Keeping it in the family: proposed reforms to FIRB's treatment of family arrangements
This part of our FIRB Reforms Article Series focuses on the Commonwealth Government's proposal to prevent the use of family arrangements by foreign investors to circumvent the operation of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). The release of the Commonwealth Government's discussion paper on 5 June (Discussion Paper) proposes amendments to Australia's foreign investment framework to address what it sees as gaps in the integrity of the foreign investment approvals process in respect of family arrangements and the transfer of property by operation of a will.
In the context of family arrangements, the Discussion Paper addresses two key areas of concern. Firstly, arrangements under which foreign persons provide funds to their Australian resident relatives for the purchase of land in Australia, without needing FIRB approval. The Commonwealth Government's key concern is that this process can be used in situations where the Australian resident is effectively holding the land on an undeclared and undocumented trust arrangement (i.e. for the benefit of the family more broadly, some of whom may be foreign persons), rather than for their own benefit. As this process circumvents the requirement for FIRB approval, the Commonwealth Government's concern is that it allows for foreign investment in Australian land in circumstances that are contrary to Australia's national interest.
Secondly, the Commonwealth Government has addressed arrangements in which investments made in breach of the FIRB rules are subsequently transferred to another foreign person by will, devolution, or by the operation of law, leaving the Commonwealth Government with little scope to regulate or prevent the investment due to an exemption loophole in the FATA.
Waving goodbye to the presumption of advancement
The position in the FATA at present reflects a common law principle called the 'presumption of advancement'. This principle presumes that where a person (in this case, a foreign person) provides money to a relative (in this case, an Australian resident), it is by way of gift. This means that if those funds are used to acquire property, the relative receiving the funds and making the acquisition takes an unfettered ownership of the property. That is, the person acquiring the property is not deemed to hold it on trust for the foreign person who provided the purchase price. This means that the relative providing the funds ordinarily has little recourse at law to argue that they have an interest in the property (whether legal or equitable), but in practice, the family context of the arrangement usually means that the trust type relationship is simply 'understood'.
The legal position under the presumption of advancement is different to the position that would exist if the arrangement was not in the family context. If a foreign person provided an Australian resident (who was not a family member) with funds, and those funds were used to acquire land in Australia, there would be a legal presumption that the property was held on trust for the foreign person. This would mean that the acquisition of the land would be subject to all of the usual restrictions and application requirements under the FIRB rules.
The problem, as the Commonwealth Government identifies in its Discussion Paper, is that a foreign person may avoid FIRB screening by relying on the presumption of advancement and providing funds to an Australian resident family member to purchase the asset on their behalf, or at least with an intention or understanding that the benefit of the property will be held for the family more broadly (which would include foreign individuals). These types of arrangements make it difficult to trace the 'true' ownership of the property back to the purchaser's foreign relatives. By the time it becomes clear that a piece of Australian land was actually held on trust by an Australian resident for a foreign person, the property has usually already been sold and the funds from settlement dispersed offshore. This leaves little recourse for the Australian government against the foreign person who has avoided scrutiny.
Although not within the scope of this article, this type of informal and undocumented trust arrangement may also have tax avoidance implications, especially now that most states have a foreign holder duty and land tax surcharges.
Proposed reform of the FATA
To rectify this issue, the Commonwealth Government proposes to amend the FATA to explicitly exclude the presumption of advancement from its operation. The legal effect of this is that where a foreign person advances money to their Australian family members for the purchase of Australian land, the ownership of the land will be traced back to the foreign relative who provided the funds, and who will be treated as acquiring the Australian land themselves, unless it can be proven to be a genuine gift.
Practically speaking, this can result in the foreign relative being required to apply for FIRB approval before the Australian relative can proceed with the acquisition. It will also restrict the acquisition of developed residential real estate under these types of arrangements, as it is FIRB's policy not to allow the acquisition of this type of land by foreign investors other than in certain limited circumstances (such as the redevelopment of the land to increase the housing stock).
A proposed exception to this rule is that the presumption of advancement will be reinstated where the parties to the transaction can show that the money advanced was a genuine gift. The Commonwealth Government has not yet provided guidance on how this could be demonstrated. We expect that, at a minimum, the gift will need to be documented and FIRB may use its enhanced information gathering powers to monitor any future sale proceeds to ensure that the original representations were true (that is, to ensure profits are not sent offshore).
If there's a will, there's no way
The Commonwealth Government is also proposing a crackdown on investments previously made in breach of the FATA which have subsequently been transferred to another foreign person by will, devolution, or by the operation of law.
At present, an exemption in section 29 of the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (FATR) 'legitimises' investments made in breach of the FATA where the relevant property is later transferred by will, by devolution, or by the operation of law. The effect of this exemption is that a foreign person is permitted to hold Australian property that they would otherwise not be permitted to acquire under the national interest test, thereby avoiding screening by FIRB.
The Discussion Paper proposes an amendment to do away with this problem by requiring foreign investors to notify FIRB of an acquisition facilitated by the operation of a will, by devolution or by the operation of law where the original interest did not receive FIRB approval. The Commonwealth Government has also proposed broader powers for the imposition of conditions on, or even to order the disposal of, the relevant property.
Family arrangements whereby a foreign person advances money to an Australian relative for the acquisition of Australian property are not uncommon acquisition structures. For some Australian residents who borrow funds from foreign family members, the later repayment to those family members is not part of a FIRB avoidance scheme. Rather, it is the simple utilisation of one's support network.
By January 2021, these types of arrangements (whether or not they intend to avoid FIRB approval) will be the subject of greater scrutiny by FIRB as the Commonwealth Government attempts to strengthen the integrity of Australia's foreign investment framework. As such, foreign persons who are the parents, spouses or other family members of Australian citizens will be the most affected by these proposed amendments to the FATA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.