Review of the current regulatory and tax landscape for foreign investors

Articles Written by Marcus Clark (Partner), Reynah Tang AM (Partner), David Colenso (Consultant)

Key takeaways

There has been a raft of reforms to Australia’s foreign investment framework over the last 12 months. The Commonwealth Government has introduced legislation which is intended to bolster the integrity of the foreign investment framework. In summary, the reforms have seen the introduction of application fees, increased penalties for non-compliance, increased monitoring by the Australian Taxation Office (ATO) and lower thresholds for agricultural purchases. In addition to Commonwealth Government changes to the foreign investment laws, Queensland, New South Wales and Victoria have introduced stamp duty and land tax surcharges on foreign owners of Australian residential property.

These changes reflect increased scrutiny of foreign investment in Australia, following media, political and community pressure. The Commonwealth Government is treading a fine line between encouraging investment in certain sectors and balancing that with strengthening the integrity of the foreign investment framework. The ever present “national interest test” remains a cornerstone of the system. Further, obtaining a satisfactory FIRB outcome will always require skill, planning, judgement and a detailed knowledge of the FIRB and tax systems.

1. Application Fees

The administration of the foreign investment laws in Australia is now partially funded by application fees imposed on all foreign investment applications.

Since 1 December 2015, applicants for foreign investment approval have been required to pay a fee before their application is processed. The application fees range from $5,000 to $101,500 depending on the type of application and the value of the acquisition. For example, an application to acquire an interest in residential land valued at up to $1 million attracts a fee of $5,000. For an interest over $1 million the fee increases to $10,100 plus $10,100 for each additional $1 million in property value. Business acquisitions attract a fee of $25,300 increasing to $101,500 where the value of the investment is greater than $1 billion.

2. Penalties

The reforms introduce stricter and additional penalties for breach of Australia’s foreign investment rules. The government has increased the existing criminal penalties and introduced new civil financial penalties for breaches of foreign investment rules. The penalties range up to $135,000 for individuals and up to $675,000 for companies. In recent times, there have been a number of divestment orders made by the Treasurer, albeit limited to residential land.

3. ATO Monitoring

The ATO has been handed responsibility for assessing foreign investment applications relating to residential land. Further, in February 2016, the Commonwealth Government announced that in applying the “national interest test” to foreign investment applications, it will generally require investors to satisfy a series of tax compliance and disclosure obligations relating to the investor and its associates. Foreign investors will need to consider which entities fall into their “associate” group, which is taken from the tax law and is extremely broad.

As a result of these changes, the ATO has increased its prominence as a key stakeholder in the foreign investment approval process. Foreign investment law compliance is joined with tax compliance, so assessing and managing tax risk is now a pivotal consideration when planning a foreign investment in Australia. The Foreign Investment Review Board (FIRB), in conjunction with the ATO, will not simply look at whether there will be compliance with Australia’s tax laws, but will also examine the impact that the structure of the acquisition may have on tax receipts over the life of the investment. High gearing levels, aggressive transfer pricing positions and the use of entities located in tax havens are examples of matters than may attract additional attention.

The Government’s measures include standard conditions which may be imposed for an application to not be against the “national interest test”.

The standard conditions that can be imposed are obligations to:

  • comply with Australia’s tax laws, including paying any outstanding taxes;
  • provide the ATO with any information requested by the ATO in relation to the transaction;
  • notify the ATO of any material transactions with related offshore parties that may be subject to the transfer pricing rules or anti-avoidance tax rules; and
  • provide an annual report to FIRB on compliance with the tax conditions.

Depending on the circumstances of the foreign investor and the particular investment being made, there are additional conditions which may be imposed where the ATO has identified a particular tax risk. Those conditions may include a requirement that the foreign person is required to:

  • engage in good faith with the ATO on issues raised to resolve any tax issues; or
  • provide information to the ATO on a periodic basis including giving details of forecast tax payable.

Overall, these tax conditions represent a much closer formal alignment of Australia’s national interest assessment criteria under the foreign investment regime and Australia’s tax laws. In recent years, tax has been an increasingly important consideration in FIRB’s assessment of whether acquisitions pass the “national interest test”. The closer alignment of tax considerations with FIRB’s deliberations was boosted by the appointment of the former Commissioner of Taxation, Michael D’Ascenzo as a member of FIRB in 2013. Since then, the ATO has assumed greater responsibility for administering certain aspects of Australia’s foreign investment regime, such as the Agricultural Land Register and residential land acquisitions.

The upshot is that the new laws will require foreign investors to consider tax issues in a more formal way than they did previously. The key points for deals involving FIRB approval are now that:

  • foreign investors will need to think carefully about the best way to approach FIRB to address these issues and engage productively with the ATO prior to submitting any application; and
  • as a result, it will inevitably extend the approval process and FIRB applications will take longer to process.

