The Federal Government has recently released an ‘options paper’ setting out numerous proposed changes to the current Australian foreign investment review framework.  One of the proposed changes, which has been met with strong criticism from property development industry groups, is a new fee structure for foreign investment in Australian residential real estate.

Proposed new fee structure

The proposed fees will be imposed by the Australian Tax Office (ATO) and will include a $5,000 application fee for property purchases which are valued at under $1 million. Applications to purchase a property equal to or greater than $1 million will be subject to a fee of up to $10,000. The fee will then increase in increments of up to $10,000 for each additional $1 million in the property value.

It is expected that the government will collect approximately $200 million each year.

Government Position

The Government believes there would be significant benefits in creating a new specialist compliance and enforcement area within the ATO, to improve data collection, compliance and enforcement activities around foreign investment in residential real estate.

The costs of administering this new function will therefore be offset through the introduction of these new fees and through increased penalties for breaches of the foreign investment rules. The fees also aim to assist Australian residents in securing property against foreign investors.

Whilst industry professionals support better compliance and data collection, the general consensus is that the proposed fees are excessive and well above what is needed to fund these activities.

Additionally, these fees are significantly higher than the $1,500 recommended by last year’s parliamentary inquiry into foreign investment.

Concerns and implications of proposed new fees

Despite the Government’s reasoning, industry experts believe the higher fees will in fact have a negative impact on the Australian property market.

It is argued that the fees will provide a strong disincentive for those looking to invest in Australia, which will in turn stifle the market.

Currently, foreign investors can only buy newly developed property under existing Foreign Investment Review Board rules and for every newly constructed home that a foreign investor purchases, up to four other homes are enabled to be built. Therefore, if foreign investment in new residential housing does decrease as a result of these fees, this would jeopardise housing supply, thereby worsening existing shortages and driving up house prices.

While other industry professionals believe that the fees will not achieve the desired outcome of maintaining affordable property prices and will most likely not prevent foreign investment, they do agree that it nevertheless sends a bad message to the world, particularly China, that Australia is not welcoming to foreign investors.

Other notable proposed changes outlined in ‘options paper’

(a) Advanced off-the-plan certificates

Currently, property developers can apply for an advanced off-the-plan certificate to sell new apartments in a development of 100 or more to foreign investors (the investor does not then need to obtain separate approval).

These certificates are granted on the condition that the apartments are marketed in Australia, as well as overseas. This is to ensure that domestic buyers have the same opportunity to purchase the apartments.

Although, there are currently no penalties for breaching this condition, the ‘options paper’ proposes to significantly increase the civil and criminal penalties for developers who fail to comply with their obligation to market their development to domestic buyers and not solely to foreign investors.

The new proposed penalties are:

  • Civil — Individual 250 penalty units ($42,500)
  • Criminal — 500 penalty units ($85,000), imprisonment of two years or both

 
Additionally, the Government is proposing to tighten the rules around the use of these advanced off-the-plan certificates by limiting the value of all apartments that can be bought by a single foreign investor to $3 million in any single development. Thus, in order to purchase apartments above this value, foreign investors would have to seek individual approval.

This new proposal may not however affect:

  • Syndicate foreign investment (that is, multiple foreign investors acquiring Australian real estate)
  • Local syndicated investment (that is, foreign investors who invest into local real property managed investment schemes. This gives investors access to the Significant Investor Visa which carries eligibility to apply for permanent residency after a minimum for 4 years)
  • Multiple development investments ( as presumably, a foreign investor will still be able to invest more than $3 million across multiple developments)

 
(b) Foreign investment in rural land and agribusinesses

Under the current foreign investment framework, proposed investments by private investors in rural land and agribusinesses are subject to the same thresholds that apply to other foreign acquisitions of Australian companies or business assets. However, the Government is seeking to dramatically reduce these current thresholds.

This means foreign investors will need to obtain prior approval for a proposed acquisition of an interest in rural land where the cumulative value of the land owned by the foreign investor, including the proposed purchase, is $15 million or more.

The lowering of these thresholds may create possible opportunities for local developers in that they could acquire rural land or agribusinesses for the purpose of selling to foreign investors once the rural land has been rezoned and designated as urban land.

As there are no thresholds on foreign investors seeking to purchase urban land, local developers could sell this newly designated urban land at a premium to foreign investors.

If you have any queries regarding the above, please contact David Mazzeo on 03 9614 7707.

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