No surprises in Kelly O'Dwyer's 12 FIRB report recommendations

As was widely anticipated, the Federal Parliamentary committee into affordable housing and foreign investment has recommended lawyers, real estate agents and mortgage brokers who knowingly help offshore property buyers break foreign investment rules should face stiff new penalties.

It is among the 12 recommendations of a long-awaited parliamentary inquiry by the House Economics Committee that found foreign investment is not causing market distortions in the housing sector:

• Recommendation 1

The Committee recommends that the current foreign investment framework applying to foreign purchases of residential real estate be retained in its current form, utilising the existing legislated prohibitions and restrictions on purchases of established dwellings, and encouraging foreign investment to increase Australia's supply of new housing.

• Recommendation 2

The Committee recommends that the Foreign Investment Review Board and the Foreign Investment and Trade Policy Division of Treasury put in place appropriate processes for the purpose of audit, compliance and enforcement of the foreign investment framework. Such processes must accurately capture audit, compliance and enforcement data for the purpose of oversight of the Foreign Investment Review Board and the Treasury.

• Recommendation 3

The Committee recommends that the Government apply a modest administrative fee to the current screening for all foreign purchases of residential real estate, including purchases by temporary residents.

Fees collected should be hypothecated to the Treasury's Foreign Investment and Trade Policy Division for the purpose of funding audit, compliance and enforcement activities.

• Recommendation 4

The Committee recommends that the Government introduce a civil penalty regime for breaches of the foreign investment framework as it applies to residential real estate, with the following features:

n pecuniary penalty orders imposed under this penalty regime to be calculated as a percentage of the property value to act as an effective deterrent; and

n the regime to apply to foreign investors and any third party who knowingly assists a foreign investor to breach the framework.

Pecuniary penalty orders collected should be hypothecated to the Treasury's Foreign Investment and Trade Policy Division for the purpose of funding audit, compliance and enforcement activities.

• Recommendation 5

The Committee recommends that the Government amend the Foreign Acquisitions and Takeovers Act 1975 to provide that the criminal penalties for breaching the foreign investment framework as it applies to residential real estate, apply equally to any third party who knowingly assists a foreign investor in residential real estate to breach the foreign investment framework.

• Recommendation 6

The Committee recommends that in any instance where a foreign owner divests an illegally held established property, any capital gain from the sale of that property be retained by the Government.

Funds collected by this measure should be hypothecated to the Treasury's Foreign Investment and Trade Policy Division for the purpose of funding audit, compliance and enforcement activities.

• Recommendation 7

The Committee recommends that Australia's Foreign Investment Policy be amended to explicitly require a temporary resident to divest an established property within three months if it ceases to be their primary residence.

• Recommendation 8

The Committee recommends that the Government, in conjunction with the States and Territories, establish a national register of land title transfers that records the citizenship and residency status of all purchasers of Australian real estate. This information should be accessible by relevant agencies from a single database.

• Recommendation 9

The Committee recommends that the Government establish an alert system for the expiry of temporary visas that can be used by the Treasury to issue property divestment orders in cases of non-compliance:

- By amending the Migration Act 1958 so that the Department of Immigration and Border Protection must inform FIRB when a temporary resident departs Australia upon expiry of their visa; and

- By establishing effective and timely internal processes at the Treasury to receive and cross-check this information against its property databases to screen for compliance with the foreign investment framework.

• Recommendation 10

The Committee recommends that the Government amend the Foreign Acquisitions and Takeovers Act 1975 to provide that residential property sold under off-the-plan certificates that is marketed for sale overseas, must be marketed in Australia for the same period of time. Breaches of this requirement should be subject to sanctions under the Act ranging from fines to the cancellation of a sale.

• Recommendation 11

In light of the expected finalisation of the statutory review of the Anti- Money Laundering and Counter-Terrorism Financing Act 2006 in early 2015, the Committee recommends that the Government consider the purchase of residential property by foreign investors as a possible area of investigation when considering amendments to the legislation.

• Recommendation 12

The Committee recommends that Treasury's Foreign Investment and Trade Policy Division make greater use of the databases held by AUSTRAC, and also of other relevant Federal and State Government databases, to assist the Foreign Investment Review Board in its duties and responsibilities. 

The report of Kelly O'Dwyer's committee over six public hearings, and after considering more than 92 submissions, centred around four key findings.

First, there is no accurate or timely data that tracks foreign investment in residential real estate. No-one really knows how much foreign investment there is in residential real estate, nor where that investment comes from.

• A national register of land title transfers that records the citizenship and residency status of all purchases of Australian real estate would fix this and would allow facts to be injected into discussions about foreign investment, rather than ‘best guestimates’. A national register would also help with compliance and enforcement with the foreign investment framework – allowing data to be compared easily.
• Other relevant government information should also be captured and made available to FIRB. At present, FIRB cannot access data from the Department of Immigration and Border Protection on departing visa holders. Given the government has this information, this makes no sense.
• Together, these initiatives would allow authorities to track departing visa holders who may have purchased an existing home but who, under current rules, need to sell that home within three months of leaving.

Second, there has been a significant failure of leadership at FIRB, which was unable to provide basic compliance information to the committee about its investigations and enforcement activity.

• During the course of the inquiry, it came to light that no court action has been taken by FIRB since 2006. During the entire Rudd-Gillard-Rudd Government, not one divestment order was issued, which means not one government sale of illegally acquired property was made. This compares with 17 divestment orders between 2003 to 2007 when foreign investment in residential real estate was at much lower levels. FIRB was also unable to provide basic data on voluntary divestments.
• It defies belief that there has been universal compliance with the foreign investment framework outlined above since 2007.
• The systems failure at FIRB needs to be repaired; and new resources injected into FIRB to ensure better audit, compliance and enforcement outcomes.

Third, if you are not prepared to enforce the rules, then it is less likely that people will comply with the rules. This is especially true if the consequences of a breach are not meaningfully adverse.

• The ability to sanction people who have breached the foreign investment framework more easily is critical. Hence the need to bring in a civil penalty regime for breaches of the foreign investment framework; along with the need to capture those people, who have previously stood outside the framework but materially impact the integrity of our foreign investment regime. For instance, third parties who knowingly assist foreign investors to breach the rules.
• Currently, non-resident foreign investors can profit from the illegal purchase of property. Given this, the current financial penalty that can be applied to a property, regardless of its value, is seen by many as simply the ‘cost of doing business’. Fines and pecuniary penalty orders should directly relate to the value of the property concerned. Furthermore investors who breach the framework should not be able to profit.

Fourth, currently the Australian taxpayer foots the bill for the administration of FIRB and FITPD, not the foreign investors applying for approval. This has arguably contributed to underinvestment in FIRB’s audit, compliance and enforcement activities.

• Just as other regulators adopt a user pays model, the committee recognises that a modest administration fee can be implemented to fund enhanced audit, compliance and enforcement capacity within FIRB, as well as other new measures outlined in the recommendations.
• Parliamentary Budget Office analysis suggests that a modest application fee of $1,500 would generate revenue of $158.7 million over 4 years2, yet amount to 0.27% or 0.20% of the purchase price for an average home in Melbourne and Sydney respectively.

Source: Federal Parliamentary committee into affordable housing and foreign investment