By Harrison Dell, Director.
The real estate market is witnessing a transformation through the introduction of blockchain technology, particularly through the tokenisation of real property. Australia’s obsession with both real estate and blockchain technology have made it a perfect melting pot for these technologies.
Tokenisation is the process of converting rights or ownership interests in an asset into a digital token on a blockchain. This is the evolution of securitization which occurs in centralsied systems such as Exchange Traded Funds (ETFs) traded on stock exchanges or issued by custodians.
This innovation offers a novel way to invest in Australian real estate and sub rights related to real estate, promising increased liquidity, fractional ownership, and broader accessibility. However, it also raises significant legal and tax implications that investors and stakeholders must carefully consider.
What is Tokenisation and what laws govern it?
Tokenisation in the context of real estate usually involves dividing property into shareable digital units or tokens that represent ownership or economic rights. These tokens can be bought, sold, or traded on digital platforms, often using blockchain technology to secure transactions and record ownership.
However, tokenisation opens up new methods to invest in property and can involve dealing in parts of property rights, such as:
- Rights to rental income distinct from ownership of the property itself.
- Dealing in options over development land.
- Packages of mortgages over land.
- Specific tokenised investments for first-home buyers.
Many of these are financial products and specific advice is needed.
Legal Framework in Australia
The legal aspects of tokenising real property in Australia are still evolving. Current property law does not directly address the ownership transfer through digital tokens, implying a need for legislative adaptation to fully integrate this technology. For the time being, all real estate tokenisation projects must use a legal wrapper, usually an Australian company.
Tax Implications
From a tax perspective, tokenisation introduces complexities in how these transactions are treated by the Australian Taxation Office (ATO) and various state revenue offices. Here are some of the primary considerations:
- Capital Gains Tax (CGT): Investors may be liable for CGT on profits made from selling property tokens if they are considered a capital asset. Determining the event date for CGT purposes—whether at the token purchase or exchange—can be contentious.
- Income Tax: Rental income derived from tokenised properties is taxable. Investors need to declare this income in their tax returns, similar to traditional real estate investments.
- GST Considerations: The sale and lease of residential property generally remain GST-exempt. However, token transactions may attract GST if deemed to be supplying “new residential premises” or potential commercial properties.
- Stamp Duty: Each state and territory in Australia has different regulations regarding stamp duty, which could apply to the initial issuance and subsequent trades of property tokens, or on the rebalancing of a fund itself.
- Foreign Investors: A product should consider whether any foreign persons (defined in state legislation) may affect the state tax status of any entity that may trigger transfer duty, landholder duty or land tax however described. Additional taxes may apply, such as surcharge purchaser duty in NSW.
Each real estate tokenisation project we have advised has raised many niche tax questions that are specific to the product being crated.
Regulatory Considerations
Tokenisation of real property must comply with the existing financial services framework of the Corporations Act 2001, the Australian Securities and Investments Commission (ASIC) regulations, and property law principles concerning title registration and transfer processes. ASIC requires that any platform facilitating the trade of real estate tokens must hold an Australian Financial Services Licence (AFSL). Additionally, these platforms must ensure compliance with Australian Consumer Law, providing clear, accurate, and not misleading information about the property investment.
AFSL’s can be expensive to obtain, many providers use Corporate Authorised Representatives (CARs) to enter the space and
Example
Consider a scenario where a commercial building in Sydney is tokenised into 10,000 tokens. Each token represents a 0.01% ownership stake in the property. Investors can purchase any number of tokens, and the returns on their investment might come from rental yields and capital appreciation, distributed proportionally to the number of tokens they hold.
Relevant issues are:
- Entity type, a trust, company or something else like a Managed Investment Trust.
- AFSL or licensing that may be required for capital raising.
- Tax issues are varied between income tax/CGT on the units themselves, the status as an MIT or otherwise, additional state taxes in NSW on the entity and more.
Conclusion
The tokenisation of real property in Australia is a burgeoning field that presents significant opportunities alongside novel challenges.
While it promises to revolutionise Australian real estate investment by making it more accessible and liquid, comprehensive legal and tax frameworks need further development to fully embrace this technological shift. Investors should remain informed and cautious, seeking professional advice before engaging with this emerging market.
Disclaimer: This material is produced by Cadena Legal, a NSW-registered legal practice. It is intended to provide general information and opinions on legal topics, current at the time of first publication. The contents do not constitute legal advice and should not be relied upon as such. Contact us here for advice.
