Australia: FIRB compliance audits: what to expect and how to respond

The Federal Government is boosting its compliance activity following the recent reforms to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the FATA).

Specifically, the Foreign Investment Review Board (FIRB) and the Australian Taxation Office (ATO) (which administers FIRB's functions in relation to residential land in particular) are actively seeking to identify acquisitions of Australian residential property by foreign persons who have failed to obtain prior FIRB approval as required under the FATA.  While this has always been high on FIRB's and the ATO's priority list, a greater focus has recently been placed on acquisitions of land by discretionary trusts.  This has been a well known, but often overlooked, issue in the past.  It is now an issue that is well and truly on the Federal Government's radar. 

In a further reflection of FIRB's increased focus on compliance, many investors will also receive prompt letters reminding them of their obligation to notify FIRB after taking an action for which the investor has received approval.

Given the significant penalties that can be imposed for breaches of the FATA, it is important for foreign investors to understand their obligations.

Before investing: consider the requirement to notify FIRB

Generally, all foreign investors require FIRB approval for the acquisition of residential land in Australia, regardless of value.  The policy states that FIRB approval will generally be granted for the acquisition of new dwellings, but will only be granted for the acquisition of established residential dwellings in certain circumstances (such as for redevelopment that increases the housing stock, or to temporary residents to use as their principal place of residence).  There are also some exemptions from the requirement to obtain FIRB approval for foreign investors with a close connection with Australia, such as New Zealand citizens.

Many of these exemptions and concessions are not well understood, particularly where the foreign investors acquire their interest in residential land through companies or trusts.  Even the definition of ‘foreign person' for foreign investment purposes causes confusion, especially in the context of discretionary trusts.  A discretionary trust will be a foreign person (and therefore will require FIRB approval for the acquisition of residential land) if a foreign beneficiary holds an interest in the trust of 20% or more.  As this is an ‘associates inclusive' test, and each discretionary beneficiary is deemed to hold an interest equal to their maximum potential percentage interest in the income or capital of the trust, this effectively means that a discretionary trust will be foreign under the FATA if any of the beneficiaries are foreign. 

In recent months, foreign investors have reported receiving notices from FIRB of their potential breach of the FATA in relation to an acquisition of Australian residential land, particularly where the acquiring entity is a discretionary trust. 

Specifically, the notice received by certain foreign investors has required the investor to provide further information to FIRB in order for FIRB to ascertain whether a breach has occurred and what enforcement action may be necessary.  The type of information a foreign investor may need to provide to FIRB includes:

a)            details of other Australian properties owned by the investor;

b)            a copy of any signed contracts relevant to the acquisition;

c)            an explanation as to why FIRB approval was not sought (if it was not sought);

d)            details of any tenants who occupy the property (if any);

e)            the name of any solicitors, conveyancers or real estate agents who have assisted the investor in the purchase; and

f)             a copy of the trust deed for the purchaser trust (if relevant).

This focus on foreign discretionary trusts is not surprising since the recent introduction of certain foreign duty and land tax surcharges by the New South Wales government which use effectively the same definition of foreign person (including foreign trust) as under the FATA, which has brought this issue into greater focus in recent years.  

In the past, where an acquisition of Australian property is structured through a trust (particularly a trust with Australian default beneficiaries and which only distributes to Australian beneficiaries), the requirement to obtain FIRB approval may have been overlooked.  Further, FIRB has historically not actively sought to identify such circumstances.  However, the Federal Government's stance is clearly shifting: foreign investors who structure their investment into Australian residential property through a trust may need to review their trust deeds to ensure the breadth of potential beneficiaries does not result in the trust being a foreign trust under the FATA.  This is not always obvious, and our specialist FIRB team can assist to review the relevant trust deed to ascertain whether FIRB approval is required.

Treasury is not always forgiving in its enforcement stance either.  While the maximum penalty is ten years' imprisonment, there are no examples to date of any such measures being enforced for a person's breach of the FATA.  What is more likely is the issuance of a forced divestiture order and the imposition of a monetary penalty (which may equate to 100% of the capital gain made on the property).

This recent area of focus highlights how critical it is for foreign investors to obtain legal advice in relation to their proposed investment into Australia to avoid a breach of the FATA.

After investing:  a continuing obligation to comply with the FATA

The second area of recent interest to FIRB is the enforcement of foreign investors' requirement to notify FIRB once an action for which the investor received a no objection notification or exemption certificate has been taken.

Under the FATA, foreign investors who receive FIRB approval or an exemption certificate in relation to an investment into Australia must notify FIRB once the investment has been undertaken.  The foreign investor must notify FIRB within 30 days of that action being taken via an online portal.

Recently, many foreign investors have received email correspondence from FIRB to remind them of the requirement to notify FIRB once the action has been taken.  Non-compliance (or late compliance) can result in an administrative penalty being imposed by FIRB in the form of an infringement notice.  However, our experience to date is that FIRB uses this mechanism as a reminder to encourage compliance rather than to impose penalties.

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.