Another unseen consequence of the reforms is that, although the new rules apply prospectively, they can potentially apply to foreign investors with existing Australian holdings as a result of a reorganisation of the corporate ownership structure. In some cases, this may lead to the application of the new tax conditions.

4. Agriculture

The threshold for agricultural investment was reduced from $252 million (non-cumulative) to $15 million (cumulative) on 1 March 2015. Consequently, foreign investors are required to obtain approval for any proposed investment in agricultural land where the cumulative value of agricultural land owned by the investor is $15 million or more (including the proposed investment).

The FIRB reforms also introduce a $55 million threshold for direct investment in agribusiness. The definition of “agribusiness” will capture primary production businesses as well as meat, seafood, dairy, fruit and vegetable processing and grain, sugar and oil manufacturing.

5. Non-resident withholding tax regime

From 1 July 2016, a new withholding tax regime applies to purchases of certain types of Australian assets. It will have an impact on both vendors and purchasers of affected assets and affects transactions that involve the sale or acquisition of:

  • shares in a land rich company or units in a land rich trust that, directly or indirectly, holds substantial Australian real property;
  • real property in Australia (including leasehold interests);
  • mining rights over Australian land.

For transactions caught by the new rules, the purchaser will be required to pay 10% of the purchase price (subject to some adjustments) to the ATO at or before settlement.

The 10% withholding tax will not apply in certain situations, including where:

  • a vendor provides an ATO compliance certificate (in respect of direct real property interests) or a qualifying declaration (in respect of shares or units in a land rich entity) that it is an Australian tax resident;
  • a vendor provides a qualifying declaration that the shares or units are not “indirect Australian real property interests”; or
  • the transaction is on an approved stock exchange.

In some situations, a variation may be sought from the ATO to reduce the withholding tax rate below 10%.

6. New duty and land tax surcharges for foreign buyers of residential land

The eastern seaboard states of Queensland, New South Wales and Victoria have all introduced a stamp duty surcharge on foreign persons purchasing residential real estate.

Duty changes

Land tax changes

And from 1 January 2017, New South Wales and Victoria will also impose an additional land tax surcharge on foreign owners.

The use by the New South Wales legislation of the definition of foreign person under the Foreign Acquisitions and Takeovers Act 1975 creates some pernicious results for home owners who are not Australian or New Zealand citizens. It means that any such home owner who is not present in Australia on 31 December of a particular year, or is present in Australia on that day but has not been so present for at least 200 days of that year, will be a foreign person and thus liable for land tax on his or her home even if it is used as his or her principal place of residence.

As a result, purchasers of residential land in New South Wales, Victoria and Queensland should consider carefully whether they are “foreign” and if so, whether the surcharge will apply to the land or interest being acquired. In Queensland and Victoria, purchasers should also consider whether they are eligible for a discretionary exemption from the Commissioner. In Victoria for example, the Treasurer and Commissioner have a discretion to exempt persons where the activities of the entities they control are involved in the development or redevelopment of property that adds to the supply of housing stock in Victoria. New South Wales does not have a similar exemption. While Queensland does not have a specific discretion in its legislation, the Commissioner of State Revenue has published rulings which provide guidelines on ex gratia relief from the additional foreign acquirer duty. Five conditions must be satisfied:

  1. the foreign entity undertaking the transaction must be ‘Australian-based’;
  2. the foreign entity must comply with any FIRB requirements in relation to the land;
  3. the foreign entity must have met other regulatory requirements including complying with the Corporations Act 2001 and any Queensland taxation laws;
  4. the development must be significant either because the development itself is significant or the developer has that status. Significant development status requires that the land that is subject to the transaction is either:
    • acquired by a foreign entity for the purpose of undertaking a development or redevelopment of 50 or more residential lots (the ‘transaction lot test’) or;
    • to be developed or redeveloped into less than 50 residential lots but where it will make a significant contribution to the region in which it is occurring. This ”regional significance test” is not targeted at metropolitan areas or urban infill developments but is focused on regional developments.
  5. the foreign entity must primarily employ or contract for services and materials from Australian employees, building contractors and suppliers to engage in the development of land under the relevant transaction.

7. What do the changes mean?

These changes reflect increased scrutiny of foreign investment in Australia, following media, political and community pressure. The Commonwealth Government is treading a fine line between encouraging investment in certain sectors and balancing that with strengthening the integrity of the foreign investment framework. The ever present “national interest test” remains a cornerstone of the system. Further, obtaining a satisfactory FIRB outcome will always require skill, planning, judgement and a detailed knowledge of the FIRB and tax systems.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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