Review your content’s performance and reach.
Become your target audience’s go-to resource for today’s hottest topics.
Understand your clients’ strategies and the most pressing issues they are facing.
Keep a step ahead of your key competitors and benchmark against them.
add to folder:
Questions? Please contact [email protected] 
All questions
Overview of the market
The Australian real estate market is highly securitised, with a significant majority of the country’s commercial real estate being held through listed and unlisted real estate investment trusts (REITs).
REITs first appeared in Australia in the early 1970s and have steadily grown in number, size and complexity. Today, there are 49 REITs listed on the Australian Stock Exchange (ASX). Commonly referred to as A-REITs (and previously listed property trusts, or LPTs), listed REITs represent a total market capitalisation of around A$168 billion and are important players in the broader Australian market.2
There is also a substantial unlisted REIT sector in Australia, with both listed REIT managers and privately owned fund managers managing unlisted real estate funds targeting Australian and offshore institutional investors and sovereign wealth funds, primarily through syndicate, club and joint venture style structures.
As a result, larger real estate transactions in Australia tend to reflect a securitised model involving large-scale mergers and acquisitions, takeovers, spinoffs and other securities market transactions (as distinct from the more traditional real estate conveyancing). The past 12 months have seen continued high levels of activity in parts of the sector, with a number of large portfolio transactions, as well as takeover activity and investor activism focusing on wholesale property funds.
Australian REITs have attracted substantial investment from offshore, including significant inflow from Asia and a number of large pension funds and sovereign wealth funds, with the lower Australian dollar in recent years (reflecting low interest rates) and relative economic stability being key contributors to the comparative attractiveness of Australian real estate. In 2021, total foreign investment in the sector was estimated at over A$14 billion, involving about 50 transactions.3
International private equity firms, and Australian-based private equity-style real estate managers, have also been active in the Australian market, both as acquirers and sellers, over the past 12-month period.
Recent market activity
The past 12 months has seen an increase in real estate M&A activity relative to the previous corresponding period, with transactions including public M&A, portfolio sales and wholesale fund M&A.
Two of the most significant real estate M&A transactions over the past 12 months were the destapling and merger of Aventus Group with Home Consortium; and the proposed acquisition of Irongate by funds managed by Charter Hall and PGGM.
Aventus Group was an ASX-listed internally managed big-box retail property REIT with a A$2 billion market capitalisation.
In October 2021, Aventus Group and Home Consortium agreed a merger under which:
The destapling and mergers were implemented by way of an inter-conditional scheme of arrangement and trust scheme, which were approved by Aventus investors in January 2022.
This transaction was a rare example of a real estate portfolio moving from an internally managed model to an externally managed model.
Irongate Group is an internally managed ASX/Johannesburg Stock Exchange dual-listed commercial property REIT. In late 2021, 360 Capital acquired a 19 per cent interest in Irongate and proposed the appointment of two nominees to Irongate’s board. 360 Capital subsequently proposed the acquisition of Irongate by way of scheme of arrangement and a trust scheme for A$1.50 per security, which was raised to A$1.72 per security.
Subsequently, in January 2022, a consortium comprising funds managed by Charter Hall and PGGM entered into an agreement giving it a call option over 360 Capital’s 19 per cent interest and proposed the acquisition of Irongate by way of an inter-conditional scheme of arrangement and trust scheme for A$1.90 per security.
Real estate private equity firms have been active in acquiring and disposing of a range of real estate assets over the past few years, including in the past 12 months.
Recent transactions include the acquisition by Blackstone of a A$1.6 billion portfolio of industrial real estate assets from Dexus, and KKR’s investment in an A$460 million industrial property development project managed by Logos.
Real estate companies and firms
The larger publicly traded REITs in Australia have significant market capitalisations and are typically structured to hold (in a tax-efficient way) both passive real estate assets and active business operations.
The top 20 ASX-listed REITs range from a market capitalisation of over A$38 billion to a market capitalisation of about A$2 billion. The largest REIT, Goodman Group, is an integrated industrial property manager with assets across Australia, the Americas, Asia and Europe. The next-largest REIT, the retail property-focused Scentre Group, has a market capitalisation of over A$15 billion.
