Treasury releases foreign investment reforms

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The Australian Treasury yesterday released the Exposure Drafts and Regulatory Impact Statement of legislation designed to tighten foreign investment rules, including those relating to residential real estate.

On 2 May 2015, the Government announced a package of reforms to strengthen the foreign investment framework, including:

  • stronger enforcement of the foreign investment rules by transferring all of the residential real estate functions to the Australian Taxation Office;
  • stricter penalties that will make it easier to pursue court action and ensure that foreign investors are not able to profit from breaking the rules;
  • application fees to improve service delivery and ensure that Australian taxpayers no longer have to fund the cost of administering the system;
  • increased scrutiny around foreign investment in agriculture;
  • increased transparency on the levels of foreign ownership in Australia through a land register; and
  • a more modern and simpler foreign investment framework.

These reforms will be given effect by the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015, the Register of Foreign Ownership of Agricultural Land Bill 2015 and the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015.

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The Government is now seeking input from stakeholders on the two substantive Bills (the Fees Imposition Bill is a standard tax imposition Bill) and their explanatory materials.

The closing date for submissions is Friday, 17 July 2015.

The Regulatory Impact Statement, which accompanies the proposed legislative changes, explains the rationale behind the reforms along with procedural matters. Key extracts explaining the reforms are presented below:

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The fundamental principles behind the foreign investment framework are sound and the framework has generally received the support of domestic and international stakeholders.

However, heightened community sensitivity over certain types of foreign investment (in particular agriculture and residential real estate) and shifts in global investment patterns are placing stress on the ability of the framework to address community concerns.

Increasing community concerns in relation to agriculture have put pressure on the traditional approach of maintaining consistent thresholds for business investments across all sectors. While consistent thresholds portray Australia’s non-discriminatory, non preferential approach to business investment, they do not account for the relative significance of an investment in particular sectors where asset, business or land values are generally lower. For example, an investment of $100 million in the mining industry may be small relative to the size of the industry, while a $100 million investment in agriculture is more significant to industries in that sector.

Increasing community concerns in relation to foreign investment in residential real estate have also been a focus in recent times, particularly in relation to compliance and enforcement of existing rules. In particular, concerns exist that there are foreign investors who are circumventing the framework and affecting housing affordability. Various media articles have quoted anecdotal cases of investors purchasing both new and existing properties…

In addition to the findings of the House of Representatives Standing Committee on Economics that compliance of the residential real estate rules are not effective, the consultation process provided anecdotal evidence of people being prepared to breach the foreign investment rules in relation to real estate on the basis that the risks of being caught were low. This reinforces the view in the community that changes need to be made to how the rules are enforced…

Agricultural investment

Until 1 March 2015, non-government business proposals were only screened if they were over the relevant threshold ($252 million for most countries). Agricultural investment proposals (both land and businesses) were assessed under the general business screening arrangements. This meant that there was only screening of a small number of exceptionally large agricultural transactions that were above the $252 million threshold…

Lack of data on foreign ownership

More broadly than agriculture, the absence of available information on what foreign investors have purchased and how much of Australian land is actually held by foreign investors is further undermining the integrity and public confidence of the foreign investment framework…

On 24 April 2010, the then Assistant Treasurer, the Hon Senator Nick Sherry MP, announced the reintroduction of the requirement for temporary residents to seek foreign investment approval prior to acquiring residential real estate in Australia. The requirement for temporary residents to seek foreign investment approval to purchase residential real estate was removed in March 2009.

One of the reasons for reintroducing the requirement for temporary residents to seek foreign investment approval to acquire residential real estate was to address concerns at the time about the lack of transparency and available data around foreign investment activity in Australia’s residential real estate sector…

The House of Representatives Standing Committee on Economics reported that it:
… does not have confidence in the integrity of the current FIRB data on foreign investment in residential real estate. This lack of accurate and timely data represents a fundamental deficiency preventing proper understanding and analysis of the impact of foreign investment on the Australian real estate market.

The House of Representatives Standing Committee on Economics also found that a lack of reliable data has further eroded public confidence in the framework, and that to maintain and restore confidence significant improvements need to be made.

The lack of reliable data also impedes identification of the size and scope of the problem of identifying how much non-compliance exists with the foreign investment rules…

Residential real estate investment

Foreign persons will generally be granted approval to purchase new dwellings on the basis that such investment adds to Australia’s housing stock. This includes purchases of dwellings off-the-plan, before construction commences. These types of purchases can considerably contribute to developers being able to commence construction.

