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Foreign Investors Face Tough New Penalties

Last week, the Federal Treasurer Joe Hockey introduced into parliament tough new laws for foreign investment in Australian property.

These new laws are set to come into effect by 1 December so if you’re planning to invest in Australian real estate, listen up.

Breaches of Foreign Investment Review Board (FIRB) rules could see you faced with penalties upwards of $135,000 or up to 3 years’ imprisonment!

The Australian Government announcement comes after a House of Representatives Economics Committee (the committee) inquiry into foreign investment in Australian property which will also likely see a levy applied to all foreign investment applications.

The government has taken several measures this year to make life harder for foreign investment, including a tighter regulatory regime, a high-profile forced sale and investigations of other possibly illegal transactions.

Here’s what every foreign investor needs to know.

Foreign investor tax

As per the House of Reps committee’s recommendations, the Government will apply a $5,000 levy or “application fee” on all foreign investment proposals from 1 December 2015. A tiered approach will be applied to application fees depending the type of investment.

As a rough guide, it will look something like this:

  • Under $1 million there will be a $5,000 application fee.
  • Under $1 million, it will be $10,000 for every extra million dollars in the purchase price. This likely relates to large purchases where multiple units are bought as part of a development project.

Despite this levy, Home Loan Experts managing director Otto Dargan said it will not likely have much of an impact in curbing foreign investment in Australia.

“Compare the Aussie dollar to the United States and the RMB (Chinese Yuan Renminbi) and you’ll see that it’s dropped,” he said.

“All Australian real estate is discounted, driving foreign investors to buy, so why would they care about $5,000 or $10,000?”

The ATO to enforce breaches of foreign investment rules

Treasurer Hockey said the proposed measures were designed to restore confidence in a FIRB system that had not prosecuted anyone for breaching the rules since 2006.

Although the FIRB framework itself will remain the same under the draft reforms (reviewing foreign investment proposals on a case-by-case basis with the aim of channeling investment into new housing), the Government wants FIRB and the Foreign Investment and Trade Policy Division of Treasury to put in place appropriate processes for the purpose of audit, compliance and enforcement of foreign investment regulations.

In a nutshell, non-residents looking to buy to let will now be overseen by the Australian Taxation Office (ATO), including the collection of fees like the new levy, upfront screening and, most importantly, the enforcement of FIRB rules.

Although FIRB and the Treasurer will still be involved, the Government believes that the ATO has a wider reach and the resources to better enforce compliance, to detect breaches and to even pursue court action.

Big fines and prison time

Under the draft legislation introduced to Parliament, a fine for breaches of residential real estate applications will apply following an amendment to the Foreign Acquisitions and Takeovers Act 1975.

These amendments will include the following increased penalties depending on the severity of the breach :

  • A $135,000 fine.
  • 3 years imprisonment.
  • The forced sale of the investment property.

With the proposed specialist ATO unit, court action will be much easier to pursue but Otto said these tougher penalties could have an impact on foreign investor lending policies.

If FIRB rules are breached but the foreigner investor is overseas, their only Australian asset is that one property and they have a considerable amount owing on the property, for instance, the bank is usually the biggest loser.

The reason is that government fees such as council rates sometimes take preference over a mortgage when a property is sold.

For example, if a property is sold for $1 million but but there is $980,000 owing on the mortgage, the government will get about $50,000 but the bank will lose $30,000.

“What this means is that lenders may potentially reduce foreign investor lending from 80% of the property value to 60% to allow for the extra risk,” Otto said.

“It’s too early to tell for sure though.”

Foreign investors will not benefit from illegally purchased property

In another crackdown on rule-breakers, any capital gain from the forced sale or divestment of an illegally purchased investment property will be retained by the Government.

According to the draft legislation, foreign investors would be required to pay capital gains tax directly to the government on residential sales worth more than $2.5 million.

For properties valued above $2.5 million, local buyers will have to make a 10 per cent withholding payment if they know or reasonably believe that the vendor is a foreign resident.

The 10 per cent amount is an estimate of the vendor’s final income tax liability, so sellers will still have to lodge an income tax return and pay any outstanding debt.

Time limit on temporary residents selling their property

If it ceases to be their primary residence, temporary residents will be required to sell or “divest” an established property within three months if it ceases to be their primary residence.

Sometimes, temporary residents will purchase a new property but keep their old property, leave it vacant and instead sell it later on for a profit.

On a national level, this has a massive impact on the housing supply problem, pushing up house prices and rent across Australia.

What should I do to prepare for these changes?

Apart from the proposed fees and penalties for foreign investment, the Government will also be putting in measures to better track foreign investors in Australia including the ATO being notified when temporary visas expire and greater data sharing between government departments.

The first thing you can do to prepare for these rule changes is to follow the current FIRB rules!

In fact, the Treasurer has given rule-breakers until 30 November to sell their properties before they’re potentially hit with these new penalties

Secondly, there may lending policy changes that come out of the Abbott Government’s draft laws. These changes (if any) haven’t come into effect yet so, in the meantime, get in touch with a mortgage broker that understands foreign investor policy.

Our brokers know which lenders favour non-residents looking to buy to let in Australia and we also understand the FIRB approval process.

Call 1300 889 743 or complete our free assessment form today.