The unintended consequences of the 2015 FIRB changes

Unintended consequences for residential and non-vacant commercial land transactions

In December 2015 the Federal Government implemented the most substantial raft of amendments to the FIRB legislative framework in over 40 years (2015 FIRB reforms). However, since the 2015 FIRB reforms were implemented, there have been a number of unintended consequences which have placed an additional regulatory burden on the Federal Government and added unnecessary red tape for foreign investors.

A recent consultation paper released by Treasury has identified the unintended consequences of the 2015 FIRB reforms and called for input from stakeholders to determine how to overcome the issues that have been identified.

In the property space, the consultation paper identified unintended consequences in relation to residential land transactions, non-vacant commercial land transactions and the commercial fees framework.

Residential land

Inconsistent exemption certificate framework

An unintended consequence of the 2015 FIRB reforms has been the incentivising of non-compliance with the FIRB process by foreign investors looking to purchase residential land in certain circumstances.

Pre-approval exemption certificates are available for foreign buyers looking to buy established dwellings or for property developers wanting to sell new dwellings to foreign persons.

However, foreign buyers looking to purchase a new dwelling or vacant residential land need to apply individually for each property they are considering, even if they only want to make one purchase.

This process can subject foreign buyers to substantial fees as multiple FIRB applications may be required.

The hassle and cost of multiple applications incentivises non compliance with the FIRB process as it can be cheaper for foreign buyers who are considering multiple properties, but only intend to buy one, to pay the relevant fine and notify FIRB after the property has been purchased, rather than make multiple applications and pay the fees.

Treatment of failed off-the-plan settlements

An off-the-plan property is deemed sold under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) when the parties sign the contract and it becomes binding.

If the sale is not completed the property is deemed to be an established dwelling for any future acquisitions.  This prevents foreign buyers from later buying the property and may substantially effect a developer’s capacity to re-sell the property.

On 26 November 2016, the Treasurer announced that foreign buyers would be allowed to purchase an off-the-plan dwelling (as a new dwelling) when another foreign buyer has failed to reach settlement.  However these purchases are still technically in breach of the FATA provisions as, whilst allowed by FIRB in practice, they don’t truly comply with the legislation.

Residential land used for commercial purposes

Acquisitions of residential land and commercial land are subject to different treatment under the FIRB process.

Due to the definition of commercial land under the FATA, some land that would be considered commercial in nature (such as aged care facilities, retirement villages and some student accommodation), are deemed to be residential land.

As a result, foreign investors looking to undertake commercial developments of aged care facilities, retirement villages and some student accommodation, face different treatment under the FIRB process.  In addition, foreign owners of these facilities must also receive FIRB approval each time they use a mandatory buyback mechanism (such as those used in retirement villages) before on-selling the property to new residents in their facilities.

Proposed cures

To overcome the unintended consequences in relation to dealings with residential land, Treasury has proposed introducing:

  • new exemption certificates which will allow foreign buyers to receive a broad pre-approval to purchase new dwellings or vacant land to avoid the need for numerous individual FIRB applications;
  • new exemption certificates which will allow developers to sell off the plan properties to foreign buyers which have been subject to a failed settlement; and
  • amendments to the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) to subject residential land used for an aged care facility, retirement village or certain student accommodation to the same screening process as non-vacant commercial land.

The proposed cures are intended to decrease the regulatory burden for the Government which will result in cost savings in the hundreds of thousands of dollars a year.

Non-vacant commercial land

The 2015 FIRB reforms were implemented in an attempt to reduce the number of routine cases in the FIRB system by increasing the monetary screening thresholds for non vacant commercial land from $55 million to $252 million.1

However, non vacant commercial land that is considered ‘sensitive land’ is still subject to the lower $55 million threshold.  ‘Sensitive land’ includes land under prescribed airspace.  In practice, this has meant that a substantial number of buildings in capital cities around Australia are subject to the lower threshold which has not achieved the policy outcome of removing routine cases from the FIRB process.

Treasury has proposed amendments to the relevant sections of the legislation in an effort to better align the legislation with its intended effect which could potentially remove 15 - 20 FIRB applications from the system per year and save the Federal Government between $500,000 and $600,000 annually.

Fee complexity

Feedback from stakeholders has indicated that foreign investors and stakeholders have found the fee system to be unnecessarily complex.  At this stage, Treasury is only considering amendments to the fee structure for commercial transactions and no changes to the residential fee structure have been proposed in the consultation paper.

The fee complexity stems from the different fees applicable for different acquisition types, with some fees tiered on a sliding scale based on consideration.  For example, a $20 million commercial acquisition could attract a fee of $10,100 for vacant commercial land, $25,300 for an acquisition of securities, $101,500 for agricultural land or $203,000 for residential land.

This has resulted in significant work by foreign investors before submitting a FIRB application to determine the correct fee that applies as well as complexity in administering the system when, in some cases, has adversely impacted timeliness in processing applications.

As a result, Treasury is considering methods to streamline the fee structure such as:

  • granting broader powers for FIRB to grant fee waivers;
  • adopting a flat fee structure that is not dependent on transaction type or consideration; or
  • adopting a tiered fee structure for all commercial transactions based on consideration rather than transaction type.

Lavan comment

As with any substantial legislative reform there will be an adjustment process. The recent consultation paper indicates that Treasury is listening to feedback from stakeholders and is looking to work together with stakeholders to rectify some of the unintended and less favourable consequences of the 2015 FIRB reforms.  Submissions by stakeholders have recently closed and Lavan looks forward to seeing what changes are made to simplify the FIRB process for foreign investors.

04 April 2017
Property Updates
AUTHOR
Peter Beekink
Partner
AUTHOR
Tamara Heng
Partner
SERVICES
Property and Leasing


FOOTNOTES

[1] A higher $1,094 million threshold applies for agreement country investors which includes Chilean, Chinese, Japanese, New Zealand, South Korean and United States investors, except foreign government investors. This will also include Trans Pacific Partnership countries, if the TPP comes into force and higher thresholds do not already apply.