There has recently been much publicity on the strong level of foreign investment in Australian real estate and the impact that this is having on housing affordability. Federal MP, Kelly O’Dwyer, who is leading a parliamentary inquiry into housing affordability in Australia, voiced concerns in recent weeks that the Foreign Investment Review Board (FIRB) is not adequately policing compliance with foreign investment rules.
She has called for tougher penalties for instances of non–compliance and has also suggested that professionals that assist foreign persons in contravening the rules, such as selling agents, accountants and lawyers, should also be exposed to penalties.
Whether these changes will be introduced remains to be seen. However, it seems likely that FIRB will more actively police compliance with the foreign investment rules as a result of this publicity.
The foreign investment rules are detailed and vary depending upon the type of property in which an interest is being acquired and the characteristics of the foreign person acquiring the interest (among other things). This update provides a high level overview of those rules.
Who do the foreign investment rules apply to?
The foreign investment rules apply to “foreign persons”. In general terms, a foreign person is:
There are further subcategories of foreign persons and specific rules that may apply to those subcategories.
For example, stricter rules apply to entities that are owned or controlled by foreign governments, New Zealand citizens are exempt from the requirement to obtain FIRB approval before acquiring residential real estate and more lenient rules apply to New Zealand and United States investors acquiring developed commercial property.
What interests in land do the rules apply to?
This update focuses on direct acquisitions of Australian land by foreign persons.
However, acquisitions of a broad range of interests in Australian land may be subject to the foreign investment rules, including leases, security interests, profit sharing arrangements and interests in companies or unit trusts that own Australian land. Leases for a term of five years or which are likely to exceed a term of five years are subject to the foreign investment rules.
How does FIRB decide if approval will be granted?
FIRB examines applications on a case by case basis and makes recommendations to the Treasurer on whether applications should be approved.
The Foreign Acquisitions and Takeovers Act 1975 (Cth) governs the foreign acquisition of land in Australia. The Treasurer can refuse applications that are contrary to the national interest or, alternatively, apply conditions to an approval to ensure that it is not contrary to the national interest. The national interest test is not defined in the legislation and has been left intentionally broad so that the concept can be interpreted and applied in a flexible manner.
Australia’s foreign investment policy provides guidance on when approval is likely to be granted and the conditions upon which approval is likely to be granted.
In general, FIRB approval must be sought before purchasing residential land regardless of its value.
Different rules apply to acquisitions of new dwellings, established dwellings or vacant land for residential development.
A “new dwelling” is a dwelling that has not previously been sold by a developer and has not been occupied for more than 12 months.
A foreign person must obtain FIRB approval before acquiring a new dwelling. However, it is FIRB policy to approve applications without conditions. The rationale for this policy is that sales of new dwellings to foreign persons do not reduce the housing stock in Australia.
Developers undertaking off the plan sales in developments exceeding 100 lots may obtain an upfront approval to sell to foreign persons. Purchasers then do not need to make their own individual application for FIRB approval. The off the plan contract does not need to be made conditional upon the buyer obtaining FIRB approval within a specified time (usually 30 – 45 days).
Developer approvals are usually granted if the developer will market lots for sale within Australia (ie not solely overseas). The developer is required to meet ongoing reporting requirements to FIRB if upfront approval is granted.
All dwellings that that are not new dwellings are established dwellings.
FIRB policy is to generally not approve the acquisition of an established dwelling by a foreign person. However, there are some exceptions:
FIRB approval to acquire a vacant lot for residential development will generally be granted on the condition that continuous construction commences within two years of approval being granted.
Commercial land is land that is not residential or rural land.
Foreign persons do not need to obtain FIRB approval to acquire developed commercial land valued at $54 million or less unless the property is heritage listed in which case the threshold is $5 million. A higher threshold ($1,078 million) applies to United States and New Zealand investors.
Acquisitions of vacant land for commercial development are normally approved subject to the condition that continuous construction commences within five years.
Rural land is land used wholly or exclusively for the purpose of carrying on a business of primary production. Hobby farms and rural residential lots will be considered residential property.
A foreign person needs approval to buy an interest in a primary production business where the total assets of the business exceed $248 million (or $1,078 million for New Zealand and United States investors).
Lavan Legal comment
Failure to comply with the foreign investment laws and conditions of FIRB approvals can result in actions which include monetary penalties, unwinding of the transaction or divestment of the interest acquired.
Whilst the FIRB has taken little enforcement action in recent years, this may well change in light of recent publicity.
Foreign investors looking to invest in Australian land should consider the foreign investment rules and obtain appropriate advice if necessary. Lavan Legal regularly provides advice in this area and prepares applications for FIRB approval.
The process of applying for FIRB approval is not onerous and applications are usually responded to within 30 days.