On 2 May 2015, the Australian government announced a series of changes to the foreign investment framework (see our Foreign Investment Update), including changes to the approval regime for off-the-plan developments and the introduction of significant application fees for advanced off-the-plan certificates from 1 December 2015.
Australian and overseas developers should consider whether they can take advantage of the present regime by applying for FIRB approval before the changes come into force.
Application fees applicable from 1 December 2015
Currently, property developers can apply for an advanced off-the-plan certificate (AOP Certificate) to sell new apartments in large developments (of 100 lots or more) to foreign investors, saving the foreign investor from having to obtain an individual approval. AOP Certificates are granted on condition that the developer must market the lots in the development both in Australia and overseas.
There are currently no fees for an application for an AOP Certificate. The Government's announcement on 2 May 2015 confirms that the Government has determined to introduce application fees for approvals for sales of residential property, including for AOP Certificates (as was proposed in the discussion paper published in February 2015). The rationale for the fee is that the Government wants applicants to subsidise the administration costs of giving approvals. The new fees are to apply to any application made after 1 December 2015.
At this stage, the new fees are a statement of policy only, and will not be finally confirmed until legislation is passed to amend the Foreign Acquisitions and Takeovers Act 1975 (Cth) (expected to be after August 2015).
The announcement states that from 1 December 2015 there will be a $25,000 flat fee applicable to an application for an AOP Certificate. In addition, it seems that there will also be a further fee payable each six months based on a reconciliation of the number of foreign sales achieved in that six month period.
The rates for approval applications for individual purchases by foreign persons are $5,000 per sale for apartments under $1 million or $10,000 per sale for apartments over $1 million, plus an additional $10,000 for each further $1 million in value.
So, for example, the application fees for the first six months of sales (to foreign buyers) might be:
|Unit A sold for $800,000||Individual sale fee||$5,000|
|Unit B sold for $800,000||Individual sale fee||$5,000|
|Unit C sold for $1,500,000||Individual sale fee||$10,000|
|Unit D sold for $2,500,000||Individual sale fee||$20,000|
|Plus||AOP Certificate fee||$25,000|
In large developments, the total cost of FIRB application fees could be significant, and clearly raises questions for developers as to whether they will absorb these costs or seek to pass them on through the contract (if that is not prohibited by the final form of the legislation) as an adjustment.
It is not clear what transitional arrangements will apply to AOP Certificates approved before 1 December 2015. The Government's recent announcement and earlier discussion paper suggests that developers who obtain an AOP Certificate before 1 December 2015 may still be required to pay the individual sale fees applicable to the value of each sale to a foreign buyer within the development.
This requires further clarification. Given there is little administration to be done after the initial AOP Certificate application is approved it seems potentially unfair to be charging the same fee that would apply for a single fresh application on top of the initial AOP Certificate application fee for each purchase made by a foreign person.
What is clear is that there will be a cost impact of the new fee regime if it is legislated in something like the form announced by the Government. Developers should therefore prepare for that and if possible mitigate the consequences by applying ahead of the introduction date, even if only to mitigate the initial fee.
New penalties for developers failing to comply with conditions
Although AOP Certificates are granted on the condition that the apartments are marketed in Australia, as well as overseas (to ensure that domestic buyers have the same opportunity to purchase the apartments), there are currently no penalties for breaching this condition.
The Government's recent announcement also confirms the proposal, set out in the February discussion paper, to introduce penalties:
- for a developer who fails to comply with the obligation to adequately market the development to Australian buyers (maximum criminal penalty of $637,500 for a company / maximum civil penalties of $212,500 for a company); and
- for a developer who fails to comply with the reporting conditions associated with the AOP Certificate regarding the actual sales made to foreign buyers (maximum civil penalties of $212,500 for a company or infringement notices ranging between $2,040 and $51,000).
Restriction on high value sales under an AOP Certificate
The Government's February discussion paper also proposed tightening the rules around the use of AOP Certificates by limiting the value of all apartments that can be bought by a single foreign investor to $3 million in any single development.
If foreign investors want to purchase apartments above this value, it was proposed that they would have to seek individual approval, on the basis that this would reduce the scope for any criminal behaviour (such as money laundering) by ensuring that high wealth investors are subject to the upfront screening process.
Although the Government's more recent announcement is silent on this proposal, it is nevertheless a matter to watch closely. In the Sydney CBD, for example, a $3 million restriction may preclude most penthouse apartments from being sold to foreign investors under an AOP Certificate.