REITs have historically been structured as unit trusts, with a key benefit of this being the ability to access flow-through tax treatment where the trust holds passive investments and does not conduct an active business. This means that income and gains derived by the trust are taxed in the hands of investors at their applicable tax rates (see further Section IV).
The increasing sophistication of the market, and diversification of key participants, has driven the development of a range of innovative structures. Most notably, almost all of the larger REITs now use a stapled structure where two or more securities (typically units in a trust and shares in a company) are jointly quoted on the ASX (under a single code) and trade together, with each investor owning a corresponding proportion of each entity.
This can allow for flow-through tax treatment for passive real estate assets held in the trust, coupled with access to the returns of an operating business conducted by the company. Typically the operating business activities are complementary to the holding of real estate assets, for example, funds management, asset management, leasing and property development. The Commonwealth government has recently reviewed the use of stapled structures in the infrastructure and real estate sectors, and has enacted tax law changes limiting their use: see further Section IV.v.
The stapled structure has also been used to enable internalisation of management of REITs. Internalisation involves the REIT’s management platform being owned and operated within the listed structure (on the operating business side of the stapled entity), as opposed to the REIT being managed by an externally owned entity with fee leakage. Almost all of the larger listed REITs have moved to an internalised structure, although the Home Consortium merger with Aventus Group is an example of a move form internalised management to an externally managed structure. Internalisation can also be adopted for unlisted REITs, but is less common.
Larger REITs have tended to focus on more traditional real estate classes (retail, office, industrial and residential). Over the past few years there has been increased interest in alternative real estate classes including healthcare, aged care, retirement living, student accommodation, childcare, manufactured housing and data centres.
The Australian market is also characterised by a number of large listed integrated property companies whose activities cover development and construction as well as asset ownership and management through a stapled REIT structure. Groups such as the Lendlease Group, Mirvac and Stockland have a multi-disciplinary focus across the full spectrum of the property life cycle.
Many of the larger listed REITs and property companies have a significant global footprint. For example, the Goodman Group and Lendlease Group have operations in Australia, the Americas, Europe and Asia.
Real estate private equity managers in Australia comprise a mix of:
Offshore pension funds and Australian superannuation funds are also active as both direct and indirect investors in Australian real estate private equity transactions, investing either through third-party funds or directly.
Unlike the global PE firms, Australia’s traditional PE firms have generally not expanded their activities into real estate investment, although they are increasingly active in alternative asset classes with a significant real estate component.
Real estate private equity operations in Australia are characterised by active management of real estate assets, focusing on repositioning, releasing and differing degrees of development of portfolio properties. Over the past five years, private equity real estate investment activity has expanded to encompass value-add strategies, portfolio assembly and acquisitions of alternative real estate classes. Investment vehicles vary in size ranging from sub-A$100 million in real estate assets to over A$10 billion.
Real estate private equity managers adopt a variety of approaches to structuring investments, depending on the type of asset, the manager’s position in the market, the type of investors whose funds are managed and the level of oversight that investors wish to exercise. These range from joint ventures, through clubs or syndicates, to the wholesale funds more commonly used for investment in other real estate asset classes.
Typically, externally managed unit trust structures are used whether the investment vehicle is a joint venture or a wholesale fund, although single asset investments can also be structured as direct co-ownerships of the underlying real estate assets. As for listed REITs, unit trust structures provide flow-through tax treatment where passive assets are held. Development activities, where the purpose is to retain the assets within the investment vehicle (rather than, for example, development for sale), generally do not compromise the passive nature of the investments.
Offshore real estate PE firms typically invest into Australia real estate assets through unit trusts, leveraged corporate structures or (where suitable) direct ownership of underlying assets. Their offshore fund structures reflect those typical of the jurisdiction where such funds are based.
Transactions
REITs are primarily constituted in Australia as unit trusts comprising a separate trustee and the trust estate. General trust law principles apply to the establishment and operation of the trusts, including detailed rules about matters such as the trustee’s powers and fiduciary duties owed to investors.
