Updated article: originally published as review of the regulatory and tax landscape for foreign investors.
There has been a raft of reforms to Australia’s foreign investment framework over the last few years. The Commonwealth Government has introduced legislation which is intended to bolster the integrity of the foreign investment framework. In summary, the reforms have seen the introduction of application fees, increased penalties for non-compliance, increased monitoring by the Australian Taxation Office (ATO) and lower thresholds for agricultural purchases. In addition to Commonwealth Government changes to the foreign investment laws, Queensland, New South Wales, Victoria and South Australia have introduced, and Western Australia has announced that it will introduce, stamp duty and land tax surcharges on foreign owners of Australian residential property.
The administration of the foreign investment laws in Australia is now partially funded by application fees imposed on all foreign investment applications.
Since 1 December 2015, applicants for foreign investment approval have been required to pay a fee before their application is processed. The application fees range from $5,500 to $101,500 depending on the type of application and the value of the acquisition. For example, an application to acquire an interest in residential land valued at up to $1 million attracts a fee of $5,500. For an interest over $1 million the fee increases to $11,100 plus an amount of either $11,100 or $11,200 for each additional $1 million in property value. Business acquisitions attract a fee of $2,000 where the value of the investment is $10 million or less, $25,300 where the value of the investment is greater than $10 million and increases to $101,500 where the value of the investment is greater than $1 billion.
The reforms introduce stricter and additional penalties for breach of Australia’s foreign investment rules. The government has increased the existing criminal penalties and introduced new civil financial penalties for breaches of foreign investment rules. The penalties range up to $157,500 for individuals and up to $787,500 for companies. There have also been a number of divestment orders made by the Treasurer, albeit limited to residential land.
Since 2015, the ATO has been responsible for assessing foreign investment applications relating to residential land. Further, in February 2016, the Commonwealth Government announced that in applying the “national interest test” to foreign investment applications, it will generally require investors to satisfy a series of tax compliance and disclosure obligations relating to the investor and its associates. Foreign investors will need to consider which entities fall into their “associate” group, which is taken from the tax law and is extremely broad.
As a result of these changes, the ATO has increased its prominence as a key stakeholder in the foreign investment approval process. Foreign investment law compliance is joined with tax compliance, so assessing and managing tax risk is now a pivotal consideration when planning a foreign investment in Australia. The Foreign Investment Review Board (FIRB), in conjunction with the ATO, will not simply look at whether there will be compliance with Australia’s tax laws, but will also examine the impact that the structure of the acquisition and its financing may have on tax receipts over the life of the investment. High gearing levels, aggressive transfer pricing positions and the use of entities located in tax havens are examples of matters than may attract additional attention.
For the purpose of the review undertaken by FIRB, in conjunction with the ATO, applicants are routinely being asked wide ranging questions including about:
- the proposed capital structure of any Australian entities;
- the tax risk rating of each cross-border related party financing arrangement based on ATO guidelines;
- the extent that any part of the proposal reflects an arrangement covered by various Taxpayer Alerts; and
- which entities that will be required to lodge an Australian income tax return will be subject to the thin capitalisation rules and what method each taxpayer will apply to determine their respective maximum allowable debt amount post the acquisition.
The Government’s measures include standard conditions which may be imposed for an application to not be against the “national interest test”.
The standard conditions that can be imposed are obligations to:
- comply with Australia’s tax laws, including paying any outstanding taxes;
- provide the ATO with any information requested by the ATO in relation to the transaction;
- notify the ATO of any material transactions with related offshore parties that may be subject to the transfer pricing rules or anti-avoidance tax rules; and
- provide an annual report to FIRB on compliance with the tax conditions.
Depending on the circumstances of the foreign investor and the particular investment being made, there are additional conditions which may be imposed where the ATO has identified a particular tax risk. Those conditions may include a requirement that the foreign person is required to:
- engage in good faith with the ATO on issues raised to resolve any tax issues (e.g. by seeking a private binding ruling); or
- provide information to the ATO on a periodic basis including giving details of forecast tax payable.
Overall, these tax conditions represent a much closer formal alignment of Australia’s national interest assessment criteria under the foreign investment regime and Australia’s tax laws. In recent years, tax has been an increasingly important consideration in FIRB’s assessment of whether acquisitions pass the “national interest test”. The closer alignment of tax considerations with FIRB’s deliberations was boosted by the appointment of the former Commissioner of Taxation, Michael D’Ascenzo as a member of FIRB in 2013 and now, following the end of Mr D'Ascenzo's five-year term, Teresa Dyson, a former Chair of the Board of Taxation. Since then, the ATO has assumed greater responsibility for administering certain aspects of Australia’s foreign investment regime, such as the Agricultural Land Register and residential land acquisitions.
The upshot is that the new laws will require foreign investors to consider tax issues in a more formal way than they did previously. The key points for deals involving FIRB approval are now that:
- foreign investors will need to think carefully about the best way to approach FIRB to address these issues and engage productively with the ATO prior to submitting any application; and
- as a result, it will inevitably extend the approval process and FIRB applications will take longer to process.
