Foreign investment rules tightened to stop “over-heating”

By Bob Wilson, 27th July 2010

Tough new measures will in future allow foreign investors to buy Australian residential property only if that investment adds to the housing stock.

Another important change ensures that established properties bought by temporary residents can only be for their use while living in Australia.

The Federal Government made strategic changes to rules governing foreign investment in residential property following concerns raised at an industry level and taken up by national media.

National valuation advisory firm Opteon says in its June Outlook newsletter it had previously raised concerns about the prospect of foreign investment putting heat on the property market in certain locations. Opteon flagged the eastern suburbs of Melbourne as an area of concern. (Incidentally, the Reserve Bank of Australia noted Opteon's comments and asked the firm to prepare a summary of the key issues.)

As a result, and also perhaps as a consequence of national media pursuing the issues and calling for reforms, Assistant Treasurer Nick Sherry announced a major tightening of foreign investment rules as they apply to residential real estate. The reforms came with a package of tougher penalties for infringements as well as more stringent compliance, monitoring and enforcement measures.

The changes will bring temporary residents seeking to buy an existing property under the scrutiny of the Foreign Investment Review Board (FIRB), which previously only considered transactions by foreign non-residents.

Even when temporary residents have their investments approved, they will have to sell their properties when leaving the country. Where the temporary resident has bought undeveloped land, the investor will have to start construction on the land within 24 months or have the land compulsorily sold.

Opteon's article on the changes ("The heat is on for foreign investors") goes on to discuss the tough new civil penalties and data-matching that will be used to catch those breaching the new rules.

For example, the government plans a special penalty to recapture any capital gains made through an illegal purchase and sale of a property. Currently, the Foreign Acquisitions and Takeovers Act contains only a criminal penalty regime, but this will be broadened to include a comprehensive civil penalties regime.

This will include sanctions for buyers, sellers and agents, an explicit compulsory divestment requirement (where land has been bought in breach of the new real estate regime), and an additional penalty equivalent to the capital gain made by the breaching purchaser at the time of the forced sale.

The FIRB plans to enforce the new rules with three-way data-matching using FIRB's records, State and Territory lands and property office transactional data and the Commonwealth Department of Immigration and Citizenship visa status data. FIRB is also working on a Memorandum of Understanding with the Director of Public Prosecutions aimed at securing "improved enforcement outcomes".

ENDS