Overlaying this is an extensive investor-protection regulatory regime under the Corporations Act 2001 (Cth) (Corporations Act).4 The majority of this regulation only applies where a REIT is required to be registered as a managed investment scheme. Registration is generally required where REIT interests are issued to retail investors, which is the case for all listed REITs.
To be registered under the Corporations Act, the trustee of a REIT (known as a responsible entity under the Corporations Act) needs to hold an Australian financial services licence covering the operation of the REIT.5 This requires the trustee to demonstrate the requisite capability to perform its functions as responsible entity, as well as meeting minimum net tangible assets requirements. There are alternatives, such as engaging professional trustee companies to perform the responsible entity function.6
The Corporations Act provides for the trustee of the REIT to be the single entity responsible to investors in relation to the operation of the REIT (in contrast to separate trustee and manager structures used in other jurisdictions). In practice, although they retain legal responsibility, trustees will delegate the performance of management functions either to a manager under common ownership with the trustee or a third-party manager.
Registered REITs are subject to a range of requirements under the Corporations Act, including as to fundraising, takeovers and other control transactions, financial reporting and related-party transactions. REITs that are listed on the ASX are also subject to the ASX’s listing rules. These include rules providing for continuous disclosure of materially price-sensitive information, rules relating to corporate governance, and rules restricting investor dilution, related-party transactions and significant changes in the nature or scale of activities without appropriate investor approvals.
The statutory regime is primarily overseen by the Australian Securities and Investments Commission (ASIC) as the chief corporate regulator in Australia. The Takeovers Panel, which acts as the primary forum for resolving disputes about takeover bids, may also be involved in regulating control transactions for listed REITs.
Particular features of the Australian legal framework for REITs that can affect transaction execution include the following.
Separate ownership of a REIT’s trustee and manager from REIT securities, as is the case for externally managed REITs, can cause divergences between the interests of shareholders in the trustee and manager and those of the REIT’s security holders (for example, where a transaction would result in the trustee losing management of the REIT and associated fee streams). This can place directors and executives of the trustee in a position of conflicting responsibilities and interests. In practice, this is typically managed through governance protocols including establishing an independent board committee to manage the relevant transaction from a REIT security holder perspective (with conflicted executive directors abstaining).
The trustee of a registered REIT (as responsible entity) and its associates may not vote their securities if they have an interest in the resolution other than as a member of the REIT.7 This can require detailed analysis (and sometimes Takeovers Panel and court action) to determine who is entitled to vote on REIT matters, such as approval of trust schemes that affect the REIT’s trustee.
Deal structures and terms vary depending on a range of factors, including whether the REIT is listed or unlisted, concentration of investor holdings and whether the objective is to take ownership of the REIT and its underlying assets or to assume control of the management of the REIT. Tax and stamp duty considerations are also relevant.
The Corporations Act prohibits a person from acquiring more than 20 per cent of a listed REIT (or increasing an interest above 20 per cent) unless a permitted gateway applies.8 The most common techniques to acquire control of a listed REIT within this framework are an off-market takeover bid regulated by the Corporations Act or a scheme (see Section IV.ii for more information about acquisition terms used in takeover bids and schemes).
As takeovers regulation under the Corporations Act does not apply to unlisted REITs, a buyer might engage directly with individual REIT security holders to acquire their securities on whatever terms are agreed, subject to transfer restrictions in the REIT’s constituent documents (see Section IV.ii for more information about acquisition terms). Trust schemes may also be used in this context, and may be more efficient where an unlisted scheme has a number of members.
Where the primary objective is to gain control of the REIT’s management, rather than ownership and control of the REIT (and its underlying assets), a further alternative is to seek to replace the REIT’s trustee. Under the Corporations Act, the responsible entity of a registered REIT can be replaced by a simple majority resolution of unitholders present and voting for a listed REIT, or by a simple majority resolution of all unitholders entitled to vote, whether or not present, for an unlisted REIT.9 Constitutions of unregistered REITs may also provide unitholders with similar rights to remove the trustee by resolution. While relatively low voting thresholds apply, in practice it is rare that a responsible entity is forcibly removed in this way. Typically, the challenge is demonstrating to existing investors that the replacement responsible entity offers a more compelling proposition than the incumbent.
