Property 101: Foreign investment divestiture fines in Australia

Property 101: Foreign investment divestiture fines in Australia
Property 101: Foreign investment divestiture fines in Australia

Knight Frank have noted from 1 December 2015, all foreign investors must now pay a fee before their foreign investment application will be processed and stricter penalties have been ramped up by the Australian Taxation Office for those who breach the rules.

Overview

The current Australian foreign investment framework for residential property is designed to generate new housing supply. The construction of new houses and apartments is aimed to increase the opportunity for people to purchase, as well as, stimulate economic activity with the employment of builders and suppliers. 

The recent changes introduced by the Federal Government are designed not to deter foreign investment into Australia, rather ensure the current rules that limit foreign investment in established dwellings are enforced.

Until this time, there has been poor policing by the small team at the Foreign Investment Review Board (FIRB) resulting in limited penalties imposed on those who breach the rules. For a long time, the framework was undermined due to poor data collection, along with a lack of audit, compliance and enforcement.

Given no fees were collected on application, it made it quite difficult for the FIRB to justify committing more Australian tax-payer resources, despite the number of foreign investment applicants growing almost three- fold over the course of 2013-14.

Over the same time, residential property prices rose significantly in many suburbs across the country. As a result, the Australian public became increasingly concerned that the influx of foreign purchasers were having a direct impact on mainstream (established) house prices.

This placed pressure on the now former Treasurer, Hon Joe Hockey MP, to provide clarification on the role foreign investment plays in residential property.

On the 19 March 2014, he commissioned a study to be undertaken by the House of Representatives Standing Committee on Economics. After a lengthy and comprehensive eight month inquiry, the House Economics Committee found that the current foreign investment structure should be retained but made 12 practical recommendations to ensure there is better compliance within the existing framework. 

A consultation process followed with the public and key industry bodies. It was proposed that all property administration functions were transferred to the Australian Taxation Office (ATO). The ATO was seen to be well-placed to utilise it’s data-matching systems to identify possible breaches with an increase in penalties. 

The Government then introduced the legislation into Parliament in the Spring sitting. It was slated in late November 2015 with the changes taking effect from 1 December 2015.

Current rules for foreign investors

The current rules around foreign investment in residential property aims to direct investment into new housing, increasing the housing supply and support local economic activity. All foreign persons, that is temporary residents and non-residents, can apply to purchase vacant residential land for development and newly constructed dwellings in Australia.

Non-resident foreign persons are generally prohibited from purchasing established dwellings in Australia. However, temporary residents can apply to purchase one established dwelling to use as their residence while they live in Australia, although on the condition the property is sold when it ceases to be their principle place of residence. 

FOREIGN INVESTOR APPLICATION FEES NOW APPLICABLE

  • Applicants will pay a fee to the ATO before their foreign investment application is processed.
  • The fees apply for each application and is uncapped if the property is valued over AUD$1 million.
  • If an application falls into a number of categories, the category with the highest fee would apply.
  • The fee on application does not provide any assurance of securing the property. 

  Property 101: Foreign investment divestiture fines in Australia

ENHANCED COMPLIANCE AND ENFORCEMENT

  • The Government has provided $47.5 million over four years to the ATO to improve compliance and strengthen the enforcement of the rules.
  • The ATO has the capacity to cover more than 600 million transactions annually through its data-matching programs. The ATO matches its own taxpayer data with a variety of third party sources, including FIRB, immigration, AUSTRAC, banking data and state and territory land title data.
  • Suspected breaches are then followed up by around 50 investigative compliance officers.
  • Investors who have breached the rules risk being identified by the ATO as part of its compliance activities. These investors may then face criminal and/or civil prosecution. 

REVISED PENALTIES FOR BREACHING THE FOREIGN INVESTMENT RULES

The Australian Federal Government is increasing the existing criminal penalties and introducing new civil pecuniary penalties for those who breach the foreign investment rules. For more detailed information please refer to the FIRB website www.firb.gov.au

Penalty Regime for Foreign Investors, Residential Property

Under Foreign Acquisitions and Takeovers Legislation Amendment Bill 201 

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 Property 101: Foreign investment divestiture fines in Australia

NEW APPLICATION FEES AND PENALTIES FOR DEVELOPERS

Property developers can apply for a new dwelling exemption certificate to sell new dwellings in a development of 50 or more residences to foreign investors. The fee for a new dwelling exemption certificate for a developer is AUD$25,000 upfront, with a reconciliation of properties sold to foreign persons based on the above rates.

The Government has tightened the rules around the use of new dwellings exemption certificates by limiting the value of all apartments that can be bought by a single foreign investor to $3 million in the one development. If foreign investors want to purchase apartments above this value, they will have to seek individual approval. 

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Property 101: Foreign investment divestiture fines in Australia

 

 

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