Treasury released an options paper in late February 2015 calling for feedback and comments to the Federal Government’s proposal to tighten up its foreign investment policy (Proposal). This update focuses on the following key changes to that policy outlined in the Proposal:
For an overview of the foreign investment in real estate framework, please see our October 2014 Property Update.
Application fee for FIRB approval
Currently, there are no costs for foreign investors when making applications to the Foreign Investment Review Board (FIRB) for approval to purchase property in Australia.
The idea of imposing an application fee on potential foreign investors was recommended in 2014 by a parliamentary enquiry led by Liberal MP Kelly O’Dwyer. That inquiry sought to levy a $1,500 administration fee on the applicant. The Proposal considers the imposition of a much higher figure on potential foreign investors.
Under the Proposal, foreign investors will be charged up to $5,000 per application for properties valued below $1 million and up to $10,000 for properties over $1 million in value. Each additional $1 million in the property’s value will attach an increment of $10,000 on the application fee. This fee will be paid before the application is processed by FIRB, and the 30 day statutory time period to assess the application will only begin after receipt of payment.
The Government has stated that the purpose of these fees is not to deter foreign investment in real estate, but to alleviate the burden of administrative costs off the taxpayer.
Advanced off-the-plan certificates
As the law stands today, developers of any development with 100 lots or more may apply to the FIRB for advanced off-the-plan certificates to sell apartments to foreign investors. The condition for granting such certificate is that the developer must also market the apartments domestically to ensure that Australian buyers have the same opportunity to purchase the apartments. There are currently no application fees for advanced off-the-plan certificates and no penalties for breach of the domestic marketing condition.
The Proposal recommends that developers be charged an application fee similar to the fees for individual applications based on the number of dwellings sold to foreign investors. It is not clear how will this be enforced. The amount levied on developers cannot be known at the time of application. To require developers to pay FIRB application fees for an advanced certificate could mean imposing ongoing reporting duties on the developer. Further, criminal and civil pecuniary penalties have been proposed for developers who fail to market apartments domestically, including potential imprisonment for up to two years.
The Government also proposes to limit the value of all apartments that can be bought by a single foreign investor to $3 million in any single development. Individual approval will need to be sought by the foreign investor who wishes to do so.
Currently, the penalties available for breach of the Foreign Acquisitions and Takeovers Act 1975 (Act) are limited to criminal penalties and divestment orders. In practice, the FIRB does not often prosecute offenders and, prior to the surge of recent publicity, has not prosecuted a single case since 2006.
On 3 March 2015, the Treasurer ordered the sale (within 90 days) of a $39 million Sydney home by the foreign investor who acquired the property without FIRB approval.
The Government’s Proposal could see a civil penalty of up to 25 per cent of the value or purchase price of a property ($9.75 million in the above scenario) being imposed on an offender under the Act.
Furthermore, the Government has revived the idea of imposing civil penalties for any third party (lawyers, accountants and the like) who knowingly assists the foreign investor in breaching the rules of the Act. This was proposed a number of years ago but was never legislated. Instead prosecutors prosecuting third parties for knowingly assisting foreign investors to circumvent the Act could only rely on the Criminal Code Act 1995 (Cth) which allowed for fines of up to $85,000 or imprisonment of up to two years, or both.
Recently, the Treasurer announced that from 1 March 2015, foreign investors must obtain prior approval for a proposed acquisition of an interest in rural land where the cumulative value of rural land owned by that investor (including the proposed acquisition) is $15 million or more. This is a significant lowering of the threshold from the current $252 million. The Government will also establish a foreign ownership register and will start collecting information on existing foreign ownership of agricultural land from 1 July 2015.
Lavan Legal comment
Interested stakeholders have been given until 20 March 2015 to comment on the Treasury’s options paper. There has been indication that the Property Council of Australia will be lobbying against the implementation of FIRB application fees as it will place undue burden, not only on foreign investors, but also local developers developing affordable housing.
The wide scope and general wording of the Proposal make it difficult for us to comment on the consequences of implementation without speculation. A number of pressing issues still need to be considered, such as the potential conflict of the Proposals with existing foreign investor programs and what anti-avoidance measures could be put in place to ensure third party compliance.
The Proposal has been made in light of growing public concerns, whether warranted or not, of high levels of foreign investment in real estate pricing local buyers out of the market. However, such a policy should be based on hard evidence, such as the percentage of new dwellings and Australian agricultural land that have actually been acquired by foreign interests. The policy runs the risk of being driven by populist politics rather than hard facts. Some consideration must be given to the impact of the Proposal to ensure that unintended consequences are avoided.
Foreign investors and developers alike should expect to be scrutinized over the coming months and should ensure that they are in compliance with the Act and the conditions of FIRB approvals.