Under an off-market takeover bid, a bidder makes separate but identical offers to all holders of securities in the target to acquire their securities. The process is highly regulated and involves:
Under a trust scheme, the target trust’s unitholders vote to amend its constitution to enable all of the units in the target trust to be transferred to the bidder. Market practice has developed such that the process for implementing trust schemes parallels the scheme of arrangement process under the Corporations Act, which is used for consensual company acquisitions. The scheme process involves the following:
Acquisition of a stapled trust and company requires inter-conditional trust schemes and company schemes for each entity comprised in the stapled entity. Schemes may also be used to implement the stapling of the securities of two entities so that they trade together (rather than one entity acquiring another’s securities). In these circumstances a vote of the unitholders in both entities is usually required.
For both schemes and takeovers, the consideration may comprise cash or scrip or a combination of the two. Tax considerations, including availability of rollover relief from capital gains tax, will often be a key factor in determining the consideration offered (see Section IV.v).
Implementation agreements between the target and bidder are common for friendly takeover bids and schemes. They contain typical deal protection mechanisms, including:
Bidders will often seek due diligence access before entry into an implementation agreement. Whether the target provides due diligence access will generally depend on the acquirer’s indicative bid price.
Bidders can acquire a pre-bid stake of up to 20 per cent. Pre-bid stakes are not used as frequently for schemes as the bidder cannot vote its securities in a scheme. However, it is possible to obtain options or enter into voting agreements for up to 20 per cent of a target if structured appropriately. Stakes of 5 per cent or above must be disclosed to the market, and statutory beneficial ownership tracing rules can reveal smaller stakes.12 Derivatives such as cash-settled equity swaps are also commonly used to acquire stakes of up to 5 per cent without requiring disclosure to the market or the target; however, long positions exceeding 5 per cent require disclosure.
Private sale processes for REITs tend to follow a substantially similar process as for the sale of a company or business.
A formal auction process may be run with specified timelines for expressions of interest, selection of preferred bidders, due diligence and binding bids. This is generally the case for transactions involving the sale of large asset portfolios, with investment banks typically engaged to coordinate the sales process. For smaller real estate portfolios, sellers may conduct the sale process with the assistance of commercial real estate agents. For sales of unitholdings in wholesale funds, investors will usually conduct their own sale process, or the trustee may be empowered to do so on the selling unitholders’ behalf under the relevant fund constitution.
The primary sale document is typically a unit sale agreement. Key terms include conditions precedent (with any required foreign investment approvals for offshore buyers, waivers of pre-emptive rights affecting material assets and confirmation of no material adverse effect being the most common), payment of a deposit (5 to 10 per cent of the purchase price is common although sometimes no deposit will be payable), warranties (covering usual matters such as title and capacity, ownership of underlying assets and claims affecting the REIT and assets), restrictions on the operation of the REIT between signing and completion outside the ordinary course (by reference to the ability of unitholders to control the trustee’s actions) and steps to enable the change of trustee following completion.
Activity in relation to ASX-listed REITs and wholesale funds can be hostile. While the majority of transactions are negotiated to a position where the boards of both parties are supportive, this is not always possible. In addition, it is not uncommon that REITs become the subject of competing bids once they are seen to be in play.
More recent examples in the Australian market include the unsolicited proposal by 360 Capital to acquire all of the units in Irongate Group in 2021, NorthWest Healthcare Property to acquire all of the units in the Australian Unity Healthcare Property Trust for A$2.7 billion in 2021, and the various bids by Starwood, and Charter Hall and Abacus, for the Australian Unity Office Fund over 2019 and 2020.
For a hostile bidder, the preferred method is generally an off-market takeover bid, as the scheme process is unwieldy without cooperation of the target board (given, in particular, that the target is responsible for management of the scheme process and for obtaining security holder approvals).
