Foreign buyer taxes have domino effect on rentals, property development

Foreign buyers are often seen as the bogeyman of the property market but the tax and surcharge hikes that have been applied to them have had a cascading effect that revenue-hungry governments seemingly didn’t see coming.

Less than ten years ago, foreign buyers of Australian property were treated no differently to locals in terms of taxes and charges.

Today it’s a very different picture and one that is impacting the rental market in particular.

Established properties now attract an application fee of $44,100 for a property under $1 million, rising to $88,500 if value is between $1 million and $2 million. It lifts each additional million in value thereafter by $88,500 per million.

When Queensland raised its foreign owner transfer duty surcharge to 8 per cent, matching New South Wales and Victoria, it became the latest state government to look to foreign property buyers as a source of revenue.

NSW will reclaim its position as the highest taxing regime on foreign buyers when its surcharge purchaser duty goes up from 8 to 9 per cent. Additionally, surcharge land tax is also payable in addition to the base annual land tax, and is sometimes payable even in circumstances where the land is exempt from base land tax. The proposed changes will also increase surcharge land tax from 4 to 5 per cent effective from the 2025 land tax year.

The states’ collective desire to raise more revenue through higher duties has led to lower revenues.

– Steve Douglas, SMATS Group

But many property professionals are not convinced the gains flowing into public coffers are exceeding the harm done to rental property supply.

Steve Douglas, Executive Chairman, SMATS Group, said foreign buyers are an important part of Australia’s property investment landscape and rental market and a valuable contributor to economic activity for many reasons.

In a submission to Senate Economics References Committee’s Financial regulatory framework and home ownership inquiry, Mr Douglas said it was no coincidence that soon after the introduction of new surcharges there was a significant drop in the level of foreign buyer activity.

“Under our Foreign Investment Review Board (FIRB) rules foreigner investors can only acquire newly constructed property, which translates into valuable new housing stock and economic value through construction jobs and spending,” Mr Douglas said.

“As foreign investors in the main live overseas, the overwhelming majority rent their properties into the market providing valuable rental stock that has kept the market in stabilisation.

“In our experience, foreign investors in the Australian property market have stayed as owners over longer periods, creating stability for the specific tenant and the general market.

“They have also been instrumental in supporting large scale apartment developments over a long period, helping developers meet important pre-sale conditions of finance, largely due to their cultural acceptance of off-the-plan acquisition where the Australian buyers have shown reluctance.”

Mr Douglas said approvals fell quickly from the record high in the financial year to 2016 of 40,121, before collapsing to just 7,513 in FY2019, from where they have not recovered.

“This has been an Australia wide issue, with all states experiencing similar patterns.

“Ironically, the states’ collective desire to raise more revenue through higher duties has led to lower revenues through suppression of activity.”

Commercial investors also affected

Rapidly rising taxes on foreign buyers in Victoria are also hitting industrial tenants hard.

For the 2024 land tax year, the state government increased the absentee owner surcharge (also known as the ‘foreign owner surcharge’) from two to four percent from the 2024 land tax year onwards.

“At the same time, they lowered the tax threshold, so many foreign owners have moved from a nil tax payable on smaller valued properties to a starting Victorian land tax of $4,000 a year overnight, and inevitably this $80 per week-plus cost will have to be recovered from tenants,” Mr Douglas said.

“It is naive to think that this will just be absorbed by the landlord.

“For many foreign buyers, this is the last straw as they have dealt with poor returns, higher regulation and now ever increasing land tax and ownership costs, including the Covid Debt Repayment Plan Levy.

“This in turn is further impacting the rental market as many of the properties sold move to owner occupation rather than to another investor, further reducing the rental pool and placing additional pressure on the supply of rental properties.”

Introduced in 2016, the initial surcharge began at 0.5 percent, increased to 1.5 percent for the 2017-2019 land tax years, and to two percent for the 2020-2023 land tax years. As of 2024, this has now increased to four percent.

Stefanie Frawley, Director of Portfolio Management, TMX Transform, noted that with Victoria facing exponential debt in 2024 of more than $135 billion in the face of post-pandemic spending, the state government is using land tax changes as one way to recover debt.

“The impact across residential and commercial land holdings is becoming evident and disproportionately impacts industrial land.

“Office buildings require significantly less land than industrial, and the cost is spread over multiple tenants over multiple floors but a single tenant usually occupies industrial property, which requires significant land holdings.”

Developers, builders in firing line

Speaking about the Queensland foreign tax changes, Jess Caire, Executive Director, Property Council of Australia, said they may have led to a 33,000 home reduction in housing supply.

“These ill-considered taxes have only worsened Queensland’s housing issues by driving away the global capital that backs Australian-based developers who deliver new homes at scale and bring community-building projects to life.”

Independent research from the Queensland Economic Advocacy Solutions (QEAS) that assessed eight years of evidence concluded that the state’s harsher property taxation policies on international capital have worsened Queensland’s housing crisis.

The report also showed that total international investment in Queensland has dropped 83.9 per cent since the introduction of the taxation policies in 2016, resulting in the state losing out on an estimated $17.8 billion in housing investment.

Antonia Mercorella, CEO, Real Estate Institute of Queensland (REIQ), argued that the state’s taxes “effectively close the door on being able to access foreign funds.”

“These punitive measures rob capital from local builders and developers who are instrumental in delivering new housing supply and this leads to downward pressure on approvals and shortfalls in housing,” Ms Mercorella said.