Since the forced sale in early 2015 of the $39 million Point Piper Mansion, Villa de Mare, which was bought in breach of Australian foreign investment laws, the Government has foreshadowed the introduction of a tougher and more robust foreign investment regime. And From 1st December 2015, a number of changes to Australia's foreign investment rules commenced.

These changes impact on builders and developers who sell and market to foreign buyers. Previously there was no fee payable by most purchasers of newly constructed residential dwellings.

Fees for Foreign Buyers

As of 1st December 2015, all applicants must pay a fee to the Foreign Investment Review Board (FIRB) before the foreign investment application is processed. The fee payable would depend on the type of application and the value of the property intended to be purchased. Key changes of the fees payable are set out in the below table:

The Australian Tax Office

The Australian Tax Office (ATO) is now charged with the responsibility to regulate foreign investment in residential real estate and strengthen the enforcement of the FIRB rules. The ATO plans to establish a register relating to foreign ownership of residential real estate from the 1st July 2016.

Advance Off The Plan (Blanket) Approval

A blanket approval may be given to vendor/developers for advance off the plan developments. The development must consist of fifty or more dwellings and have received Council approval.

An application fee of $25,000 advance payable off the plan approval applications applies. This approval allows the vendor/developer to sell 100% of dwellings in their development to foreign persons, without the need for individual foreign buyers to apply to FRIB for separate approval.

However the application fee is not credited towards any fees payable for individual sales to foreign buyers. The vendor/developer must report to FIRB every six months, detailing then sales to foreign buyers in the preceding six months. They must then pay FIRB further fees for each dwelling sold to foreign buyers.

For example, if during a six month period a developer sells twenty off the plan apartments to foreign buyers (and these sales are all valued under $1 Million) the developer will be liable for approximately $100,000 (i.e. Twenty sales at $5,000 each) together with the applicable fee of $25,000 for obtaining the blanket off the plan approval.

Although these new costs may be absorbed into the development costs, it is recommended that vendors or developers, who wish to recoup these costs directly from foreign clients, include a clause in their sale contracts entitling them to do so.

Advance off the plan approval will only be granted on the dwellings for sale in the development are also marketed in Australia. Harsh penalties may apply for any breach of the marketing or reporting conditions.

The current rules, restricting non-resident foreign persons from purchasing established dwellings remain in place.

New Penalties

The Government has announced a range of tougher penalties to make it easier to pursue foreign investors who breach the rules.

For criminal penalties, the maximum penalties for most offences will be:

  • Individuals – 750 penalty units ($127,500) or three years imprisonment; and
  • Company – 3750 penalty units ($637,500).

Civil penalties will also be introduced, with maximum penalties of:

  • Individuals – 250 penalty units ($42,500); and
  • Company – 1250 penalty units ($212,500) for business and agricultural investments.

In the residential real estate space, the civil penalties are more severe and extend to capital gains made on divestment, or percentages of the purchase price or market value of the property. In addition, infringement notices will also be introduced for certain residential property breaches.

The Government will also introduce increased criminal penalties and new civil penalties for third parties who knowingly assist foreign investors to breach the rules.

Bottom line

Any foreign individuals or companies involved in investment in Australia must familiarise themselves with the regime and ensure that they are aware of all their rights and responsibilities. Indeed, it is very important that foreign investors and advisors need to be aware of their obligations and to abide by these new FIRB rules to avoid the significant civil penalties which can now be enforced.

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.