Issues and challenges for bidders in these circumstances are common to hostile public markets transactions generally, including:
In considering strategies for defending against hostile bidders, REIT trustee directors need to comply with their statutory and fiduciary duties including, in particular, the requirement that any action be for a proper purpose and in the interests of the REIT’s security holders. ASX listing rules also prohibit certain issues of securities within three months of a takeover announcement. The Takeovers Panel may declare target actions to frustrate a current or pending bid as unacceptable, and require them to be unwound or suspended until approved by target security holders. Asset lock-up arrangements (such as call options over key REIT assets) are generally uncommon and may be declared unacceptable by the Takeovers Panel if not disclosed or approved by security holders.13 US-style takeover defence arrangements, such as poison pills, are not available to target directors of listed entities in Australia.
Financing approaches for Australian real estate M&A and private equity transactions are primarily influenced by the type of transaction and the financing arrangements already in place for the target.
The cost of debt funding for real estate transactions has been trending higher in recent times. While appetite for good credit remains, domestic Australian banks have reduced their exposures to certain sectors, such as construction and development financing for large residential developments, largely in response to a perceived oversupply of inner city apartment developments in some Australian state capital cities. The importance of alternate funding sources has increased in light of the more subdued lending appetite of domestic banks, and funding from non-bank sources is becoming more prevalent.
Financing for real estate M&A is broadly divided into:
Investment finance typically comprises senior debt, which is typically limited recourse debt (with recourse limited to the assets being acquired) provided by one lender or a syndicate of lenders. Senior lenders typically take first-ranking security over key assets to secure the senior debt. Senior lenders will typically require the parent or sponsors of the borrower to contribute equity to the borrower in the form of equity or deeply subordinated debt, which is contributed before senior debt and any external mezzanine debt.
The majority of real estate M&A transactions are financed using senior debt provided by at least one of the Australian domestic banks. There is also increasing appetite from offshore investors buying into the Australian real estate market. As a result, an increasing number of transactions are being financed by senior debt from offshore banks, particularly Asian banks supporting the investment of their customers into the Australian market, and from life funds and specialised investment funds.
Mezzanine or subordinated financing has been most commonly used for development financing, particularly where the sponsors are unable to fund the equity required to achieve the loan-to-value ratio, debt-to-equity ratio or cost-to-complete tests imposed by the senior lenders. However, a trend is emerging for mezzanine debt to be used for investment finance, particularly as loan-to-value ratio requirements of senior debt lenders tighten. Typically, the key providers of mezzanine debt have been life funds or specialist investment funds, although increasingly offshore global investment funds and private equity sponsors are becoming active as mezzanine lenders.
Australian domestic banks have been reluctant to accept capital structures with multiple tiers of debt, partly because of the intercreditor rights being sought by mezzanine lenders (including rights to enforce, standstill periods and restrictions on senior refinancing) and the practicalities of enforcement. However, more recently, senior lenders have become more willing to accept lenders providing mezzanine debt at the holding entity level. These instruments, which are structurally subordinated to senior debt, often feature payable in kind interest together with an equity stake in the form of a conversion feature (somewhat similar to a convertible bond) such that the mezzanine lender can get the benefits of preferred equity and secured debt.
Debt capital markets (bonds, notes, private placements and other debt securities) have been used in portfolio financings by REITs to obtain longer tenor and to diversify funding sources. The availability of funding in the US debt capital markets, particularly US private placements, has become a significant source of debt funding for larger REITs more recently.
Typically, security is required by senior and mezzanine lenders for investment finance. Senior lenders will require first-ranking security, with mezzanine lenders receiving second-ranking security over the same assets. The priority of the securities and rights of the mezzanine lenders to enforce their second-ranking security will be regulated by inter-creditor arrangements. Lenders usually require:
Lenders do not usually have recourse to any other assets of the parent.
Portfolio financing is either secured against the assets of the REIT vehicle or unsecured, depending on the creditworthiness of the borrower and gearing of underlying investment vehicles. Whether or not security is provided, it is supported by guarantees and negative pledges from all entities comprising the investment vehicles.
