Parliament acts on dodgy foreign property buying

By Leith van Onselen

The Parliamentary Committee examining foreign investment has released its report, and if I had to sum it up in one word it would be “transparency”.

Here is a summary of the recommendations:

  • Retaining the current framework applying to foreign purchases of Australian housing to encourage foreign investment in new dwellings and increase housing supply.
  • Improving the internal processes at Treasury and the Foreign Investment Review Board (FIRB) and removing barriers to enable adequate audit, compliance, and enforcement of the foreign investment framework.
  • Applying a modest administrative fee to the current screening of foreign purchases of residential real estate to better resource FIRB. Fees collected should be hypothecated to the Treasury’s Foreign Investment and Trade Policy Division for the purpose of funding audit, compliance and enforcement activities.
  • Introduction of a civil penalty regime for breaches of the foreign investment framework. Pecuniary penalty orders imposed under this penalty regime should be calculated as a percentage of the property value to act as an effective deterrent.
  • Requiring that penalties now apply to all third parties who knowingly assist a foreign investor to breach the framework.
  • Requiring that any capital gains from the sale of an illegally held property be forfeited to the Government. Funds collected by this measure should be hypothecated to the Treasury’s Foreign Investment and Trade Policy Division for the purpose of funding audit, compliance and enforcement activities.
  • Amending Australia’s Foreign Investment Policy to explicitly require a temporary resident to divest an established property within three months if it ceases to be their primary residence.
  • In conjunction with the States and Territories, establishing a national register of land title transfers that records the citizenship and residency status of all purchasers of Australian real estate. This information should be accessible by relevant agencies from a single database.
  • Establishing an alert system for the expiry of temporary visas that can be used by the Treasury to issue property divestment orders in cases of non-compliance. This includes amending the Migration Act so that the Department of Immigration must inform FIRB when a temporary resident departs Australia upon expiry of their visa. It will also require establishing effective and timely internal processes at the Treasury to receive and cross-check this information against its property databases to screen for compliance with the foreign investment framework.
  • Amending the Foreign Acquisitions and Takeovers Act 1975 to provide that residential property sold under off-the-plan certificates that is marketed for sale overseas, must be marketed in Australia for the same period of time. Breaches of this requirement should be subject to sanctions under the Act ranging from fines to the cancellation of a sale.
  • In light of the expected finalisation of the statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 in early 2015, the Committee recommends that the Government consider the purchase of residential property by foreign investors as a possible area of investigation when considering amendments to the legislation.
  • The Committee recommends that Treasury’s Foreign Investment and Trade Policy Division make greater use of the databases held by AUSTRAC, and also of other relevant Federal and State Government databases, to assist the Foreign Investment Review Board in its duties and responsibilities.

As you can see, the recommendations would address virtually all flaws in Australia’s foreign investment monitoring/surveillance regime. In fact, if I had to devise a Christmas wishlist, this would be it, with the only addition being banning all sales of pre-existing dwellings to temporary residents.

In delivering the Committee’s report, Liberal chair, Kelly O’Dwyer noted:

“The Committee has undertaken a thorough review of the foreign investment framework as it applies to residential real estate. We have found that the framework itself is appropriate and strikes the right balance in terms of encouraging beneficial foreign investment in the housing market, however its application is severely lacking.”

“I regard the current internal processes at the Treasury and FIRB as a systems failure. Most concerning is that sanctions seem to be virtually non-existent. There have been no prosecutions since 2006 and no divestment orders since 2007. Suggestions by officials, that this is due to complete compliance with the rules is simply not credible. The data on foreign purchases of Australian houses and apartments is inadequate, making policy evaluations very difficult”…

“Australians must have confidence that the rules, including those that apply to existing homes, are being enforced. Our inquiry revealed, that as it stands today, they could not have that confidence.”

“This report makes 12 common sense recommendations to Government to enable proper enforcement of the existing framework for foreign investment in Australian housing; provide extra resources to do so; and accurately measure the impact of foreign investment by collecting accurate and timely data. These practical measures are critical in order to ensure that foreign investment in Australian housing continues to serve our national interest for future decades.”

Well done Ms O’Dwyer. You and the Committee have nailed the recommendations. And it is now up to the Government to implement them in full and put an end to foreigners buying-up our pre-existing housing stock, inflating housing costs, and shafting first time buyers.

For too long, Australian property has been used as a safe haven for dodgy Chinese money. And the transparency and enforcement that these reforms bring will go a long way to prevent foreign money from being laundered through Australian houses.

[email protected]

Leith van Onselen
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Comments

  1. just so we get what the implications of the size of this are

    According to FIRB statistics, in the first 9 months of this financial year, FIRB approved foreign investment into residential property of around $24.8 billion, 44 per cent higher than the $17.2 billion approved during all of 2012-13. Much of this investment is concentrated in the Melbourne and Sydney markets. Most of the increase is attributable to proposed investment in new property, which at $19.3 billion for the first 9 months of 2013-14 is 79% higher than 2012-13. The total number of established property approvals for the first 9 months of 2013-14 is 5,755 compared to 5,101 for 2012-13. p.iv

    there is some snow in the recommendations vis impact on the market

    Conclusion (p95)
    4.52 The committee is acutely aware that many in the community are struggling to afford a first home in the face of rising house prices. There are many factors involved in the strength of current property prices in Australia, some of which have been touched on in this report, but they are beyond the scope of this inquiry. Of interest in this regard, affordable housing is currently the subject of an inquiry by the Senate Economics References Committee which is due to report its findings by 27 November 2014.

