Foreign investors face a number of legal and regulatory challenges when acquiring land in Australia.
In addition to start-up issues relating to the raising of funds and structure of investment vehicles, the practical implication of varying protocols, taxes and ownership restrictions imposed at both a State/Territory and Commonwealth level, require careful consideration as a part of the decision to purchase land in Australia.
Recent, and proposed changes to the Foreign Acquisitions and Takeovers Act 1975(Cth) (FATA), and the policies administered by the Foreign Investment Review Board (FIRB) highlight the need for prospective investors to be aware of the requirements imposed upon their ownership of Australian land.
The right of foreign investors to acquire Australian land is, in many cases, subject to the requirement to obtain the approval of the Australian Treasurer.
Where approval is required, application is generally required to be made to FIRB before the land is acquired.
Failure to obtain approval is an offence under the FATA, and can result in the imposition of significant fines and other penalties, including the land being seized by the Commonwealth.
The need for approval depends upon a number of factors, including
(a) The current and intended use of the land;
(b) The value of the land; and
(c) The nature and ownership structure of the investment vehicle being utilized.
There have also been well-publicized changes proposed to the foreign investment rules. These proposals are set out below.
The most recent changes came into effect on 1 March 2015, and lowered (in most cases) the monetary threshold at which FIRB approval becomes a requirement for the acquisition of Australian rural land, currently defined as land used wholly or exclusively for carrying on a business of primary production.
Prior to the changes, foreign investors could purchase rural land valued up to $252,000,000 without FIRB approval.
From 1 March this year, the threshold has been reduced to $15,000,000, and applies not only to each individual property, but also to the total rural property holdings of the foreign investor and its related entities. AS a result, if any proposed acquisition is either:
(a) Proposed to be for more than $15,000,000; or (b) Would bring the total value of the rural land portfolio of the investor to over $15,000,000
Then FIRB approval for the acquisition (and any future acquisitions) would be required.
On 26 February 2015, the Australian Treasury Department released a consultation paper titled ‘Strengthening Australia’s Foreign Investment Framework’ (Discussion Paper).
The Discussion Paper set out a number of different areas of reform of the foreign investment framework.
3.1 Introduction of Fees
The Discussion Paper proposes that the costs associated with enforcing the FATA and the operation of the FIRB should be borne, to a large extent, by the foreign investors themselves, rather than from government revenue (taxes).
To this end, the Discussion Paper sets out a series of application fees for different types of acquisitions, largely scaled with reference to value.
Some of the more common examples include the following:
- Acquisitions of rural land and residential real estate will incur an application fee of $5,000 for any acquisition valued at $1,000,000 or less, and a further $10,000 for each additional million dollars.
- Acquisitions of Non-Residential Urban Land and Commercial Real Estate will incur a fee of $10,000 and $25,000 respectively, regardless of value, and
- Acquisitions of Businesses will incur a fee of $25,000, for business valued at up to $1 billion, and $100,000 for Businesses valued at over $1 billion.
3.2 Increased Penalties
The proposed changes to the foreign investment rules include a wider range of potential penalties such as:
- criminal penalties including fines and imprisonment
- civil penalties, including forced divestiture and fines (with fines ranging from fixed amounts, to a proportion of the purchase price, to any capital gain made on sale), and
- penalties for third parties assisting a foreign investor to breach the rules (including real estate agents, legal advisers, accountants and other professional advisors), who have assisted in putting in place structures that facilitate the violation of the FATA).
3.3 Off-the-plan Approvals
The Discussion Paper sets out two proposed amendments to off-the-plan approvals.
- a fee should be introduced calculated on value of properties sold to foreign buyers.
- the total value of all apartments that can be bought by a single foreign investor should be limited to AUD$3 million in any one single development.
From a practical perspective, foreign investors should obtain professional advice prior to entering into a contract to purchase land in Australia as to whether approval is required and, if necessary, make any contract to purchase land subject to the obtaining the approval of the Commonwealth Treasurer.