New Laws Regulating Foreign Investment In Australia: Investments In Real Estate.

26 November, 2015

 

This alert focuses on the new laws for foreign investment in Australian real estate under the amendments to the Foreign Acquisitions and Takeovers Act 1975 (Act) and draft regulations1, which are scheduled to take effect from 1 December 2015.

 

Who is a foreign person?

 

The concept of a "foreign person" remains largely the same.

 

However, key changes are:

 

• the definition now extends to foreign governments, representing a codification of what was previously Australia's foreign investment policy. The definition of "foreign government investor" has also been amended, and includes foreign governments and any corporation, trust or partnership in which a foreign government has a 20% interest or multiple foreign governments have an aggregate 40% interest. As previously, the monetary thresholds under the new regime do not apply to investment by foreign government investors, which means that all foreign government investors must obtain prior approval before acquiring an interest in land, regardless of its value; and
• previously a corporation (or trust) was a foreign person if at least 15% of its shares or voting power (or 15% of the income or property of the trust) was held by a foreign person and its associates (the "substantial interest" threshold). This has increased to 20% under the new regime. The "aggregate substantial interest" threshold for interests held by multiple foreign persons and their associates remains at 40%.

 

What interests in land are caught?

 

The new legislation introduces a definition of "Australian land" which includes agricultural land, commercial land, residential land or a mining or production tenement, in place of the previous definitions of "Australian urban land" and "Australian rural land". Whilst the new regime is broadly unchanged in terms of the nature of transactions and interests to be notified, material changes have occurred in respect of heritage listed property, pre-approval for off-the-plan developments and acquisitions of interests in land-owning corporations and trusts.

 

• Different treatment of some properties
• Heritage listed property
• Developed commercial property that is heritage listed was previously subject to a lower non-indexed threshold of $5 million.2 This threshold no longer applies and such property is simply treated in the same way as developed commercial real estate. 

 

Pre-approval for off-the-plan sales

 

A developer may apply for a residential development "exemption certificate" if they propose to acquire or have acquired land and propose to dispose to foreign persons new dwellings that will be or have been built on that land. This is similar to the previous "advanced off-the-plan approval" regime.

 

The exemption certificate will specify the developer and the interest to which the certificate relates and will allow foreign purchasers to acquire dwellings in the development without the need for their own approval. The following restrictions apply:

 

• the new dwellings must be within a development of 100 or more residences (as per the previous regime); and
• a single foreign investor may only rely on the exemption certificate for acquisitions of up to $3 million in any one development. A foreign investor wishing to purchase apartments over this value will need to seek individual approval.

 

The development must be advertised both within Australia and overseas.

 

There are now significant application fees payable for the exemption certificate which did not apply previously, and these fees increase depending on the number of apartments in the development sold to foreign persons. The fees are:

 

• an application fee of $25,000; and
• if during a six month period after the exemption certificate is granted (and every six month period after it) one or more new dwellings are sold, an additional fee of:
  • o for each sale that is $1,000,000 or less, $5,000; and
  • o for each sale over $1,000,000, $10,000 for each $1,000,000 of the acquisition price (not including any parts that are less than $1,000,000).

 

Acquisitions in Australian land corporations and Australian land trusts

 

Previously acquisitions of interests in Australian urban land corporations and urban land trusts (that is corporations or trusts where Australian property holdings exceed 50% of their assets) required approval in circumstances where direct investment in the assets would have been exempt. For instance, where a company owned property below the threshold value for FIRB approval, the acquisition of the shares in the company required FIRB approval whereas the acquisition of the property would have been exempt.

 

Under the new regime, these companies and trusts are now called "Australian land corporations" and "Australian land trusts". The acquisition thresholds for direct investment now also apply to the acquisition of an interest in the company or trust (other than an agricultural land corporation or agricultural land trust) provided that the total value of interests in residential land and commercial land that is vacant which are held by that company or trust is less than 10% of the total value of its assets.

