key takeaways
Background
One of the primary features of Australia’s foreign investment regime is that it requires foreign investors to obtain Foreign Investment Review Board (FIRB) approval (by way of “no objection notification” or “exemption certificate”) before proceeding with a proposed investment.
A significant fee is payable by foreign investors who lodge an application for FIRB approval. Such fees are calculated based on the value of the interest being acquired by the foreign investor.
In addition to FIRB application fees, foreign investors who acquired a residential dwelling after 9 May 2017 must pay an annual vacancy fee. The vacancy fee is payable by foreign investors in circumstances where the dwelling is not occupied, or genuinely available for rent (for a term of at least 30 days), for at least 183 days in a 12-month period.
A FIRB vacancy fee, if payable, will generally be equal to the FIRB application fee originally paid by the foreign investor to obtain approval to purchase the property.
FIRB Changes
On 10 December 2023, the Federal Government announced that it would be amending the existing FIRB fee regime to make three changes:
1. (Tripling of Foreign Investment Fees)
The first change is to triple application fees for the acquisition of residential land for established dwellings.
The effect of tripling residential application fees is illustrated in the table below:
Acquisition value of established dwelling | Current FIRB Fees to acquire an established dwelling | New FIRB Fees to acquire an established dwelling |
|---|---|---|
$1,000,000 or less | $14,100 | $42,300 |
$1,000,000 - $2,000,000 | $28,200 | $84,600 |
$2,000,000 - $3,000,000 | $56,400 | $169,200 |
$5,000,000 | $112,80 | $338,400 |
$20,000,000 | $535,800 | $1,607,400 |
$40,000,000 or more | $1,119,100 | $3,357,300 |
This substantial increase in FIRB fees aims to steer foreign buyers away from existing properties, intended to create a positive ripple effect on housing supply, job creation in the construction industry, and overall economic growth.
2. (Doubling of Vacancy Fees)
The second change is to double annual vacancy fees for all foreign owned dwellings that are purchased after 9 May 2017. This, together with the tripling of foreign investment fees means a six-fold increase in vacancy fees for future purchases of established dwellings.
The effect of doubling annual vacancy fees is illustrated in the table below:
Acquisition value of established dwelling | Previous annual vacancy fees for established dwellings (for land acquired between 1 January 2021 – 31 December 2023) | New annual vacancy fees for established dwellings (for land acquired between 1 January 2021 – 31 December 2023) | New annual vacancy fees for established dwellings (for land acquired after new/tripled application fees are introduced) |
|---|---|---|---|
$1,000,000 or less | $14,100 | $42,300 | $84,600 |
$1,000,000 - $2,000,000 | $28,200 | $84,600 | $169,20 |
$2,000,000 - $3,000,000 | $56,400 | $169,200 | $338,400 |
$5,000,000 | $112,80 | $338,400 | $676,80 |
$20,000,000 | $535,800 | $1,607,400 | $3,214,800 |
$40,000,000 or more | $1,119,100 | $3,357,300 | $6,714,600 |
The emphasis on vacant properties serves to encourage foreign investors to make their unused properties available to renters, contributing to the availability of housing for Australians. Unfortunately, it is anticipated that this tripling of fees across the full spectrum of residential land acquisitions will likely have an unintended stifling effect on large subdivision development.
3. (BTR Application Fees Cut)
FIRB approvals for BTR projects involve substantial complexities, costs, and time investments, posing challenges for developers and project acquirers. Historically, developers have encountered challenges in realising their investments through sales to foreign investors due to the deterrent of high FIRB fees associated with residential land. This deterrent adversely impacts the appeal of new housing projects, especially for offshore institutional investors.
Acknowledging these challenges (and recognising the role of foreign investment in economic success) the third change announced by the Federal Government is to cut application fees for foreign investment in BTR projects, aligning them with commercial land rates.
This revision aims to foster investment in the sector by making BTR projects more financially viable for developers and attractive to foreign investors. For instance, as of 14 December 2023, any BTR project acquisition with consideration of up to $50 million will only incur a FIRB application fee of $14,100.
This reduction, applicable to all types of land, aims to make the foreign investment framework consistent and predictable for BTR investors.
Strengthening Compliance Measures
In addition to the changes to the foreign investment fee regime, the Federal Government has also announced enhancements to the Australian Taxation Office's (ATO) compliance regime to ensure foreign investors continue complying with their obligations under the FIRB rules.
While the Government's announcement lacks specifics about the nature of these changes, it suggests a potential uptick in the issuance of infringement notices and increased audit activity by the ATO.
Conclusion
Given the tripling of application fees and the doubling of vacancy fees for established residential premises, foreign investors (including developers eyeing redevelopment projects) should thoroughly assess the substantial transaction costs and potential ongoing holding expenses before committing to an acquisition of established dwellings.
how can mcw help?
If you are a foreign investor navigating these changes or seeking advice on strategic investment, our experienced team at McInnes Wilson Lawyers is here to assist you.
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