Another unseen consequence of the reforms is that, although the new rules apply prospectively, they can potentially apply to foreign investors with existing Australian holdings as a result of a reorganisation of the corporate ownership structure. In some cases, this may lead to the application of the new tax conditions.
The threshold for agricultural investment was reduced from $252 million (non-cumulative) to $15 million (cumulative) on 1 March 2015. Consequently, foreign investors are required to obtain approval for any proposed investment in agricultural land where the cumulative value of agricultural land owned by the investor is $15 million or more (including the proposed investment).
The FIRB reforms also introduce a $55 million threshold for direct investment in agribusiness. The definition of “agribusiness” will capture primary production businesses as well as meat, seafood, dairy, fruit and vegetable processing and grain, sugar and oil manufacturing.
Non-resident withholding tax regime
From 1 July 2016, withholding tax applies to purchases of certain types of Australian assets. It impacts on both vendors and purchasers of affected assets involving:
- shares in a land rich company or units in a land rich trust that, directly or indirectly, holds substantial Australian real property;
- real property in Australia (including leasehold interests); or
- mining rights over Australian land.
For transactions caught by the regime, the purchaser is required to pay 12.5% of the purchase price (subject to some adjustments) to the ATO at or before settlement.
The 12.5% withholding tax does not apply in certain situations, including where:
- a vendor provides an ATO compliance certificate (in respect of direct real property interests) or a qualifying declaration (in respect of shares or units in a land rich entity) that it is an Australian tax resident;
- a vendor provides a qualifying declaration that the shares or units are not “indirect Australian real property interests”; or
- the transaction is on an approved stock exchange.
In some situations, a variation may be sought from the ATO to reduce the withholding tax rate below 12.5%.
In addition to the above, it is proposed that, with effect from 1 July 2018, purchasers of new residential premises or a new subdivision of potential residential land will be required to withhold and remit an amount equal to 1/11th of the purchase price to the ATO at or before settlement in respect of the vendor’s goods and services tax liability. Click here for our December 2017 acumen article: new withholding obligation for GST on residential property transactions.
New duty and land tax surcharges for foreign buyers of residential land
The states of Queensland, New South Wales, Victoria and South Australia have each introduced a stamp duty surcharge on foreign persons purchasing residential real estate. Western Australia has announced that it will introduce a similar surcharge.
Land tax changes
New South Wales, Victoria and Queensland also impose an additional land tax surcharge on foreign owners, referred to in Victoria and Queensland as absentee owners.
The use by the New South Wales legislation of the definition of foreign person under the Foreign Acquisitions and Takeovers Act 1975 creates some pernicious results for home owners who are not Australian citizens. It means that any such home owner who is not present in Australia for at least 200 days of that year, will be a foreign person and thus liable for land tax on his or her home even if it is used as his or her principal place of residence.
As a result, purchasers of residential land in New South Wales, Victoria, Queensland, South Australia and Western Australia should consider carefully whether they are “foreign” and if so, whether the surcharge will apply to the land or interest being acquired. In New South Wales, Queensland and Victoria, purchasers should also consider whether they are eligible for a discretionary exemption from the Commissioner. In Victoria for example, the Treasurer and Commissioner have a discretion to exempt persons where the activities of the entities they control are involved in the development or redevelopment of property that adds to the supply of housing stock in Victoria. New South Wales recently introduced a similar concession which operates as a refund mechanism and will apply retrospectively to certain Australian based foreign developers. While Queensland does not have a specific discretion in its legislation, the Commissioner of State Revenue has published rulings which provide guidelines on ex gratia relief from the additional foreign acquirer duty for significant developments or significant developers which meet a range of conditions.
In addition to the new duty and land tax surcharges for foreign buyers of residential land, the Commonwealth and Victoria have imposed additional charges on vacant residential property.
To ensure that foreign owned residential property is used and occupied, from 9 May 2017, foreign persons who make a foreign investment application to purchase residential real estate are subject to an annual charge if the property is not rented out or occupied for more than six months per year. The charge is equal to the fee payable for the foreign investment application and is administered by the ATO.
Unlike the Commonwealth regime, the Victorian vacant land surcharge is not limited to foreign owned residential property. From 1 January 2018, Victoria will impose a vacant residential land tax surcharge of 1% on residential properties in inner and middle Melbourne that were vacant for more than 6 months in the preceding calendar year. Residential property will be considered vacant if it is not lived in by the owner, or the owner’s permitted occupier, as their principal place of residence, or a person under a lease or short-term leasing arrangement made in good faith.
What do the changes mean?
These changes reflect increased scrutiny of foreign investment in Australia, following media, political and community pressure. The Commonwealth Government is treading a fine line between encouraging investment in certain sectors and balancing that with strengthening the integrity of the foreign investment framework. The ever present “national interest test” remains a cornerstone of the system. Further, obtaining a satisfactory FIRB outcome will always require skill, planning, judgement and a detailed knowledge of the FIRB and tax systems. The State tax changes have been promoted on the basis that they will reduce pressure on housing prices said to be resulting from foreign investment. However it is evident (from the decision of the South Australian Government to introduce the surcharge following rejection by the South Australian Upper House of its proposed bank levy) that the surcharges can also help fill a budget shortfall, or otherwise buttress government coffers.