifying and managing your obligations in relation to CGT and FRCGW.

 

Disclaimer: The information contained in this briefing is general in nature, not intended to be definitive, and does not take into account specific circumstances.

It is recommended that you seek appropriate legal advice as to the application of the taxes discussed in this briefing to your specific circumstances.

Citizen / PR or Non-Resident – Stamp Duty requirements

Stamp Duty where one party is a Citizen or PR, and the other is Non-Resident

When you buy or acquire property in Victoria, you have to pay land transfer duty (also known as stamp duty).

If you are a foreign purchaser and you acquire residential property, as well as land transfer duty, you have to pay foreign purchaser additional duty (for acquisitions on or after 1 July 2016, the additional duty rate is 7%) on the share of the property you acquired. Therefore, if you are purchasing as joint tenants, your share is 50%. If you are purchasing as Tenants-in-common, your share of the property acquired will be that nominated by you.

The additional duty is calculated on the dutiable value of the non-resident’s share of the residential property, which is the greater of the price paid for, or the market value of, the property/land, prior to any land transfer duty concessions being applied.

To calculate the total duty payable, including additional duty:

1. Calculate the land transfer duty in the usual way, applying any relevant concessions;
2. Then, calculate the additional duty on the non-resident’s share of the dutiable value of the property (ignoring any concessions that reduce dutiable value); and
3. Add the land transfer duty amount in step 1 to the additional duty amount in step 2 to determine the total duty amount payable for the transfer.

Please note that if the property acquired is exempt from land transfer duty, the additional duty does not apply.

Therefore, if you are a foreign purchaser, you may be entitled to an exemption from additional duty if you purchase a principal place of residence jointly with your spouse/domestic partner who is an Australian Citizen, Permanent Resident or New Zealand Citizen who holds a special category visa. You must, however, live in the property as your principal place of residence for a continuous period of 12 months, starting within 12 months of becoming entitled to possession of the property.

You can apply to the State Revenue Office to vary this requirement to:
• reduce the 12 month residence period,
• determine that a temporary absence from the residence does not break the continuity of residence, or
• extend the period in which the residence must begin.

This exemption is available for transfers from 14 June 2018.

It is also worth noting that additional duty applies to any arrangement or transaction involving the transfer of an interest in residential property to a foreign purchaser, including:
• Buying a residential property at, for example, auction or by private sale;
• Buying a non-residential property with the intention of converting it to residential property;
• Being given a residential property as a gift; and/or
• Certain leasing arrangements in respect of residential property.

 

We invite you to contact us if you require further information and/or assistance with identifying and managing your obligations in relation to Stamp Duty requirements.

Disclaimer: The information contained in this briefing is general in nature, not intended to be definitive, and does not take into account specific circumstances.

It is recommended that you seek appropriate legal advice as to the application of the taxes discussed in this briefing to your specific circumstances.

The cost of owning property in Victoria: Land tax

In this informative article, we look at Land Tax in Victoria.

 

 When is land tax payable?

Land tax is payable in certain circumstances and is payable in addition to other taxes such as the Victorian vacant residential land tax, the absentee owner surcharge and the federal annual vacancy fee.

Land tax is payable when the total site value of all the Victorian property that you own as at 31 December is equal to or exceeds the current limit of $250,000.00.

The site value is the unimproved value of your land and does not include capital improvement such as buildings.

 

Exemption

Your home, that you live in is exempt from this tax, however, if you rent out your home or change your address, the exemption ends, and you must notify the State Revenue Office immediately. Other exemptions also apply.

 

What is Land Tax Payable On?

 

Land tax is payable on rental and investment properties, commercial properties such as retail shops, office premises and factories, holiday homes, vacant land, and other non-exempt land.

 

Land Tax Rates

The current land tax rates apply annually on a scale from approximately 0.2% to 2.25 of the total site value of all Victorian property that you own as at 31 December. It all depends on the site value.

 

Examples

 

If you have a site value of $500,000.00 then the land tax payable is $775.00.

 

If the site value is $5,000,000.00 then the land tax payable is $69,975.00.

 

To find out what your potential land tax liability may be, you can do so via the State Revenue Office Land Tax Calculator.

 

Please see our COMPARISON-TABLE summary.

We invite you to contact us if you require further information and/or assistance with identifying and managing your obligations in relation to the cost of owning your property in Victoria.

 

Disclaimer: The information contained in this briefing is general in nature, not intended to be definitive, and does not take into account specific circumstances.

