Foreign investment fee will only be a minor inconvenience: Karl Fitzgerald

GUEST OBSERVATION

The Abbott government’s lurch at a foreign investment fee to fund the Foreign Investment Review Board (FIRB) will be a minor inconvenience. 

“There is significant global evidence from recent times including Canada, Singapore and Hong Kong where these types of taxes on foreign investment have been totally counterproductive, caused significant corrections within the markets and harmed the construction industry” CBRE residential projects chairman Justin Brown was quoeted as saying in the AFR.

The response from the real estate sector has been typical. 

Whilst we are supportive of some traction towards the taxation of excessive real estate profits, the 1% charge will mean little in comparison to last year's capital gains.

As outlined in the foreign investment future, the average $3,375,000 FIRB approved investments last year would pay a foreign investment fee of $33,750. The capital gains were running at $229,500. Such a fee will not break the bank.

In that same post I mentioned how effective Singapore’s foreign investment fee of 18% was in maintaining the public interest – low land prices. The property lobby have convinced the news cycle that rising property prices are a good thing. They are if you are a property seller or a bank. For the public this means rising debts and thus interest payments.

We do however see merit in the commentary of Ray White chairman Brian White in comparing such a charge as a stamp-duty like charge. Such a foreign investment fee will curb some demand, impeding turnover.

However, it is likely to be minor as the above capital gains to foreign investment fee comparison demonstrates. Treasurer Hockey was adamant the fee was purely an administrative one so that the FIRB could do its job.

Only $200 million is needed yearly to fund an expanded FIRB. Will we get a new website for that? The relative size of such fundraising is again minor to the $418 billion in land price increases in the 13-14 year.

After a minor skirmish, we expect this will have little imposition on the global land bubble. The fact it is set at a much lower rate than Hong Kong and Singapore ensures global investors will still be set upon buying up locations of inspiring natural beauty.

If the government knew what they were doing, a Federal Land Value Tax would be reimposed nearly 100 years since our first federal tax was announced. Accompanying this would be a significant 5-10% income tax deduction and a doubling of the pension. The LVT would curb speculative foreign investment, reigniting the Australian creative spirit alongside lower land prices and a lower tax burden for all.

Karl Fiztgerald is project director of Prosper Australia.

This article first appeared on Prosper's website.