New Foreign Investment Framework Now Operational

New rules governing Australia’s foreign investment framework came into force on 1 December, with several critical enhancements negotiated.

Following a 2014 parliamentary inquiry into foreign investment in residential real estate, the Federal Government earlier this year proposed significant changes to the operation of the FIRB framework.

These included heightened compliance measures with existing foreign investment rules, increased penalties for non-compliance and new fees for commercial and residential property purchases by foreign buyers.

The new rules are aimed at streamlining the regime to focus resources on the issues important to government.

While many of the enhancements to compliance mechanisms were broadly supported, other measures among the proposed changes were inconsistent with the findings of the parliamentary inquiry, which made it clear there was no foreign investment risk from commercial transactions, and these changes risked negatively impacting on residential housing supply.

Since the announcement of the initial package, government has consulted closely with industry and the final arrangements that came into force on December 1 now include a number of measures to modernise and streamline the foreign investment framework originally proposed. This ensures that the foreign investment laws are enforced and will provide Australia with a more robust foreign investment strategy that boosts the velocity of capital to drive the economy.

Key FIRB framework enhancements negotiated with government include:

• The FIRB changes now exclude applications for commercial transactions below $252 million (pegged to CPI) for office, industrial and commercial accommodation (instead of $55 million), or below $1.094 billion for foreign investors from the “agreement countries” – the US, New Zealand, Japan, Korea and Chile.
• Under the new framework, residential land is defined as “land on which there is at least one dwelling or the number of dwellings that could reasonably be built on that land is <10”.  This means that land not meeting those criteria, and also not defined as agricultural land, will be deemed commercial land. In this circumstance, land purchases by foreign persons up to the new threshold of $252 million will not be required to seek approval.
• Exemption Certificates will replace the Annual Programs currently in place and allow foreign persons or entities to pay a single fee for a program of land acquisitions, rather than a fee for each purchase. For residential land sales greater than 11 lots now defined as ‘commercial’, a flat fee of $25,000 is payable for a program of land purchases between $252 million and $1 billion. For a program of land purchases over $1 billion, a flat fee of $100,000 is payable. Exemption certificates can now extend beyond a 12-month validity period, to better align with developers’ acquisition programs.
• Foreign investors with interests less than 5 per cent are now excluded from calculation of the 40 per cent threshold, so many entities will now not be at risk of breaching the threshold.
• A practical error in the original rules for notifying Treasury on certain FIRB transactions has been rectified so that an entity no longer has to notify Treasury before a transaction takes place if it is unreasonable or impossible to do so. Notification can be done after the fact so there is no automatic compliance failure (nor penalty) if the rule is breached by a listed share trade.
• Existing investments will not be impacted – the FIRB has confirmed that extension of the “foreign persons” definition to “foreign governments” is prospective and existing foreign investor transactions will not be affected.

The government’s active approach to industry consultation ensures that the reforms should operate effectively without adversely impacting investment in Australia’s largest industry.