Changes to Foreign Investment Law - focus on agricultural land and residential real estate
The Australian Prime Minister, the Treasurer and Minister for Agriculture have issued a joint media release indicating that changes will be made to the threshold for purchases of agricultural land in Australia. The current threshold for investments, other than from countries with which Australia has a free trade agreement or similar (such as USA, Japan, China, Korea and New Zealand) is $252 million. From 1 March 2015, this threshold will be reduced to $15 million. The threshold will be cumulative based on the total value of agricultural land owned by the foreign investor. The current threshold is based on each individual investment in Australia.
The Treasurer has also indicated that the Government will introduce a new $55 million screening threshold for foreign investment in Australian agribusiness. The Government is seeking views regarding the definition of “agribusiness”.
The change to the threshold does not prevent investment in agricultural land where the investor owns or would own land worth in excess of $15 million. Investments in excess of $15 million are subject to an application to the Foreign Investment Review Board and require approval from the Board and ultimately from the Treasurer. In determining whether to grant approval, the Board will work with State and Territory Governments and consider the implications of the acquisition on Australia’s national interest.
The recent media release states that the Australian Taxation Office will collect information on all new foreign investments in agricultural land, regardless of value and develop a stock take of existing agricultural land ownership. In Queensland, the Foreign Ownership of Land Register Act already has created a register of foreign ownership of land in Queensland. This information is collected as part of the registration of transfers of land.
The exact changes to the foreign investment policy have not been finalised and the Treasury has issued an Options Paper called “Strengthening Australia’s Foreign Investment Framework” seeking view of proposed reforms to strengthen Australia’s foreign investment framework, particularly for resident real estate and agriculture.
The Options Paper raises the concept of the definition of “agricultural land”. Currently “rural land” is defined by reference to the Income Tax Assessment Act and requires exclusive ongoing use of the land for a primary production business. This definition does not capture land used for multi-purposes or land that is suitable for but not currently used for agriculture. The current definition of rural land will be maintained until legislation defining agricultural land is in place. One example of a change to the definition would be to extend to refer to land that during the past 5 years has been used for carrying on of the business of primary production. Other examples refer to land primarily used for the purpose of carrying on an Australian agribusiness.
The Options Paper refers to potential change in the definition of “urban land” and to introduce a broader definition of “residential land” which reflects common understanding of the nature of land. Residential land may be land which is not agricultural land and used for the purposes of 1 or more residential dwellings.
A recent Parliamentary enquiry has also reviewed the current policy regarding investment in residential real estate. Currently investment in developed residential property is not permitted except by a foreign person with permanent residency. The Government is considering mechanisms to enforce the current rules.
The Options Paper has raised the possibility of increasing compliance and enforcement activities and to amend the Foreign Acquisitions and Takeovers Act to provide for increased criminal penalties and new civil penalties and infringement notices. The proposed new penalties include a 2 tier system under which a foreign person who acquires residential property without approval but who voluntarily comes forward may be liable for a penalty of $2,040 plus the relevant application fee and for a company $10,200 plus the relevant application fee. The 2nd tier infringement notice would issue where failure to apply is identified through compliance activities and for an individual the fine would be $10,200 and for a company $51,000. In addition, there is a proposal to introduce a civil penalty of the greater of 10% of the purchase price of the property or 10% of the market value of the property plus the application fee.
Where a non-resident acquires established property or a temporary resident acquires more than one established property or where a temporary resident fails to sell an established property when it ceases to be their principal place of residence or otherwise breaches a conditional approval, a civil penalty may be imposed of the greater of:
- The capital gain made on divestment of the property;
- 25% of the purchase price; or
- 25% of the market value of the property.
It is proposed to impose civil penalties on a developer who fails to market apartments in Australia in breach of an advanced off the plan certificate. This includes a potential fine of up to $42,500 for a civil claim or $85,000 and 2 years imprisonment for a criminal action. A developer which is a company may be liable for 5 times each penalty. Similarly there are proposed penalties for a developer who fails to comply with reporting conditions or for a foreign person who fails to comply with reporting conditions which require them to notify of actual purchase and sale of established properties.
A new penalty is also proposed for third parties who assist a foreign investor to breach rules. This would require amendments to the Foreign Acquisitions and Takeovers Act and include potential civil penalty of up to $42,500 for an individual or 5 times that amount for a corporation and a new criminal offence of knowingly assisting another person to be included in the crime criminal code with a maximum penalty of $85,000 and imprisonment of 2 years.
The Options Paper is requesting feedback on whether the new civil and criminal penalty regime would be effective to ensure compliance. There is also a proposal to impose civil and criminal penalties for non-compliance in other areas including acquisitions of business, commercial real estate and agricultural investments.
The Government is also proposing to introduce fees for applications to FIRB with the final level of fees to be set following consultation. The range of fees are:
- for residential real estate proposals and rural land acquisitions, a fee of up to $5,000 would apply to properties valued under $1 million, the fee would increase to $10,000 where a property is equal to or greater than $1 million and then the fee would increase by $10,000 for each additional $1 million in property value;
- property developers seeking an advanced off the plan certificate to sell residential property to foreign investors would be levied on an application fee based on the number of dwellings sold to foreign investors; and
- business, commercial real estate and agribusiness investments would be subject to an application fee of between $10,000 up to $100,000 depending on the size and sector.
The fee would be paid before the foreign investment application is processed with the 30 day statutory period for FRIB to assess the application beginning after the payment of the fee has been received.
The Government will consider arrangements where a fee will be refunded where the proposal does not proceed, for example where an applicant may lodge an application so that a bid can be made at an auction or where an application is withdrawn and resubmitted to extend the statutory deadline.
The new policies are not intended to restrict foreign investment in agricultural land or new residential property but will require greater disclosure of information by a proposed foreign investor.
The proposed changes are far reaching and, while the level of proposed application fee would not be an economic deterrent to foreign investment in the residential sector, the proposed significant fees for purchases in the commercial and agribusiness could be a disincentive to investment in Australia. The proposed regime indicates a less open approach to foreign investment with a higher degree of scrutiny and penalties.
Should you have any queries concerning the above please do not hesitate to contact Philip Mitchell.
Philip Mitchell, Partner