 

Annual program certificates

 

The new section 58 "exemption certificates" allow a foreign investor to obtain advance approval for a 12 month program of acquisitions of Australian urban land (relieving them of the requirement to notify and seek FIRB approval for each individual acquisition within that period). This is consistent with the previous annual program certificate regime, and applies to all land and investor types. However, the discretionary and case by case nature of the exemption which applied under the previous regime has not been altered. Both the legislation and the explanatory statements issued in connection with it make it clear that FIRB will be under no obligation to issue an exemption certificate when it is applied for.

 

Passive investments in trusts and companies

 

The new regime has clarified some anomalies in the previous regime and makes it clear that a passive investment in Australian land that is an acquisition of an interest of less than 10% in shares or units in a listed land entity (including an Australian land corporation or Australian land trust) or an acquisition of an interest of less than 5% in shares or units in an unlisted land entity (including an Australian land corporation or Australian land trust) does not require FIRB approval. 

 

Raised thresholds

 

As with the previous regime, acquisitions of certain interests below specified thresholds do not require approval. The thresholds for which FIRB approval is not required have been raised in most circumstances except in the case of vacant and residential land. The table below summarises the changes. 

 

Under the previous regime entering into leases for a term in excess of five years did not require FIRB approval where the premises was available for immediate occupation for use in the conduct of the tenant's business. This exemption is not contained in the new regime.

 

Fees

 

Under the new regime application fees are payable to FIRB, which vary depending on the nature of the property being acquired. The fees are: 

 

 

Additionally, investors should note that, until the applicable fee is paid (or waived), the notice is taken not to have been given and the decision period which FIRB has to consider the application will not start. Accordingly, failure to pay the applicable fee will adversely impact deal timeframes.

 

Enforcement and penalty regime

 

Under the previous regime there was no civil penalty for infringements. The new regime not only increases the criminal penalties but also introduces a civil penalty regime that can include an infringement notice being issued and/or a civil penalty being charged.

 

Criminal penalties can include:

 

• for individuals – fines of up to $135,000 or three years' imprisonment; and
• for companies – fines of up to $675,000.

 

Civil penalties vary depending upon the offence and can include the following:

 

• where a foreign person acquires property without approval where approval is likely to have been granted:
  • o a civil penalty being the greater of 10% of the purchase price or market value in addition to the relevant application fee;
  • o if the person voluntarily notifies FIRB of the breach, an infringement notice of up to $2,160 for individuals and $10,800 for companies plus the relevant application fee; or
  • otherwise an infringement notice of up to $10,800 for individuals and $54,000 for companies plus the relevant application fee; or
• where a foreign person acquires property without approval where approval is unlikely to have been granted (e.g. the acquisition of an existing dwelling) or where there has been approval subject to a condition requiring commencement of construction and it has not commenced, the civil penalty is quite significant: the greatest of the capital gain made on the property, 25% of the price and 25% of its market value.

 

A civil and criminal penalty has also been introduced for the advanced off-the-plan exemption certificate for a failure to market apartments in Australia, being up to $135,000 or three years' imprisonment for individuals and up to $675,000 for companies.

 

These civil and criminal penalties potentially extend to third parties such as real estate agents, accountants and company officers where a third party knowingly assists a foreign investor to breach the law.

Additionally, unpaid civil penalties may now result in a charge against the land (in specified circumstances) that will need to be cleared before transfer of the land can be effected, similar to a charge for unpaid land tax.

 

Footnote

 

1. A number of important aspects of the new regime will be determined by regulations, which are currently in draft form. This alert assumes that the regulations will be passed as drafted.

2. All dollar figures in this alert refer to Australian dollars.
3. Most transaction thresholds are indexed annually on 1 January.
4. Fees are indexed annually on 1 July by reference to the consumer price index. 

 

 

For further information, please contact:

 

Sebastian Busa, Partner, Baker & McKenzie

sebastian.busa@bakermckenzie.com