Prospective foreign purchasers of Australian land may appear to be attractive clients for Australian financiers

Foreign investors looking to acquire an interest in Australian land face a regime of new screening thresholds and fees, tougher penalties and the establishment of an agricultural land register following recent wholesale amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act).

Failure by a foreign investor to comply with the strict obligations of the Act may result in:

  • compulsory divestment of the acquired interest and forfeiture of any resulting capital gain; and/or
  • civil penalties of up to $45,000 for individuals and $225,000 for corporations or up to 25 per cent of the consideration or market value of the acquired interest; and/or
  • criminal penalties of up to $135,000 or 3 years’ imprisonment for individuals or $675,000 for corporations.

Australian financiers should ensure as part of their due diligence processes that their foreign borrowers do not contravene their obligations under the Act in proposing to acquire Australian land. This is because the efficacy of any security interest granted by a foreign investor in Australia land may be undermined by:

  • the creation of a first ranking charge in the land by the operation of the Act in respect of any civil pecuniary penalties unpaid by a foreign investor under the Act (sections 104 to 106 of the Act); and/or
  • the potential vesting of Australian land in the Commonwealth of Australia, which permits the Commonwealth to sell the land in order to satisfy its first ranking charge (effectively subordinating the charge and/or mortgage interest held by the Australian financier over the land - sections 108 to 109 of the Act).

This new regime of foreign investment laws came into force on 1 December 2015. Lavan Legal recommends that Australian financiers familiarise themselves with the new regime of foreign investment laws to ensure they efficiently and effectively deal with any proposed acquisition of Australian real property-related assets by foreign investors.

Overview

Foreign government investors must obtain approval from the Foreign Investment Review Board (FIRB) before acquiring any interest in Australian land, regardless of its type or value, unless the purchase is for diplomatic or consular requirements.

A private foreign investor must notify FIRB and obtain approval before taking a ‘significant and notifiable action’, meaning the acquisition of interests that meet certain value thresholds, depending on the type of land and interest acquired.

FIRB must:

  • make a decision on an application for foreign investment approval and publish that decision in the Government Gazette within 30 days of notification by the applicant (not including the applicant’s response time where additional information is requested); or
  • make an order before the end of the decision period extending the period for consideration by up to 90 days.

The applicant may voluntarily extend the decision period in writing prior to the completion of the 30-day period.  There is no limit to the number of times the decision period can be extended in this way.

If FIRB does not make a decision or extend the decision period before the end of the decision period and the decision period is not voluntarily extended by the applicant, the Treasurer no longer has power to make any orders in relation to the proposed transaction under the Act.  The result then is that the proposed acquisition may proceed.

What is a foreign person?

A ‘foreign person’ is:

  • a natural person who is not ordinarily resident  in Australia;
  • a corporation in which a natural person not ordinarily resident in Australia or a foreign corporation holds a controlling interest;
  • a corporation in which two or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate controlling interest (of at least 40 per cent);
  • the trustee of a trust estate in which a natural person not ordinarily resident in Australia or a foreign corporation holds a substantial interest (of at least 20 per cent); or

the trustee of a trust estate in which two or more persons, each of whom is either a natural person not ordinarily resident in Australia or a foreign corporation, hold an aggregate substantial interest (of at least 40 per cent).

Screening thresholds

The schedule of value thresholds triggering the requirement for FIRB notification and review addresses three categories of foreign persons:

  • foreign government investors;
  • private investors from countries without Free Trade Agreements (FTA) with Australia; and
  • private investors from FTA partner countries, currently Chile, Japan, New Zealand, South Korea, Malaysia, Singapore, Thailand, the United States and China.

The thresholds vary between the categories and are calculated according to the amount paid for or the value of the interest, except in the case of agricultural land, where the screening threshold applies to the cumulative value of the applicant’s acquisitions.

Private investors from non-FTA countries must seek FIRB approval before acquiring:

  • agricultural land valued at $15 million or more, unless the investor is from Singapore or Thailand, when the threshold rises to $50 million.  This review threshold includes the total value of current and proposed interests in agricultural land held by the investor and its associates;
  • vacant commercial land or mining and production tenements of any value; and
  • developed commercial land valued at $252 million or more, unless the land is considered ‘sensitive’ land, in which case the threshold falls to $55 million.  Sensitive land includes mines and critical infrastructure such as airports or ports or land leased to the Commonwealth, a State or Territory or one of their bodies.

The monetary thresholds for private investors from FTA countries are:

  • for agricultural land:
    • $1094 million for investors from Chile, New Zealand and the United States; and
    • $15 million for investors from China, Japan and Korea;
  • for vacant commercial land - $0;
  • for developed commercial land - $1094 million; and
  • for mining and production tenements:
    • $1094 million for investors from Chile, New Zealand and the United States; and
  • $0 for all other investors.

Subject to certain exemptions, all foreign investors must obtain FIRB approval before acquiring an interest in residential land, regardless of value.

Agricultural land

Given the national significance of agricultural production, the Government takes a close interest in foreign acquisition of agricultural interests.  Consistent with this focus, it has established a Register of Foreign Ownership maintained by the Australian Taxation Office (ATO) and lowered the screening threshold for FIRB review to $15 million, subject to the FTA agreements referred to above.  The review threshold includes the total value of current and proposed interests in agricultural land held by the applicant and their associates.

