Commercial Real Estate For Development

Acquisitions of real estate for commercial developments not to be used for residential purposes are normally approved (unless considered contrary to the national interest) subject to:

* continuous construction commencing within 5 years;

* a minimum amount equivalent to 50 per cent of the acquisition cost or current market value of the land (whichever is higher) must be spent on development; and

* once construction is completed, the parties notifying the completion date and actual development expenditure.

Residential

Residential real estate means all Australian urban land other than commercial properties (that is offices, factories, warehouses, restaurants, shops). Acquisitions of 'hobby farms' and 'rural residential' blocks by foreign interests are included in the residential real estate category.

Foreign purchasers intending to acquire real estate in Australia must seek prior approval from the Government through the Foreign Investment Review Board unless specifically exempted by the Foreign Acquisitions and Takeovers Regulations.

Entering Into A Contract

All contracts by foreign persons to acquire interests in Australian real estate must be made conditional upon foreign investment approval, unless approval was obtained prior to entering into the contract.

For properties to be purchased at auction, prior foreign investment approval must still be obtained and advice provided whether the parties were successful or not, and if so, a copy of the signed contract forwarded to the Foreign Investment Review Board (FIRB) after the auction.

Who is Exempt?

Exemptions include:

• Acquisitions by Australian citizen’s resident abroad;

• Acquisitions of property zoned residential by foreign nationals who hold permanent resident visas or hold, or who are eligible to hold, a 'special category visa' (eg a New Zealand citizen); and

• foreign persons purchasing, as joint tenants, with their Australian citizen spouse property that is zoned residential.

Under the Act, a foreign person is:

• a natural person not ordinarily resident in Australia;

• a corporation in which a natural person not ordinarily resident in Australia or a foreign corporation holds a controlling interest (that is, a holding of 15 percent or more);

• a corporation in which 2 or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate controlling interest (that is, a total holding of 40 percent or more);

• the trustee of a trust estate in which a natural person not ordinarily resident in Australia or a foreign corporation holds a substantial interest; or

• the trustee of a trust estate in which 2 or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest.

A substantial foreign interest (ie, a controlling interest) occurs when a single foreigner (and any associates) has 15 per cent or more of the ownership or several foreigners (and any associates) have 40 per cent or more in aggregate of the ownership of any corporation, business or trust.

The Government seeks to ensure that foreign investment in residential real estate increases the housing stock. The Government, therefore, seeks to channel foreign investment into activity that directly increases the supply of new housing (that is, new developments - house and land packages, home units, townhouses, etc) and brings benefits to the local building industry and their suppliers.

The policy on developed residential real estate is negative. The effect is twofold. First, it helps reduce the possibility of excess demand building up in the existing housing market and secondly, it aims to encourage the supply of new dwellings, many of which would become available to Australian residents, either for purchase or rent, therefore maintaining greater stability of house prices and the affordability of housing for Australians.

Residential Real Estate for Redevelopment

Applications to acquire existing residences for redevelopment are considered on a case-by-case basis. Proposals approved under this category must provide for an increase in the housing stock, that is, an increase in the number of dwellings. An amount equivalent to a minimum of 50 per cent of the acquisition cost or current market value (which ever is the greater) must be spent on the redevelopment of the site.

* The existing residence can not be occupied prior to demolition and redevelopment.

* Where the property is at the end of its economic life (ie, derelict, uninhabitable) a proposal may be approved for the construction of one dwelling.

* To demonstrate that the property is uninhabitable and must be demolished, a valuation of the existing structures by a licensed valuer may be required. Photographs and other forms of evidence may also be required.

* Once construction is completed, parties notify the completion date and actual development expenditure.

* Once these conditions have been fulfilled, properties acquired under this category may be rented out, sold to Australian interests or other eligible purchasers, or retained for the foreign investor's own use.

Stand-Alone Dwellings

Where the new dwelling to be purchased is a stand alone dwelling (for example a house/land package where construction has commenced or been completed) the purchase may be approved under this category providing:

* the developer has constructed a similar dwelling with overlapping construction dates;

* the similar dwelling is being sold, or has been sold for a similar consideration;

* the similar dwelling is in a proximal location; and

* the similar dwelling has been, or is to be, purchased by an Australian or other eligible person.

If a similar dwelling does not exist, foreign investment approval is not available under this category.

A property purchased under this category may be rented out, sold to Australian interests or other eligible purchasers, or retained for the foreign investor's own use. Once the property has been purchased, it is second-hand real estate and is subject to the restrictions applying to that category.

Second–Hand Real Estate

Acquisitions of residential real estate that has been previously owned or occupied, that is second-hand houses, flats or units, are not normally approved except for the following two categories:

1. Foreign nationals temporarily resident in Australia, holding a current temporary resident visa which permits continuous residence in Australia for a further period of more than 12 months from the time of application. The dwelling must be used as their principal place of residence1 and not for rental purposes, and must be sold immediately when their visa expires, they no longer reside in the property or when they cease to reside in Australia.

* Persons who hold visitor or bridging visas are not eligible for approval under this category.

* This category includes students 18 years of age and over studying courses of more than twelve months duration at recognized tertiary institutions.

o A general limit of $300,000 applies to the value of properties acquired by these students.

2. Foreign companies with a substantial Australian business, buying for named senior executives continuously resident in Australia for periods longer than 12 months, provided the dwelling is sold when no longer required for this purpose. Whether a company is eligible, and the number of properties it may acquire under this category, will depend upon the scope of the foreign company's operations and assets in Australia.

* Unless there are special circumstances, foreign companies normally will not be permitted to buy more than two dwellings under this category.

Foreign companies would not be eligible under this category where the property would represent a significant proportion of its Australian assets.

Business or Hobby? Answer Has Implications for Deductions

FS-2007-18, April 2007

The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is a business or a hobby, an activity not engaged in for profit.

In order to educate taxpayers regarding their filing obligations, this fact sheet, the eleventh in a series, explains the rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business. Incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes, according to IRS estimates.

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

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Does the time and effort put into the activity indicate an intention to make a profit?

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Does the taxpayer depend on income from the activity?

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If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

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Has the taxpayer changed methods of operation to improve profitability?

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Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

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Has the taxpayer made a profit in similar activities in the past?

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Does the activity make a profit in some years?

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Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Deductions for hobby activities are claimed as itemized deductions on Schedule A (Form 1040). These deductions must be taken in the following order and only to the extent stated in each of three categories:

*

Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.

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Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

*

Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

Are broker's funds commingled with trust funds?

Correct Procedure:

Funds belonging to a broker should not be commingled with trust funds. Common examples of commingling are:

* personal or company funds deposited into the trust fund bank account;
* trust funds deposited into the general or personal bank account; and
* funds collected on real property wholly owned by the broker handled through the trust account.

A broker, however, is allowed to maintain up to $200 of personal funds in a trust account to cover checking account service fees and other bank charges.

Commissions, fees, other income earned by a broker, and funds belonging in part to the broker's principal and in part to the broker when it is not reasonably practicable to separate such funds, must be withdrawn from the trust account within 25 days from the date of deposit.