Foreign Investment Laws and Their Impact On the Market

On December 1, 2015, the government introduced new Foreign Investment Review Board (FIRB) application fees, as well as a new compliance/penalty regime. This is intended to make purchasing Australian residential property even more complex for foreigners. With the new rules, foreign investors supposedly cannot buy a property in Australia without legal advice to ensure that they comply with regulatory requirements.

Here’s a closer look at how the new rulings have impacted the foreign investment market.

Who do the new rules apply to?

The new rules apply to Temporary Residents in Australia and Foreign Non-Residents outside of Australia who wish to invest in Australian property.

More specifically, the new rules apply to ‘foreign persons’ who don’t ordinarily reside in Australia as defined under the Foreign Acquisitions and Takeovers Act 1975, including:

• Overseas investors
• Businesses
• Student visa holders
• Corporations (with specific requirements)
• Trustees of a trust estate.

Foreign persons should get approval from the government through FIRB before purchasing a property in Australia.

FIRB approval

Buying established (second hand) residential property

Temporary residents who wish to buy an established property by themselves or with another temporary resident as their principal residence will require FIRB approval. The property must be sold when their visa expires, they leave Australia, or the property is no longer used as their principal place of residence.

If the property isn’t a principal residence and is to be demolished and additional accommodation built, FIRB approval is required and the construction should commence within 24 months. If the property isn’t to be demolished and additional accommodation built, it can’t be purchased.

Temporary residents who want to buy an established property with a foreign non-resident or short-term visa holder can’t buy the property. Established properties can be bought by certain foreigners who hold a visa that allows them to live in Australia continuously for at least the next 12 months.

Foreign non-residents who wish to buy an established property that is to be demolished and additional accommodation built will require FIRB approval. Construction should commence within 24 months. If the property isn’t to be demolished and additional accommodation built, it can’t be purchased.

Buying new residential property

Temporary residents and foreign non-residents who want to buy new residential property either by themselves or with another individual (temporary resident, foreign non-resident or short-term visa holder) will require FIRB approval.

What has changed?

The key changes to the foreign residential property investment rules are:

New dwellings (house and land packages, home units and townhouses bought off-the-plan)

• The existing requirement of allowing only 50% of new off-the-plan properties to be sold to foreigners was lifted, on condition that developers market locally and overseas.
• A new dwelling used to be defined as never been occupied or previously sold, but now it includes properties that weren’t sold by the developer but were rented out for no more than 12 months.

Second hand dwellings (established residential properties)

• Student visa holders who reside in Australia are no longer subject to a $300,000 limit on the price of an established property bought as their principal place of residence.
• Temporary residents don’t have to let FIRB know of proposed acquisitions of an established property for their own residence, any new properties and single blocks of vacant land for residential purposes.
• Foreign-owned companies can buy established properties for their Australian-based staff, on condition that they sell or rent them if they’re expected to be vacant for more than 6 months.

Vacant residential land for development (includes house and land packages where construction hasn’t started)

• Foreign-owned companies, trust estates and foreign non-residents who buy single blocks of vacant residential land must build a property within 24 months (it was previously within 12 months).
• Previous conditions relating to the purchase of single blocks of vacant residential land by temporary residents no longer apply.

Improved compliance and enforcement

The Australian Taxation Office (ATO) has been put in charge of overseeing foreign residential property investment to improve compliance and strengthen the enforcement of the rules.

The ATO has the power to data match, which has helped them uncover many suspicious transactions. The ATO looks at the feeds they get from immigration and Austrac, as well as information from FIRB, banks and the land titles offices, and then runs them against their own taxpayer data. Tax Commissioner Chris Jordansaid that “we are seeing examples of very young people who are here on maybe a student visa, never having lodged a tax return, yet acquiring property of, say, $5 million.”

Suspected breaches are followed up by 50 compliance officers from the ATO who are in charge of investigating potential breaches of the law. Foreign investors who’ve breached the rules will have to sell their property and then possibly face criminal prosecution.

New application fees

Foreign investors who want to buy residential property in Australia now have to pay an application fee. The fee is $5000 for a property worth $1 million or less, while it’s $10,000 for a property worth more than $1 million.

For each additional $1 million in property value, the application fee goes up by $10,000. For example, the fee is $30,000 for a $3 million property.

Paying the application fee doesn’t necessarily mean, however, that the property will be secured.

Tougher penalties

Foreign investors who don’t comply with the new rules now face tougher penalties. Those who don’t get approval from FIRB before buying Australian property could receive large fines and jail sentences.

The criminal penalties for individuals are a maximum fine of $135,000 (previously $90,000) or 3 years’ imprisonment, or both. Companies will face fines of up to $675,000.

Property developers and third parties will also face huge fines if they breach the foreign investment rules and are caught. Individuals such as buyer’s advocates and real estate agents who help foreign investors breach the rules will receive fines of up to $45,000, whereas companies face a maximum fine of $225,000.

Property developers who don’t market apartments in Australia could face fines of up to $135,000 or 3 years’ imprisonment.

Why were the changes made?

Foreign investment is important in helping Australia’s economy grow and providing jobs. In the case of residential real estate, the aim of the current foreign investment system is to channel foreign investment into new homes for Australians to buy or rent. The government’s recent changes are intended to ensure that this aim is achieved, and that the current rules which limit foreign investment in established properties are enforced.

Nearly 50% of foreign investment in Australia is in real estate, so a careful review of foreign investment proposals by the government hopes to ensure they aren’t contrary to the national interest. This review framework not only protects the national interest, it also ensures that Australia remains an attractive investment destination.

The new rules will hopefully restore confidence in the community that foreign investors are meeting FIRB requirements, and also encourage increased foreign investment in new dwellings in order to stop driving up house prices and allow Australian residents to enter the property market.