It is recommended that you seek appropriate legal advice as to the application of the taxes discussed in this briefing to your specific circumstances.

The cost of owning property in Victoria: Vacant Residential Land Tax

In this informative article, we look at Vacant Residential Land Tax in Victoria.

 

Vacant Residential Land Tax

The first tax to be aware of is the ‘Vacant Residential Land Tax’. This tax was introduced earlier this year, on 1 January 2018. The tax applies to purchases made after 1 January 2018.

 

Why is this tax payable?

This tax was designed to help address the lack of housing supply in Victoria.

 

When is this tax payable?

The Vacant Residential Land Tax is payable in certain circumstances, and is payable in addition to Victorian land tax, the absentee owner surcharge and the federal annual vacancy fee.

The tax applies to homes in inner and middle Melbourne that have been vacant for more than 6 months in the previous calendar year.  The affected municipal council areas are listed in the table below:

Banyule Hobsons Bay Moonee Valley Yarra
Bayside Manningham Moreland
Boroondara Maribyrnong Port Phillip
Darebin Melbourne Stonnington
Glen Eira Monash Whitehorse

 

So, when is a property considered ‘vacant’? A property is considered to be vacant, is a property that has not been lived in for more than 6 months in the previous calendar year by:

  • The owner, or a person living in the home permitted by the owner;
  • A person living in the property or home under a lease or short-term leasing agreement – the person living in or ‘occupying’ the home does not need to be the same person, or be living in the home for a single continuous period of time

It is not enough for the property to be just available to live in or to be occupied by someone. The property must be used and occupied or lived in for more than 6 months. It is also not enough for the property to be used on a casual basis by friends or family of the owner e.g. For hosting a party or for staying over on weekends.

 

Vacant vs Not Vacant

Vacant – you will need to pay this tax Not Vacant – you will not need to pay this tax
If you use the property for less than 6 months

i.e. from 1 January 2018 – 1 March 2018

 

When you or someone that you give permission to live in the property for more than 6 months i.e from 1 January 2018 – 1 December 2018

 

 What is the rate payable?

The rate is an annual or yearly tax and is set at 1 per cent of the Capital Improved Value (CIV) of taxable land.  The CIV is the value of ‘land, buildings and any other capital improvements’ made to the property.

 

Example

If the CIV is $400,000.00 and if the property is considered to be ‘vacant’ then the Vacant Residential Land Tax payable is $4,000.00 annually.

If the CIV is $4,000,000.00 then the amount payable is $40,000.00.

If the CIV is $400,000.00 and the property is not ‘vacant’ then you will not need to pay this tax.

 

Please see our COMPARISON-TABLE summary.

We invite you to contact us if you require further information and/or assistance with identifying, and managing your obligations in relation to the cost of owning your property in Victoria.

 

Disclaimer: The information contained in this briefing is general in nature, not intended to be definitive, and does not take into account specific circumstances.

It is recommended that you seek appropriate legal advice as to the application of the taxes discussed in this briefing to your specific circumstances.

The cost of owning property in Victoria: Absentee Owner Surcharge

In this informative article, we look at Absentee Owner Surcharge in Victoria.

 

Absentee Owner Surcharge

In certain circumstances, the Absentee Owner Surcharge is payable in addition to the Victorian vacant residential land tax, land tax and federal annual vacancy fee. The fee applies from 1 January 2017 to Victorian land owned by an absentee owner.

 

When is the surcharge payable?

The Absentee Owner Surcharge is payable by an ‘absentee individual’. An absentee individual can ne an individual (human), corporation or trust.

Absentee Individual Absentee Corporation Absentee Trust
An absentee individual is any individual who:

1.    Is not an Australian citizen or permanent resident;

2.    Does not live or reside in Australia; and

3.    Was absent from Australia:

a.    On 31 December of the year prior to the tax year, so for example, you were absent from Australia on 31 December 2017 and the tax year ends on 30 June 2018; or

b.    For more than 6 months in total in the calendar year before the tax year.

 

An absentee corporation is a corporation:

 

1.    That is incorporated outside Australia; or

2.    In which an absentee person/s has a controlling interest (i.e. holding more than 50 percent of shares in a corporation)

An absentee trust can be a discretionary trust, a unit trust or a fixed trust which has at least one beneficiary who is an absentee person.

There are different consequences for each type of trust.

Tax Rate Payable

The Absentee Owner Surcharge is an additional amount to other Victorian taxes which an owner may need to pay. The current rate is 1.5% of the general and trust surcharge rates, of the land tax payable of Victorian land owned by an absentee owner. If you pay land tax, then you may need to pay the Absentee Owner Surcharge.

