In this Alert, Senior Associate Lea Fua and Solicitor Helen Liang discuss the ongoing implications of new foreign investment policy changes in Australia.
The facts
- In October 2014, the luxury Sydney home called Villa del Mare was acquired by Golden Fast Foods Pty Ltd, an Australian company that is ultimately owned by Hong Kong listed entity, Evergrande Real Estate Group for $39 million;
- For the purposes of the Foreign Acquisitions and Takeovers Act (FATA), Golden Fast Foods is a foreign person as it is ultimately owned by a foreign person being Evergrande;
- Under Australia's foreign investments rules in relation to the acquisition of residential property, non-resident foreign persons cannot buy established dwellings as homes or investments;
- On 4 March, Treasurer Joe Hockey ordered the sale of Villa del Mare within 90 days or face possible prosecution by the Commonwealth Director of Public Prosecutions.
The action by the Treasurer follows the release by the government of proposed changes to the foreign investment rules which, amongst other things, will introduce application fees and strengthen the penalties against non-compliance with the FATA by foreign persons and third parties. See our alert on the proposed changes released on 6 March 2015.
The divestment order against Golden Fast Foods is seen as a signal that the government is tightening its scrutiny into foreign investment laws. Since the announcement by the Treasurer of the divestment order, there have been media reports that there is a pipeline of investigations by FIRB into possible non-compliant acquisitions by foreign persons of residential properties.
Under current foreign investment rules, Golden Fast Foods will be able to keep proceeds from the forced sale. However, the government is proposing to change the foreign investment rules to introduce new significant civil penalties where a non-resident foreign investor acquires an established dwelling, and a temporary resident acquires more than one established property. In addition to being forced to sell the property, the proposed maximum penalty would be the greater of:
- the capital gain made on the divestment of the property;
- 25% of the purchase price; or
- 25% of the market value of the property.
Under the government's proposed amendments to the foreign investment rules, criminal penalties will apply to third parties such as real estate agents, legal and financial advisors or others who knowingly help foreign investors to breach the foreign investment rules.
Under Australia's foreign investment rules, foreign investors must notify FIRB and obtain approval in order to acquire residential property in Australia. In this respect:
- non-resident foreign investors can only acquire new dwellings and are not able to acquire established dwellings;
- temporary residents:
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- can acquire an established dwelling as their principal place of residence while living in Australia but they must sell this property when they leave Australia; and
- are not able to acquire established dwellings for investment or holidays purposes.
Foreign investors do not need to obtain FIRB approval where they are acquiring an apartment from a property developer who has been granted an advanced off-the-plan certificate by FIRB. Government is proposing to change the rules by imposing a limit per single investor of $3 million for the purchase of apartments in any single development. If a foreign investor wishes to acquire an apartment with a value in excess of $3 million, they would need to seek separate approval and could not rely on the property developer's advanced off-the-plan certificate from FIRB.
The robust course of action that the Treasurer has adopted:
- should encourage compliance with Australia's foreign investment laws; and
- critically underscores the high cost facing foreign investors if they do not obtain proper advice before acquiring any assets in Australia.
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