FIRB rules for foreign property borrowers

The framework in brief

Australia screens certain foreign investments in land and businesses. The Treasurer makes decisions with advice from the Foreign Investment Review Board, and the framework is administered by Treasury. The Australian Taxation Office administers residential land and some other compliance matters. Official guidance, including detailed guidance notes, is published at foreigninvestment.gov.au and firb.gov.au.

The main law is the Foreign Acquisitions and Takeovers Act 1975, together with its regulations. Whether you need approval depends on who you are, what you are buying and its value. Our lesson on FIRB for foreign borrowers covers the basics, and this article focuses on how the rules affect financing.

Are you a foreign person?

The definition of a foreign person is broader than many people expect. It can include individuals not ordinarily resident in Australia, companies and trusts in which foreign persons hold substantial interests, and foreign government investors. A company incorporated in Australia can still be a foreign person if enough of it is held by foreign interests.

Getting this question right matters. Acquiring land without required approval can lead to significant penalties and orders to dispose of the property, which would also undermine any lender's security.

Residential, commercial and agricultural land

The rules treat land types differently.

Residential land. Foreign persons generally need approval to buy established dwellings or vacant residential land, and there have been restrictions on buying established dwellings. New dwellings and land for development may be treated differently, often with conditions such as building within a set time.

Commercial land. Approval thresholds for vacant and developed commercial land vary depending on the investor and the land's value. Some investors from countries with free trade agreements have higher thresholds.

Agricultural land. Agricultural land has its own thresholds and reporting requirements, including registration on a register of foreign ownership kept by the ATO.

Thresholds are indexed and updated, so always check the current figures on the official guidance pages rather than relying on older material.

How lenders treat foreign borrowers

Private and bank lenders both need to be confident that the borrower lawfully holds the property. For foreign borrowers, they typically:

• ask for a copy of the approval letter or legal confirmation that none is required;
• check any conditions in the approval, such as development timeframes;
• confirm the borrowing entity matches the entity named in the approval;
• complete anti-money laundering checks on foreign directors and beneficial owners;
• allow for higher duty and land tax in feasibility and serviceability.

Many lenders lend at lower leverage to foreign borrowers or apply additional conditions. Our lesson on AML and KYC explains the identity checks involved.

State surcharges

Separately from federal approval, states and territories charge foreign purchaser surcharges on transfer duty and, in many places, surcharge land tax on residential land held by foreign persons. These charges vary widely and can be significant. Use our stamp duty hub to find the relevant state revenue office, and read stamp duty and land tax by state for an overview.

Surcharge land tax is an ongoing cost that affects the holding period of a development. It also interacts with mortgage priority, because unpaid land tax can become a charge on the land. Our guide to land tax charges and mortgage priority explains why lenders check land tax closely.

Timing your approval and your finance

The order of steps matters. Contracts are often made conditional on approval, and lenders will not settle until approval is in place. Applications have processing times and fees, and complex cases can take longer. Allow for this in your settlement date and in any bridging arrangement. A short delay can push you into higher-cost finance or default interest if you have not planned for it. See our guide to term sheet fees and default clauses.

Development projects

Foreign developers face additional considerations. Approval for development land may carry conditions such as commencing construction within a set period. GST, the margin scheme and purchaser withholding also apply. Our guide to the GST margin scheme and development cashflow explains how those obligations affect funding.

Lenders financing foreign-owned developments usually want to see the approval conditions, a realistic program to meet them and evidence that surcharges have been included in the feasibility.

Tax residency and withholding

Foreign residents selling Australian property may be affected by foreign resident capital gains withholding, where the purchaser withholds an amount from the price and pays it to the ATO unless the seller provides a clearance certificate. Australian residents selling property may also need a clearance certificate to avoid withholding. The ATO explains these rules at ato.gov.au. Lenders relying on a sale to repay a loan will want to understand how withholding affects the net proceeds.

Practical checklist

• Confirm with a lawyer whether you, your company or your trust is a foreign person.
• Check whether the acquisition needs approval and what conditions might apply.
• Include application fees, surcharges and processing time in your plan.
• Tell your lender early about your foreign investment position.
• Keep the approval letter and conditions with your finance documents.
• Check how capital gains withholding will affect your exit.

A worked example

Mei is a temporary resident who wants to buy vacant land in a growth corridor to build a home, and later to develop a second lot. Her lawyer confirms she is likely to be a foreign person under the rules and that the land purchase needs approval. The contract is made conditional on approval, and the application is lodged with the required fee. Mei tells her lender at the start. The lender asks for the approval letter before settlement, checks the condition requiring construction to start within a set period and adds the state's foreign purchaser duty surcharge and surcharge land tax to the project costs. Because these costs reduce the funds available for construction, the lender offers a lower loan amount than Mei first expected. Planning early avoided a last-minute shortfall at settlement.

Common mistakes

• Assuming permanent residence or citizenship of a family member changes your own status.
• Using a company or trust without checking whether it is itself a foreign person.
• Signing an unconditional contract before approval is in place.
• Forgetting state surcharges when estimating total costs.
• Overlooking approval conditions, such as development deadlines, that a lender will monitor.

Where to get official help

Treasury's foreign investment website explains who needs approval, publishes guidance notes on specific topics and provides the online application portal. The ATO publishes guidance on residential land compliance and the register of foreign ownership. Each state revenue office publishes its own surcharge rules. Start with these official sources, then ask your lawyer to apply them to your situation.

Changes to the rules

Foreign investment settings are reviewed regularly, and the government has changed fees, thresholds and restrictions on established dwellings in recent years. Before relying on any article, including this one, check the date of the official guidance you are reading and confirm with your lawyer that it is current. Lenders will apply the rules in force at settlement, not when you first planned the purchase.

Further reading

• Commercial property loans
• Caveat and second mortgage registration
• ASIC registers guide