For established dwellings, generally only temporary residents will be approved to purchase these properties. Only one established dwelling may be purchased by a temporary resident and it must be used as their place of residence in Australia. Foreign investment approval is normally given subject to conditions, including that the temporary resident sells the property within three months of it ceasing to be their primary residence. Established dwellings are unable to be used as rental properties or holiday homes…

Currently, only divestment orders and criminal penalties apply for breaches of the Act. Criminal penalties are difficult to pursue due to the high burden of proof required…

In March 2014, recognising increasing community concerns, the Government asked the House of Representatives Standing Committee on Economics to inquire into foreign investment in residential real estate. It tabled its report to Parliament in November 2014.

The House of Representatives Standing Committee on Economics report highlighted no enforcement activities regarding foreign investment in residential real estate through the courts occurred since 2006 and that only 17 divestment orders had been issued since 2003. It also noted that no data could be provided on voluntary divestments by foreign investors.

From submissions and testimonies to the House of Representatives Standing Committee on Economics it was clear that ongoing concerns about possible non compliance undermine public confidence in the entire foreign investment framework, and its ability to track those that are bypassing the system…

Options already in place

A number of the proposed options considered by Government have already commenced. These are summarised below.

Reduce the screening threshold for agricultural land from $252 million to $15 million cumulative

On 11 February 2015, the Government announced that it would lower the screening threshold for agricultural land to a $15 million cumulative threshold from 1 March 2015. This was consistent with its election commitments…

Undertake a stocktake of agricultural land and introduce a foreign ownership register of all land

There is no definitive data source showing how much Australian land is owned by foreigners. Treasury only collects data on approvals of applications submitted to it, which are published in the FIRB Annual Report. It does not track whether an approval translated into an acquisition or a subsequent disposal of a property.

On 1 July 2015, the Government introduced a foreign ownership register of land, leveraging existing state and territory land titles collections. The register is administered by the Australian Taxation Office (ATO). When fully operational, the register will capture all land transfers to and from foreign persons, regardless of whether the land is agricultural, commercial or residential…

ATO to undertake screening and compliance

The role of screening residential real estate applications and undertaking compliance and enforcement of the foreign investment framework began transferring from the Treasury to the ATO on 4 April 2015.

A new, dedicated compliance and enforcement area is being established within the ATO, which already tracks compliance of a range of property transactions. This new unit will undertake compliance, investigation and enforcement activities by utilising specialist, experienced staff to systemically detect breaches of conditions on foreign purchases of residential real estate and enforce compliance through the imposition of penalties…

Introduction of application fees

Currently, no fees apply to foreign investment applications. Under this option, the Government would seek to charge a fee on all foreign investment applications to fund screening, compliance and enforcement activities and improved data collection on foreign investment.

Fees would apply to both residential real estate applications and all business foreign investment proposals.

The proposed fees are listed in the table below. Foreign investors would be required to pay the application fee before their foreign investment application is processed. The 30 day statutory time period for assessing the application would begin after payment is received.

For auctions, the eligible foreign person would seek approval to purchase one established property in a specified area. An approval would then be valid for 6 months, but only for purchases within the area for which they have sought approval. The fee will only be charged once in this instance. This is consistent with the rules that currently apply to the purchase of residential real estate as it will only allow one property to be purchased. This will remove the need for foreign investors to lodge multiple applications to bid in various auctions in an area.

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Penalties and enforcement

Currently, only divestment orders and criminal penalties apply for breaches of foreign investment rules under to the Act. The maximum penalty that can be applied by a Court to individuals on conviction of a breach (such as failing to obtain approval or comply with a condition of approval) is a fine of up to 500 penalty units ($85,000), imprisonment of two years or both. In the case of a corporation, a multiplier of five applies to the maximum fine for an individual.

Enforcing breaches under the current criminal penalty framework requires a high burden of proof and may involve lengthy court proceedings. There is currently no civil penalty regime for breaches of the Act.

This option considers introducing a civil pecuniary penalties regime, supported by an infringement notice regime. Divestment orders would still be available, but in addition the Government would have the option to pursue either criminal penalties or civil penalties through the courts. This option also considers increasing the level of the current criminal penalties but not changing the offence to which they apply…

Currently, the Criminal Code makes it a breach where a person knowingly assists another person to commit a criminal offence. Under this option, it is also proposed that a specific civil penalty be introduced for third parties that knowingly assist a foreign person to breach the Act.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.