There is a current trend for larger REITs to move from secured funding to unsecured to provide the group with greater access to other sources of funding such as debt capital markets, which is typically undertaken on an unsecured basis. Typically, the margins and fees for secured group financings are lower than for unsecured group financings, but there is less freedom allowed to the entities comprising the investment vehicle under the terms of the financing documents. While there is typically more flexibility provided than in investment financing, there are still the usual security-style covenants.
Unsecured portfolio financings typically involve a combination of syndicated bank debt and capital markets debt, in each case with the same covenant package (being representations, undertakings and events of default) set out in a common terms deed of which all of the financiers obtain the benefit. Typically, the financing is provided on a corporate-style basis, which offers more flexibility and a less stringent covenant package.
Recently, terms have been imported into real estate financing from the broader leveraged finance market, including the loosening of general covenants and use of materiality qualifiers.
Recent trends also include the use of a ‘certain funds regime’ for investment financings, and an ‘equity cure’ for breaches of financial covenants (such as the loan-to-value ratio) across property financings generally.
Most REITs are structured as managed investments trusts (MITs) (or seek to include a MIT in any stapled structure). A specific tax regime designed for MITs provides certain tax benefits for REITs, with the policy intent of promoting Australia’s funds management industry and its collective investment vehicle management expertise. As a result, whether MIT status will be available is usually a key consideration in structuring real estate investment transactions.
To access the MIT regime, a trust needs to satisfy certain ownership criteria and be managed by a holder of an Australian financial services licence. In addition, the trust cannot control the conduct of a trading business.14
The key benefits of accessing the MIT regime are:
Accordingly, where the investor mix and investment type lends itself to a MIT structure, this is generally the structure that is used.
The Commonwealth government recently reviewed the use of MITs in stapled structures.17 The government was concerned that some land-rich businesses were being split into a land-holding entity and an operating entity, with the relevant land leased to the operating entity. The land-holding entity would be structured as a MIT, which would entitle investors to access concessional tax treatment. The government concluded that, at least for non-residents, income derived from such arrangements should be subject to the full corporate rate of tax.
The review led to new legislation designed to limit access to the lower MIT withholding tax rates where MITs are used as part of a stapled structure.18 Under the new rules, subject to some exclusions and transitional arrangements, net income derived by MITs from operating entities within a stapled group (for example, rent paid by the operating entity to the MIT) will generally be subject to 30 per cent withholding tax when distributed to non-residents.
The changes should not materially affect use of stapled structures to hold and manage traditional classes of real estate assets (office, retail and industrial); however, use of MITs in stapled structures for certain alternative real estate investment classes, where the real estate is integrated with a trading business (for example, hotels, student accommodation, retirement living and aged care), could be affected.
Tax law changes were also recently enacted that will implement a regime allowing funds established as companies limited by shares (known as a corporate collective investment vehicle or CCIV) to be taxed on a similar basis to trusts (and, in particular, MITs).19 These reforms are intended to facilitate use of investment vehicles commonly used overseas in the Australian market, and complement the commencement of the Asia region funds passport. After a hiatus, the proposed CCIV regime is scheduled to commence on 1 July 2022.
The disposal of interests in a real estate-holding entity gives rise to either a taxing event (on revenue account) or a CGT event (on capital account). The distinction determines whether a security holder can access the CGT discount and CGT rollover relief, and ultimately affects the amount of tax a security holder pays on any gain on disposal.
An investment is generally considered to be held on revenue account where it was made for a profit-making purpose through sale of the interest, rather than for the holding over the medium to long-term as a passive investment. Where an investment is held on revenue account, the investor is subject to tax on any excess in proceeds received over the cost of acquiring the relevant interest. Investments held on revenue account do not enable the investor to access the CGT discount; nor is CGT rollover relief available.
