By Mandy Chen
Are you planning to buy real estate in Australia? When it comes to buying property in Australia, there are certain costs that you will need to cover. You might be wondering, what are those costs and how will they effect the bottom line?
As a general rule, beside the 10% deposit you need to pay for an off the plan project (i.e. under construction project) you should also expect to pay roughly 5% of the purchase price for various expenses associated with buying a property. Below you will find a rough estimate of the purchasing costs for your preparations when you are buying/investing in a property in Australia.
10 Expenses you should know about:
- Legal fees – Often AUD 800 to 2,500 depending on the type of property.
- Loan establishment fees – Usually AUD 0 to 1,000 depending on the lender. Private funders tend to charge a higher establishment fee.
- Stamp duty (state government taxes) – applicable for both local and foreign buyers. From around 3.5% to 5.5% depending on the state.
- Additional foreign stamp duty – 7% or 8% of the purchase price. Due to variation in stamp duty prices within different states in Australia, you may refer to the foreign citizen stamp duty for the exact numbers in each state.
- FIRB approval fees – Starts from AUD 5,600 onwards. Fees may vary based on property value and whether you are a temporary resident or foreign investor with no visa to Australia. This fee is subject to change every year.
- Property inspection fees – Normally around AUD 450 to 800 depending on the type of property.
- Land tax – An annual tax payable by owners of land. Land tax is administered by your state or territory government and is applicable everywhere except for the Northern Territory. The tax will vary, depending on which state you purchase your land and if there is a tier as well. Refer to the Australian Tax Office (ATO) for more details.
- Land tax Surcharge – If you are a foreignerwho owns residential land in Australia, you must pay a land tax surcharge in addition to any land tax you may already pay. This varies from state to state and ranges from 0.5% to 2% of the land price.
- Buyers’ agents’ fee – Varies depending on the nature of the services provided.
- Other minor costs – Building insurance, council rates, water rates, adjustments, etc.
It will always be good to refer to your conveyancer or solicitor for an exact breakdown of the costs associated with your real estate purchase.
Some additional costs to keep in mind when investing in Australia
Capital Gain Tax (CGT)
If you sell a capital asset, such as real estate or shares, you usually make a capital gain or a capital loss. This is the difference between what it costs you to acquire the asset and what you receive when you dispose of it.
You need to report capital gains and losses in your income tax return and pay tax on your capital gains. Although it’s referred to as capital gains tax (CGT), this is actually part of your income tax, not a separate tax.
Foreign Resident Capital Gain Withholding (FRCGW)
Foreign resident capital gains withholding (FRCGW) applies to vendors disposing of certain taxable property under contracts entered into from 1 July 2016. The FRCGW tax rate is 12.5%. It also applies to real property disposals where the contract price is $750,000 or more.
The assets subject to the withholding tax are:
- taxable Australian real property with a market value of $750,000 or more
- an indirect Australian real property interest
- an option or right to acquire such property or interest.
Annual Vacancy Rate
In December 2017, the Australian Government introduced a vacancy fee for foreign owners of residential dwellings.
The annual vacancy fee is levied on foreign owners of residential real estate where the property is not occupied or genuinely available on the rental market for at least six months in a 12 month period.
The fee is intended to encourage foreign owners of residential real estate to make their properties available for rent where they are not occupied as a residence, and so increase the number of properties available for Australians to live in.
The ATO will assess the vacancy fee amount that is payable following lodgement of the vacancy fee return by the foreign person.
Where a vacancy fee return is not lodged on time (within 30 days of the end of each vacancy year), the foreign owner of the dwelling is taken to be liable to pay a vacancy fee regardless of the number of days during the vacancy year on which the dwelling was residentially occupied.
Generally, the vacancy fee payable will be equivalent to the residential land application fee that was paid by the foreign person at the time the application for foreign investment approval was made to purchase the property (i.e FIRB). For further information on residential land application fees, see Guidance Note 29.
In the case of joint tenants, only one return needs to be lodged and only one fee will be payable. For tenants in common, each tenant will need to lodge a return and the fee payable will be the foreign investment application fee that was payable by each individual tenant. Where a property is co-owned by a foreign person and non-foreign person, the non-foreign person will have no liability to pay a vacancy fee.
Property Management Fee
If you’re buying the property as an investment and are intending to rent out your property, you have two options.
You can either manage the property yourself, or you can use a property manager.
Professional managing agents will look after every aspect of your tenancy.
Their job includes collecting the rent, maintaining financial records, conducting regular property inspections, handling any disputes and arranging all repairs that need to be done.
Most property managers charge a percentage of the weekly rent as management fee, usually around 7-20%, depending on the state and on the service provided. If it is a short term rental, generally agents will charge higher rates. Some agents will charge a higher % to cover all the miscellaneous possibilities, whereas some will charge a lower % just to show more competitive packages, yet may include other expenses.
Agent’s Commission & Fee
You should also expect to pay additional one-off fees i.e. 2 weeks’ rental, when agent’s find a new tenant.
If you sell your property, an agent’s commission is calculated as a percentage of the home’s sale price. Commission levels vary from state to state and suburb to suburb, so please check with your respective agent.
Selling a house costs money. Your agent will generally utilise a variety of channels to advertise your home. These may include online real estate portals, real estate magazines, newspaper ads and window displays. The cost of this advertising will be passed onto you in one form or another.
Some agents include advertising and marketing costs in their commission, while for others this is an additional fee. Likewise, some agents charge a flat fee while others charge based on a percentage of the sale price. According to LocalAgentFinder, you can usually expect advertising and marketing fees to run between 0.5% and 1.0% of the sale price of the property.
When a building gets older and items within it wear out, they depreciate in value. The ATO governs legislation that allows owners of any income producing property to claim a tax deduction for this wear and tear.
Essentially, there are three components to a depreciation schedule. The first is Capital Works Depreciation, the second is Depreciation on Plant & Equipment and the third is Renovations and Improvements. Capital Works Depreciation is based on the original construction cost. Depreciation on Plant & Equipment is where items such as carpets, blinds, ovens and many more items can be depreciated at accelerated rates. Renovations and Improvements allows for capital improvements done to the property.
Claiming depreciation deductions is a significant taxation benefit, and one which many investment property owners are unaware of. Depreciation is a non-cash deduction, meaning you do not need to spend any money to claim it.
In order to claim depreciation deductions, property investors generally need to enlist a specialist Quantity Surveyor to complete a comprehensive capital allowances and tax depreciation report or schedule. When completed, a tax depreciation schedule outlines the deductions available for both capital works and plant and equipment assets and this is used each financial year when preparing tax returns. Normally the report will cost about AUD 450 to 1,000 depending on the type of the property. You can check with your tax consultant.
Landlord insurance covers several must-haves for investment property owners that are not covered by other types of home and content insurance policies:
- Theft or burglary by tenants or their guests
- Malicious damage or vandalism by tenants or their guests
- Loss of rent due to tenant default
- Legal expenses required to evict a tenant
A good quality landlord insurance policy protects you against a number of things that other home and contents insurance policies do not cover. And the good news is that because it is an investment expense, your policy premium is tax deductible. The cost of landlord insurance varies between states and territories, and also varies by the risk associated with your property’s postcode. Normally it starts from AUD 400 onwards a year.
The above costing is subject to changes by the Australian government on a yearly basis. Hence it is always advisable to check with the agents/solicitors/tax consultants for the updated fee.
Dated: 6 May 2018
Australian property can be a wise and lucrative investment when done right, and IQI can help you in your investment journey and guide you along the way. If you have any questions, then don’t hesitate to ask us, just fill out the form below and we will get back to you with answers.