 

What you need to do

If you are an absentee owner at 31 December of any given year, then the surcharge will apply. You must tell the State Revenue Office (SRO) before 15 January of the following year. So if you are an absentee owner as at 31 December 2018, then you must notify the SRO before 15 January 2019.

 

You can notify the SRO by using the SRO Absentee Owner Notification Portal. If you do not tell the SRO that you are an absentee owner before 15 January, then penalties may apply.

 

Example

Bart is a Canadian citizen who is not an Australian citizen and is not an Australian permanent resident. Bart lives in a house he owns in Northcote up until 1 May 2018. On 1 May 2018 Bart moves back to Canada.

Because Bart is not an Australian citizen and does not holds an Australian permanent residency visa. Bart stopped living in Australia on 1 May 2018 and will not return by 31 December 2018.

This means that Bart is an ‘absentee owner’ and must notify the SRO of his absence by 15 January 2019. Bart will also need to pay the surcharge.

 

Please see our COMPARISON-TABLE summary.

We invite you to contact us if you require further information and/or assistance with identifying and managing your obligations in relation to the cost of owning your property in Victoria.

 

Disclaimer: The information contained in this briefing is general in nature, not intended to be definitive, and does not take into account specific circumstances.

It is recommended that you seek appropriate legal advice as to the application of the taxes discussed in this briefing to your specific circumstances.

The cost of owning property in Victoria: Federal Annual Vacancy Fee

In this informative article, we look at Federal Annual Vacancy Fee in Victoria.

 

Federal Annual Vacancy Fee

 The Federal Annual Vacancy Fee or ‘ghost tax’ was introduced on 9 May 2017. This fee applies to purchases of property made by foreign persons from 9 May 2017.

 

Why is this fee payable?

The fee is designed to encourage foreign owners of residential dwellings/houses/properties to make them available for rent where the house is not used as a residence. This increases the number of houses available for Australians to live in.

 

When is this fee payable?

This fee applies to an individual who is ‘not ordinarily resident’ in Australia. This includes a holder of a visa that permits the individual to remain in Australia for only a limited period, which is subject to the rules.  A foreign owner can also include a company or trust. This fee is an annual fee.

 

Who Will Need to Pay the Fee/Reporting Obligations

When purchasing or investing in property in Australia, Foreigners have reporting obligations.

Foreigners who wish to purchase property and make a foreign investment application for residential property, and Foreigners who also acquire residential properties using the New Dwelling Exemption Certificate are required to annually inform the Australian Taxation Office (ATO) whether properties owned by them are ‘residentially occupied’ or ‘genuinely available’ on the rental market as a residence for at least six months per year.

 

Residentially Occupied

Genuinely Available
The property is considered to be ‘residentially occupied’ if for at least 6 months (equivalent to 183 days) it can be proven that:

1.    The property owner or a relative of the owner genuinely occupied the property as a residence; and

2.    The property was occupied because it was leased/rented or licensed to someone for at least 30 days

The property must have been made ‘genuinely available’ as a residence (place to live) on the rental market, with minimum durations of 30-day terms

i.e. the rental period must be at least 30 days

 

If the above can be proved, then you will not need to pay the fee.

The ‘vacancy year’ is based on the first and each 12 months period after the owner’s initial right to occupy the dwelling/property.

An ‘Annual Vacancy Fee Return’ form is required to be lodged by all affected foreign person and is expected to require disclosure of the number of days that the property was residentially occupied. You must lodge this form, and keep records relating to people occupying/living in the property for five years. If you fail to do so, then this will result in penalties as high as $52,500 and you will have to pay the fee for that year.

If you fail to notify the ATO, or if you notify the ATO that the property was not residentially occupied or genuinely available then you will also be liable for the fee.

 

Fee Rates

The fee is the equivalent to the relevant foreign investment application fee for the property at the time it was acquired/purchased by the foreign investor.

The fee currently ranges between $5,000.00 and $91,300.00 depending on the purchase price of the property and is assessed by the ATO upon lodging the ‘Annual Vacancy Fee Return’.

 

Please see our COMPARISON-TABLE summary.

We invite you to contact us if you require further information and/or assistance with identifying and managing your obligations in relation to the cost of owning your property in Victoria.

 

Disclaimer: The information contained in this briefing is general in nature, not intended to be definitive, and does not take into account specific circumstances.

It is recommended that you seek appropriate legal advice as to the application of the taxes discussed in this briefing to your specific circumstances.