Recent developments to rules regarding foreign investment in Australian property signal a tougher Government stance, providing for greater scrutiny of foreign investment in Australian property and tougher penalties for non-compliance.
The changes come in response to findings last year that foreign investors were illegally acquiring property in breach of foreign investment laws, which were not being properly enforced.
What are the recent developments?
The Foreign Investment Review Board (FIRB), who is the advisory body to the Government regarding foreign property investment, has released an updated Foreign Investment Policy which dictates new rules regarding the acquisition of rural land in Australia. This will enforce greater scrutiny of rural property acquisitions, so the investment is “the right investment that serves our purposes”, Prime Minister Abbott says.
This comes shortly after the Department of Treasury released an Options Paper titled “Strengthening Australia’s Foreign Investment Framework” in February which proposed changes including new application fees, and greater penalty provisions for breaches. Most notably, the Government proposes to extend criminal liability to third parties such as foreign advisors, real estate agents or lawyers who knowingly assist foreign investors to breach the rules.
The Government crackdown was reflected last week when Treasurer Joe Hockey made headlines for ordering the sale of a $39 million luxury Sydney property that had been acquired by a foreign person (a ‘divestment order’). The property, Villa de Mare, was acquired in October 2014 by an Australian company, Golden Fast Foods Pty Ltd. The Australian company was essentially owned by a Hong Kong company, Evergrande Real Estate Group, which is deemed to be a foreign person under the Foreign Acquisitions and Takeovers Act 1975 (FATA).
The acquisition was in breach of the laws regarding acquisition of residential property: non-foreign persons cannot buy established dwelling as homes or investments.
Why has the policy changed?
A federal inquiry conducted last year into housing affordability and the influence of foreign ownership in Australia found the FIRB had been “asleep at the wheel” and not performing enforcement or compliance regimes they are tasked with, according to the chair MP Kelly O’Dwyer.
The findings found that no Government issued divestment order had been made since 2006, which had perpetuated non-compliance by foreign investors. Several recommendations were made to Treasurer Joe Hockey in November 2014, including stiffer and wider penalties for foreign investors who do not comply.
The updated Policy and proposed changes to foreign investment laws are as a result of the Government undertaking this review process. The Government has indicated these new rule changes are likely to be legislated through amendments to the Foreign Acquisitions and Takeovers Act 1975, giving them the force of the law.
Breakdown of the proposed changes
Under the updated FIRB Policy, the new rules relating to rural land acquisitions:
- Requirement that foreign investors seek prior FIRB approval for the acquisition of an interest in rural land, where the cumulative value of the rural land held by the foreign investor, including prior acquisitions, will exceed $15 million.
- An interest in rural land will include a direct interest, or an interest indirectly held.
- The new threshold regarding the acquisition of interests in rural land is contained in the Foreign Investment Policy.
Under the Government’s proposed changes to the laws:
- Changes to the foreign investment framework
- New dedicated compliance and enforcement unit within the ATO to audit and enforce non-compliance of the new rules.
- Changes to the rules around off-the-plan certificates granted to property developers, so the value of all apartments that can be bought by a single foreign investor is limited to $3 million in any single development. FIRB approval must be sought if foreign investors wish to purchase apartments above this value, and they can no longer rely on the advance off-the-plan certificate to the developer.
- A separate requirement to seek approval for the acquisition of agricultural land and agribusiness, involving the creation of a foreign ownership register that will collect information on existing foreign ownership and subsequent transactions of all interest in agricultural land from 1 July 2015.
- New Application fees – proposed changes
- New fees to be introduced to assess foreign investment applications brought by foreign investors.
- For rural and residential property – a fee of $5,000 for properties valued at less than $1 million, and a $10,000 fee for properties valued over $1 million plus a further $10,000 for each additional $1 million in value.
- For business acquisitions – a fee of $25,000 to acquire a business in non-sensitive sectors, and a $100,000 fee to acquire a business including agriculture acquisitions where the target asset value exceeds $1 billion.
- Criminal penalties will apply to third parties such as real estate agents, legal and financial advisors, or others who knowingly assist foreign investors to breach the rules.
The implications for you
The Government has asked for public submissions on the proposed changes to the foreign investment rules by 20 March 2015. Until the public consultation process has been completed, the impact these changes could have upon you, our clients, cannot be accurately assessed.
We will be following the progress of these changes closely and will keep you informed as to the final proposed amendments.
- h3er penalties
- Tougher pecuniary and criminal penalties in the FATA designed to deter non-compliance.
- New civil penalties for foreign investors who acquire an established dwelling, and a temporary resident who acquires more than one established property.