If the interest was acquired for holding over the medium to long term as a passive investment, an investment will generally be considered to be held on capital account, and subject to CGT rules, in which case:
Generally, unitholders who are individuals, trusts or complying superannuation funds can offset capital losses against current or future year capital gains. This is also the case for companies, if specific loss recoupment rules are satisfied.22
Australian-resident individuals, superannuation funds and trusts that have held an investment for more than 12 months are entitled to reduce their CGT gain by a CGT discount. Resident individuals and trusts are entitled to a 50 per cent discount and complying superannuation entities a 33.3 per cent discount of any net CGT gains made in a year.23
The CGT discount is not available to non-residents. However, non-resident security holders are only subject to CGT on the disposal of units or shares if, broadly:
As REITs generally hold interests in Australian real property, only the first test above would be relevant to non-resident securityholders. In some circumstances, companies stapled to REITs do not meet the 50 per cent real estate threshold (for example, companies in stapled groups might undertake development activity on land owned by others, and such rights under a development contract are not interests in real estate), and so both tests can be relevant in working out if any gain on the sale of shares in that company is subject to CGT.
Scrip for scrip rollover relief from CGT may be available where units or shares are disposed in exchange for units or shares.25 Transactions are often structured to allow for scrip-for-scrip rollover as this allows a security holder to defer any gain made on the transaction until the replacement units or shares are eventually sold.
The key requirements that must be satisfied to access scrip for scrip rollover relief are as follows.
Shares must be exchanged for shares, and units for units. In many cases, an offshore acquirer or target will only be a trust or a company. If the target or acquirer is not the same type of entity, or is a stapled group consisting of a trust and a company, this requirement cannot be met or may be only partially met (e.g., by a stapled group).
The acquiring entity must become owner of 80 per cent or more of the target entity. Often the threshold for a scrip-based takeover bid to become unconditional is lower. In such cases, if the 80 per cent threshold is not met, target security holders who accept the offer do not receive rollover relief.
Where the transaction is a unit-for-unit transaction, each trust must be a ‘fixed trust’. As the law as to what constitutes a fixed trust is unclear, the Commissioner of Taxation’s discretion to treat trusts as fixed trusts has almost always been sought. However, under the MIT rules, trusts that are MITs may be automatically deemed to be fixed trusts if certain requirements (including the making of an irrevocable election to be an ‘attribution MIT’) are met.
The offer must be on substantially the same terms to all security holders in the target. Significant security holders cannot be treated differently to others.
For foreign-resident security holders, the replacement interest must also be taxable Australian property. Where a larger entity acquires a smaller entity, a foreign resident’s interest in the target may exceed the 10 per cent threshold (and thus be taxable Australian property subject to CGT), but the interest in the larger entity may be below the 10 per cent threshold (and thus not taxable Australian property), meaning the rollover does not apply to that security holder.
Australia has a general anti-avoidance rule, which provides that where a transaction is structured for the sole or dominant purpose of reducing Australian income or withholding tax, the Commissioner of Taxation has the power to assess tax on the basis of a reasonable counterfactual (that is, what the structure or transaction would have been without the tax-avoidance purpose).26 Where the anti-avoidance regime is applied, the taxpayer is also generally subject to penalties and interest in addition to the primary tax that has been avoided. Accordingly, it is important that there be robust commercial reasons for using an investment structure (and for transaction steps).
Acquisitions of Australian real estate assets may attract state or territory stamp duty. Duty in relation to acquisitions of commercial land (other than in South Australia, where duty on commercial land has been abolished from 1 July 2018) generally ranges from 4.5 to 6.5 per cent of improved land value (or purchase consideration if higher) depending on which state or territory the land is located.27
Duty applies not only to acquisitions of direct interests in land, but also acquisitions of interests (usually above a certain threshold) in land-holding trusts and companies.
Higher duty rates apply to acquisitions of residential property in certain circumstances. All Australian states (excluding the territories) have imposed surcharges ranging up to 8 per cent on foreign acquirers of interests in residential real estate (and primary production land in Tasmania).
