Treasurer Joe Hockey assures us he isn’t going on a witch hunt but if you have recently advised a foreign investor on the purchase of an Australian property, you would be forgiven for double checking the details.
Last week, Mr Hockey declared that the sale of the $39 million Point Piper mansion, Villa del Mare, to a company associated with Chinese national Xu Jiayin was contrary to the Foreign Investment Review Board’s (the FIRB) foreign investment policy (Foreign Investment Policy) and ordered that the Point Piper Property be sold within 90 days.
Foreign Investment Policy
The FIRB examines proposals by foreign persons to invest in Australia and makes recommendations to the Treasurer on those subject to the Foreign Acquisitions and Takeovers Act 1975 (the Act) and the Foreign Investment Policy. The Act requires foreign non-residents to notify and seek approval from the FIRB of their intention to purchase property in Australia.
When it comes to the purchase of an existing dwelling, the Foreign Investment Policy prescribes that applications by foreign non-residents will not be approved, except in some limited circumstances. Those circumstances include:
- where a foreign person operates a substantial Australian business and needs to house its Australian based staff;
- where a foreign person buys an established dwelling for redevelopment and as long as the redevelopment increases Australia’s housing stock (at least two dwellings built for the one demolished); or
- where it can be shown that the existing dwelling is derelict or uninhabitable.
Foreign Investment Policy restricts foreign persons from purchasing existing Australian dwellings, as this is seen to be “competing” with locals. Mr Hockey’s announcement coincides with the Government’s resolve to address Australians’ concerns that foreign investors are driving up property prices.
The Point Piper Property was bought by Golden Fast Foods (GFF), an Australian holding company ultimately owned by Evergrande Real Estate Group. The exact composition of the companies’ structure is unclear but it appears that the Treasurer is relying on the Act’s stipulation that an Australian holding company for a foreign corporation is, for the purposes of the Act, a ‘foreign persons’ and therefore GFF should have advised the FIRB of its intention to purchase the Point Piper Property.
It’s a hard-line stance and if real estate agents are to be believed, the Point Piper property could sell for a bargain basement price, leaving somebody out of pocket. Mr Hockey’s statements to the press indicate he is minded that Mr Jiayin would be ‘absorbing the loss’. In reality it is more likely to be Australian based lawyers and accountants (and their insurance companies) who end up footing the bill.
Implications for Professional Advisors
It has been widely reported that Mr Jiayin engaged a small law firm to carry out the conveyancing of the sale and it is likely Mr Jiayin would be turning to them for compensation, should the property sell for a significant loss. Newspapers are also reporting that Mr Jiayin sought advice from an international accounting firm. Both entities would be likely to have notified their professional indemnity insurers.
In light of the booming Sydney and Melbourne market, further forced sales (of the non-prestige market) may not necessarily result in losses of this potential scale for foreign owners but lawyers and accountants should be on alert to ensure that great care is taken in advising prospective purchasers in respect of the requirement for FIRB approval or corporate structures designed to minimise the risk of such approvals being required.