On 25 February 2015 the federal Government announced the changes to be made to the rules for foreign purchases of Australian residential property.
The Government has made it abundantly clear that it is taking steps to crack down on illegal acquisitions of property by foreign nationals. This month China’s 15th richest man, Xu Jiayin, was ordered to sell his $39 million Point Piper property within 90 days after it became apparent the company named on the title was controlled by him. The company had acquired the established property in contravention of the Australian Foreign Investment Policy.
The current rules for Residential Property
The Australian Foreign Investment Policy for residential property is designed to increase the supply of housing stock. Accordingly, the Government has deemed some types of investment to be contrary to the national interest.
Regardless of the value of the property being acquired, foreign persons need to obtain prior approval to take an interest in residential real estate. An ‘interest’ includes buying real estate, obtaining or agreeing to enter into a lease or licence for a term of more than 5 years, including options to renew.
The rules are slightly different for temporary and non-resident foreign persons. Temporary residents are persons residing in Australia who hold a temporary visa permitting them to stay in Australia for a continuous period of more than 12 months or those who have submitted an application for permanent residency and hold a bridging visa permitting them to stay until their application has been finalised.
Temporary residents are restricted to one established dwelling which must be used as their residence in Australia. When the temporary resident leaves Australia or it ceases to be their primary residence, the property must be sold within 3 months. They are not permitted to purchase established properties for investment or holiday purposes.
Non-resident foreign investors are not usually permitted buy established dwellings. However, they may be granted approval to purchase such a property for redevelopment. Proposals for redevelopment are usually approved provided the redevelopment will increase housing stock - i.e. at least two dwellings must be built for the one demolished. Approval may be granted to replace a dwelling with a single dwelling if it can be shown the existing dwelling is derelict or uninhabitable.
Another exemption for non-resident foreign persons is if they are operating an Australian-based business, and the property will be used to house Australian based staff.
Vacant Land for Residential Development and Newly Constructed Dwellings
All foreign persons can apply to purchase vacant land for residential development and newly constructed dwellings in Australia. Applications regarding vacant land are usually approved, subject to conditions such as construction commencing within 24 months.
What are the Changes?
On 25 February 2015 the Australian Government released an ‘Options Paper’ where it is seeking submissions from interested parties on the proposed changes. The Government has determined the current policy framework itself will largely remain unchanged, and proposes the following changes be made to improve compliance, enforcement, administration and data collection.
Application Fees - Proposed
An application fee will be introduced. Previously, there have been no fees applicable for applications to the FIRB, and these costs have been borne by the taxpayer. These fees are expected to raise $200 million per year for the Government, which will fund increased enforcement activity and the cost of administering the foreign investment framework.
Fees for properties purchased under $1 million will attract a $5000 application fee, and properties over $1 million will incur an additional $10,000 fee for each additional million dollars in the purchase price. Fees will be payable before the application is processed.
Penalties for Breaching the Act - Proposed
The Foreign Acquisitions and Takeovers Act 1975 (the Act) will likely be amended to provide for increased criminal and civil penalties and infringement notices. If foreign purchasers illegally acquire residential property in contravention of the Australian Foreign Investment Policy, they will be ordered to sell the property, and they will be subject to a penalty. If the acquisition would normally be approved, this fee will be up to $10,200 for an individual or $51,000 for a company, plus the relevant application fee. If the acquisition is not normally approved, or the investor breaches the conditions of approval, they will be hit with a civil penalty of up to 25% of the value of the property or the capital gain made on divestment of the property (whichever is higher).
There will also be civil and criminal penalties introduced for breaches of the rules by third parties who assist of foreign investors – i.e. real estate agents, accountants, solicitors, associated entities. Individuals will face a civil penalty of up to $42,500 and corporations $212,500. Knowingly assisting another person to commit a criminal offence is an offence under section 11.2 of the Criminal Code. The maximum penalty is $85,000, imprisonment of 2 years, or both.
Foreign Investment Register
From 1 July 2015 the Government will establish a register of all rural property owned by foreign persons. All new acquisitions will be added to the register, and the Government will survey all property currently held. This register will be administered by the Australian Tax Office.
What are the Consequences for you?
If you are a foreign person and you intend to purchase an Australian residential property, it is essential that the contract is conditional on you obtaining approval from the foreign investment review board.
The 30 day statutory time period for the FIRB to assess an application is going to remain the same. We consider that as a result of the changes to the foreign investment policy as a whole, the number of applications will greatly increase and the FIRB may need to extend this time period, particularly for more complicated applications. Accordingly, completion of the land sale contract may take considerably more time.
As discussed above, there may be a considerable application fee payable, depending on the purchase price of the property you intend to acquire. If you fail to adhere to these new rules, or if you assist someone to breach the rules, there will also be significant penalties applicable.
We note the requirement to pay an application fee before the FIRB will process an application may be an issue for persons purchasing residential properties at auction (where unconditional offers are required). This requirement would result in the person having to submit multiple applications and incurring significant fees. It is noted in the Option Paper that the Government will consider options on this point.
Timetable of Change
While the changes to acquisitions of rural land are effective from 1 March 2015, there is no change as yet to the administration fee or penalties applicable. It does appear that the Government is already moving to increase enforcement of the current rules, as highlighted by the sale order for Xu Jiayin’s Sydney property.
The foreign investment register will be in place and will start collecting information on existing foreign ownership and subsequent transactions by 1 July 2015.
The Option Paper is open for submissions until 20 March 2015.
If you would like advice on whether your proposed acquisition requires FIRB approval or on making the application itself, please contact us using the below details.