Under the Register of Foreign Ownership of Agricultural Land Act 2015 (Cth), foreign persons were required to report all of their agricultural holdings to the ATO by 31 December 2015.  Notwithstanding that, the ATO website specifies that interest must have been notified by 29 February 2016.  Any new acquisitions of agricultural land must now be registered within 30 days of acquisition by a foreign person. This obligation applies regardless of whether the value of the land meets the threshold for FIRB notification or its purchase is covered by an exemption certificate.

Foreign persons, including foreign government investors, can apply for an exemption certificate to cover a program of acquisitions of interests in agricultural land.

Commercial land

FIRB will generally approve an acquisition of vacant commercial land subject to the applicant commencing construction of the proposed development on the land within five years of approval and not selling the land until construction is complete.

Foreign persons can apply for an exemption certificate to cover a program of acquisitions of interests in commercial land.  However, exemption certificates do not cover the purchase of sensitive land for which the $55 million screen threshold applies.

Residential land

The Australian Government’s approach to foreign investment in residential land is to promote an overall increase in Australia’s housing stock and the consequent boost to construction and economic growth.

Accordingly, applications to purchase:

  • new dwellings are usually approved without conditions; and
  • vacant land are usually approved subject to construction of a dwelling being completed within four years and evidence of completion submitted within 30 days of receipt by the applicant. In exceptional circumstances where the construction cannot be completed within four years, an application to vary the condition may be made at least two months before the end of the four-year period.

Mixed used land

Where land meets more than one of the land type descriptions, foreign buyers may be subject to multiple notification obligations.

Where an acquisition involves multiple titles with different uses, notification requirements and approvals will be determined on a title by title basis.

Leases

There is a common perception that leases do not require FIRB approval. This is not always correct.

Section 12(1)(c) of the Act provides that an interest in Australian land includes an interest as lessee or licensee in a lease or licence giving rights to occupy Australian land where the term of the lease or licence (including any extension) is reasonably likely, at the time the interest is acquired, to exceed five years.

Exemptions

FIRB approval is not required for acquisition of residential land:

  • by Australian citizens (whether or not they ordinarily reside in Australia);
  • by New Zealand citizens;
  • by holders of Australian permanent visas;
  • by foreign persons buying property as joint tenants with an Australian citizen spouse, New Zealand spouse or Australian permanent resident spouse. (To be clear, this exemption does not apply to the purchase of property as tenants in common); or
  • purchased from a developer with a new dwelling exemption certificate.

This is not an exhaustive list.

Australian or foreign developers may apply for a new dwelling certificate for a development comprising 50 or more dwellings, which has development approval from the relevant government authority and, if applicable, for which foreign investment approval was given for purchase of the land and any subsequent conditions met.

Foreign persons may purchase interests in dwellings up to a value of $3 million in a development subject to a new dwelling exemption certificate without having to make a separate application for foreign investment approval.  However, the developer must pay a fee for each dwelling in that development purchased by a foreign person.

Fees

The recent reforms included introduction of application fees to fund the cost of administering foreign investment applications.

Fees currently start at:

  • $5,000 for residential properties valued at $1 million or less and $10,000 for property valued between $1 million and $2 million, then rising $10,000 for each additional $1 million in value;
  • equivalent fees, capped at $100,000, for agricultural land;
  • $10,000 for vacant commercial land and $25,000 for developed commercial land; and
  • $25,000 for mining or production tenements (except where the interest is acquired from an Australian Government body or entity).

Costs for applications for exemption certificates are as follows:

  • to sell new dwellings in a development to foreign persons, $25,000 plus regular reconciliation based on the number and value of dwellings acquired by foreign persons;
  • for a program to acquire interests in Australian land, $25,000 for acquisitions of $1 billion and less, otherwise $100,000;

to acquire interests in mining or production tenements, $25,000 (or nil if the applicant pays a fee for an application for an exemption certificate to acquire interests in Australian land and the applications are made within 7 days of each other).

Creation of a change in property

The Act provides that a first ranking charge may be created in respect of an interest held by a foreign investor in Australian land in favour of the Commonwealth of Australia, if:

  • a Court finds that a foreign investor has contravened their obligations under the Act;
  • a pecuniary penalty is imposed on the foreign investor in relation to that contravention; and
  • (among other things) the contravention relates to the acquisition of an interest in land (including leases, licences, mining tenements, easement, et cetera).

This first ranking charge gives the Commonwealth the power to sell the interest in land subject to the charge created by the Act. The proceeds of sale are paid in the following order of priority:

  • firstly, the civil pecuniary penalty owed by the foreign investor to the Commonwealth, including any court and recovery costs incurred by the Commonwealth (as applicable);
  • secondly, to any mortgagee or chargee which holds a registered interest in the land;
  • thirdly, if the foreign investor held their interest in Australia land with another party, that party; and
  • fourthly, if any other penalty or debt is due from the foreign investor to the Commonwealth of Australia, that penalty and/or debt (as the case may be).

Conclusion

This is a very cursory summary of Australia's foreign investment laws.  For a more thorough examination of Australia's foreign investment laws please click here.

Lavan Legal recommends that Australian financiers, in dealing with a proposed acquisition of Australian land by a foreign purchaser familiarise themselves with Australia's foreign investment laws so that they ensure that the foreign investor has not and will not contravene their obligations under the Act.

Any contravention of a civil penalty provision of the Act by a foreign purchaser may give rise to a first ranking charge over the land, which will subordinate the Australian financier’s security interest in the land. This adds some new commercial risk to Australian financiers dealing with foreign investors who propose to acquire an interest in Australian land.