State and territory annual land taxes may also be payable, subject to the availability of certain concessions. The top marginal land tax rates range between 1 and 3.55 per cent (usually of the unimproved value of the land) depending on the state or territory in which the land is located. In addition, for foreign owners a 2 per cent surcharge applies to residential land in New South Wales, a 0.75 per cent surcharge applies to land in the ACT, and a 1.2 per cent surcharge applies to land in Victoria, subject to certain concessions. In Queensland, if the value of a foreign owner’s freehold land is greater than A$350,000, there is a 2 per cent surcharge on the value of all of that owner’s freehold land above the A$350,000 threshold. In Tasmania, a foreign investor land tax of 2 per cent is anticipated to be introduced from 1 July 2022 on land used (or in the case of vacant land, capable of being used), primarily or solely, for residential purposes.28
Foreign investment in Australian real estate is regulated by the Foreign Acquisitions and Takeovers Act 1975 (Cth). This legislation was substantially rewritten in 2015, and, following completion of a regulatory review, has been the subject of a number of amendments intended to clarify and expand its operation.
Nominally, acquisitions of interests in land (including direct investments and investments in land-holding trusts and companies) exceeding A$289 million are notifiable and must be approved by the Commonwealth Treasurer (as advised by the Foreign Investment Review Board (FIRB)).29 However, lower thresholds apply to a range of acquisitions.
An A$63 million threshold applies to certain classes of sensitive land. Since 1 July 2017, the classes of sensitive land have been narrowed so that the lower threshold does not apply to many types of land previously caught by the lower threshold.30
An A$15 million aggregate threshold applies to acquisitions of agricultural land.31
No monetary threshold applies to:
A higher A$1.250 billion threshold applies to certain direct investments by foreign investors from countries with which Australia has a free trade agreement, although in practice this threshold is rarely available.33
The legislation provides a 30-day period, from the date lodgement fees are paid, within which a decision whether to approve the acquisition is made. However, particularly for sensitive or complex transactions, this period is often extended. Acquisitions are reviewed on national interest grounds, with FIRB receiving input in relation to proposed acquisitions from a range of government agencies, including the Australian Taxation Office, the Cyber and Infrastructure Security Centre (where applicable) and national security agencies before providing its advice to the Treasurer. Approval is required before the acquisition can complete.34 Failure to obtain necessary approvals can lead to divestment as well as criminal sanctions.
Investment income paid to foreign investors in Australian land-owning vehicles is generally subject to Australian withholding tax (generally 10 per cent for interest, 30 per cent for unfranked dividends and up to 47 per cent for trust income distributions). Lower withholding rates may apply in certain circumstances pursuant to double-tax agreements.
Concessional withholding tax applies to income distributions by trusts that satisfy the conditions for being characterised as a MIT for tax purposes: see Section IV.v for more detail.
While interest is subject to a maximum 10 per cent withholding tax, thin capitalisation rules generally apply to disallow tax deductions for the entity paying the interest where leverage exceeds 60 per cent of the value of the underlying assets, which increases the overall effective tax rate. Other transfer pricing rules apply to prevent payment of non-arm’s length fees to offshore entities.
Corporate real estate
Real estate-heavy corporations have continued exploring and pursuing strategies for separation and spin-off or securitisation of their real estate assets.
A variety of separation structures have been used to realise the value inherent in corporate real estate portfolios:
Outlook
Inflationary pressures, the Reserve Bank of Australia’s increase in interest rates and volatility in credit markets are expected to lead to repricing of real estate assets, and more subdued real estate M&A activity in Australia.
As in previous years, activity and pricing are expected to remain mixed across different classes of real estate. Interest in retail is increasing after a long period of subdued activity, while logistics real estate activity continues to remain strong. Alternative real estate asset classes, ranging from agricultural land through healthcare properties to data centres, are seeing continued strong interest. Build to rent and other categories of institutional investor-owned residential real estate are continuing to grow as an asset class, with new funds and assets being brought to market and increased investor appetite.
Outlook and conclusions
add to folder:
If you would like to learn how Lexology can drive your content marketing strategy forward, please email [email protected].
© Copyright 2006 – 2022 Law Business Research
About Author
