The Federal Government is proposing new fees and fines for foreign buyers of residential real estate in response to recommendations in a new report.
Market focus on foreign investment's impact on Sydney’s residential demand, supply and affordability is at a peak. Interestingly though, it is almost impossible to identify what is really happening with foreign investment in the Sydney residential market. The current FIRB regime does not provide for a data collection and reporting process to measure either the benefits or the costs of foreign investment.
The Government has affirmed that foreign investment is welcome, but is proposing to bolster the foreign investment regime to allow better policing of illegal practices. Following a consultation process, these changes will likely be introduced, which will be of interest to all foreign persons intending to invest in Australia.
The Government is currently calling for interested stakeholders to respond to the options paper "Strengthening Australia's Foreign Investment Framework" released on 25 February 2015. Through this Options Paper, it is seeking feedback on the recommendations in the "Report on Foreign Investment in Residential Real Estate", released by the House of Representatives Standing Committee on Economics in November 2014.
Application fee for buyers
It is proposed that a fee of $5,000 will apply for foreign buyers seeking to purchase properties under $1 million. For properties over $1 million, a fee of $10,000 is proposed, increasing in increments of $10,000 for every extra million. These proposed fees are much higher than those of up to $1,500 recommended in the Report.
Potential foreign investors may be concerned about the approach to fees across multiple applications. It is also not clear when the fee is proposed to be raised. An investor might be concerned about when the fee becomes due in a competitive process where the foreign bidder is not successful.
Tougher penalties for breaches of the foreign investment framework
Currently, only divestment orders and criminal penalties apply for breaches. These are difficult to pursue due to the high burden of proof required.
The Government is proposing to introduce civil penalties for a range of matters including where a foreign buyer acquires property without prior approval, or where a condition of purchase is breached. Penalties are proposed to include an amount that is tied to the capital gain made on divestment or 25% of the sale proceeds / market value.
Specialist enforcement unit within the ATO
In response to the Report's recommendations to improve data collection, compliance and enforcement activities, the Government has identified the Australian Taxation Office as the most suitable agency to enforce the new civil penalty regime. It's proposing to create a specialist enforcement ATO unit, which will use its sophisticated data-matching capabilities to share information with other Government departments, including Treasury and the Department of Immigration and Border Protection.
Tougher rules for advanced off-the-plan certificates
To ensure developers comply with their obligations to market properties to domestic buyers, the Government is proposing to strengthen enforcement options and to tighten rules on the use of advanced off-the-plan certificates. Options identified include penalties for developers not marketing locally or for breaches in reporting. It may be that limits on the amount of units individual foreign persons may acquire will also be imposed.
Current framework to retain its form
The Government believes that the current legislative framework strikes the right balance between enabling foreign investment and ensuring housing stock availability to Australians. The Options Paper confirms that the proposed changes are not intended to radically alter the current foreign investment regime. Rather, they are designed to fund the audit, compliance and enforcement activities of the Government , as well as addressing the need for better data collection and sharing between FIRB and other Government departments.
The Report indeed supports the continued application of the following policies:
- Vacant land: Applications to purchase vacant land are generally approved so long as construction commences within 24 months of receiving foreign investment approval.
- New dwellings: Applications to purchase new dwellings that have not been previously occupied for more than 12 months in total are usually approved without conditions.
- Existing dwellings: Foreign non-residents are generally prohibited from purchasing existing dwellings. However, they can seek approval to redevelop an established dwelling if the redevelopment results in a net increase in available housing, or where it can be shown that the existing dwelling is derelict or uninhabitable. Otherwise, the purchase of established dwellings by foreign buyers is restricted to temporary residents. Temporary residents may apply to purchase one established dwelling to be used as their residence in Australia, on the condition that the property is sold when they leave Australia.
- Advanced off-the-plan certificates: Property developers can still apply for an advanced off-the-plan certificate to sell to foreign buyers new properties in a development of 100 or more dwellings, provided the development is also marketed locally. Failure to do so by the developer will attract a penalty under the proposed scheme. Individual foreign buyers are not then required to gain separate approval to purchase dwellings in a certified development.
Opportunity to comment
The Government's intention to strengthen the robustness of the process is clear. It will be an important balancing act to ensure that the proposed introduction of new fees on foreign investment in new residential housing does not create further housing shortages and drive up housing prices. Interested stakeholders have until Friday 20 March 2015 to make submissions in response to the Options Paper. The Options Paper identifies consultation questions on each of these changes to enable interested stakeholders to provide targeted feedback on the proposals.