    4.53 The focus of this inquiry is whether foreign investment in Australia’s residential property market brings benefits to the housing market. The committee is satisfied that it does and that it is a vital component of this sector of the economy. Importantly, the committee is also satisfied from the evidence received that foreign investment is not causing the market distortions that have been advocated in some quarters, particularly for first home buyers. This is because foreign investment levels are not large enough to do so overall and because overseas buyers mainly operate at a different price bracket from first home buyers and buy different types of properties.

    4.54 Although foreign buyers represent only a small percentage of the housing market, they are vitally important to the continuing development of this sector. The housing supply issues that have been ongoing in Australia would worsen if foreign investment was curtailed. One of the likely outcomes of any restrictions on foreign buyers could therefore be further price increases – the opposite to what some in the community believe would occur if foreign investment was further restricted.

    4.55 The issue of occupancy, in particular concerns around foreign owned properties being left vacant, was not dealt with in any great detail during this inquiry as the committee did not receive any hard evidence that this occurs with any regularity. The committee is cognisant, however, that this is a concern among many in the community and there are questions that may need to be addressed on this issue. The establishment of a property register may shed some light on this and help determine whether further investigation is warranted at a future point in time.

    4.56 Another suggestion by some in evidence to the committee is that some new apartment developments in Australia are not being built to the usual standards for Australian occupancy, but rather are specifically being built for the overseas market. The committee notes in this regard that planning laws are set by State and Territory governments and that all buildings, commercial and residential, need to meet these standards. Any diminution of building standards is a matter that should be addressed by State and Territory governments.

    4.57 As discussed in Chapters 2 and 3, the committee regards the current regulations around foreign investment in residential real estate to be appropriate. Foreign investment is needed for future residential developments to proceed and to therefore increase Australia’s housing stock. However, as also discussed in Chapters 2 and 3, the laws need to be properly enforced and foreign investments must be trackable and measurable. This will increase public confidence in the current framework and enable proper oversight of its effectiveness by policy makers.

    • Strange Economics

      Excellent work and report by the O’Dwyer committee.
      Shows the benefit of Senate committees and clear thinking from politicians.
      Though agree with all the recommendations – would be best to add “banning of all sales of existing property to temporary residents” as it was before Rudd changed the rules 5 years ago – this does nothing to add to supply.
      For example why would a foreign student needs to buy an existing house for 3 years rather than rent – only makes sense as a speculative investment. Could be worth $ 100 to 300K removed off prices of 500 to 1.5 million in Melbourne south and East as removes the marginal highest foreign buyer.
      If only it was done 3 years ago. Hope the FIRE lobby doesn’t get in to stop action or water it all down (or claim its all too late).

    • A couple of unrelated points

      1. The 3 months clause to divest interest in a property seems a bit onerous. I would not like to be in put that position myself.

      2. Has anyone mentioned foreign ownership using a company structure during the deliberations? Using a company structure for the purchase looks like a quick solution for foreigners wanting to purchase under a new regime.

  2. some issues for the ALParatchiks to address….

    It would seem to me that the report is about sheeting public anger on the issue to the ALP without touching the volume or the underlying look away approach to foreign investment in existing real estate.

    Commitment to the Foreign Investment Framework

    These practical measures will send a strong message about Australia’s commitment to its foreign investment framework in practice, as well as in words.

    This is important. Too often the signals in recent years have been in the opposite direction. For instance, in 2008, then Assistant Treasurer, the Hon Chris Bowen MP, removed the requirement for temporary residents to notify FIRB of all residential purchases.4 This rule change allowed temporary residents to purchase existing homes without notifying FIRB.

    Perhaps recognising that this neutered FIRB’s capacity to monitor compliance with the “sale on departure” condition under our foreign investment framework, his successor, Senator the Hon Nick Sherry, reversed the change and announced a range of proposed measures to tighten monitoring and enforcement in the lead up to the 2010 election. Some of them are not dissimilar to those being recommended by the Committee. Regrettably, most of those announced measures were not pursued by his successor, the Hon Bill Shorten MP, nor any of the subsequent Assistant Treasurers in the last Government.

    • Absolutely right Gunna. It is all about dotting “i”s and crossing “t”s. The market distortions are disregarded.

      After all, according to the committee they don’t exist.

    • How about an investigation into Krudd and co and his and his ministers family members and friends who all benefited from the decisions they made regarding this in the first place.

      Maybe laying bare the ugly truths of it all and creating an actual transparent framework where we can see all the conflicts of interest that apply to political decision making would benefit us the voters.

      • +10000000000000000

        What about Gillard’s other half? Hairdresser come apartment sales guy, coincidentally at the same time as foreign ownership laws were relaxed. What was his declared income during the subsequent period??

  3. Response from Kelly O’Dwyer received about 30 minutes ago…..

    Dear Bob,

    Earlier this year the Treasurer, the Hon Joe Hockey MP, invited the House of Representatives Standing Committee on Economics to conduct an inquiry into Australia’s foreign investment framework as it applies to residential real estate.

    As Chairman of the Committee I am pleased to inform you that I tabled the report in Parliament today. The Committee has conducted a thorough investigation, seeking submissions from the public, in order to provide a holistic approach to examining whether the current policy settings are delivering the best outcomes for Australia.

    To access a complete version of the report please click here.

    A copy of my Chairman’s Foreword and my media release are also available for your information.

    Thank you for your strong interest in the inquiry.

    Yours sincerely,

    Kelly

    ** You already have the link to the report above, the following for Kelly’s Chairmans foreword and media release here;

    http://www.kellyodwyer.com.au/assets/20141126-Foreward-Only.pdf

    http://www.kellyodwyer.com.au/assets/20141127-FINAL-Media-Release-Foreign-Investment-Report-Tabling.pdf

      • How have the LNP gone at getting laws passed so far?

        Just needs ALP to oppose because opposition and a couple of cross benchers to oppose because either crazy or pre-occupation with irrelevant local constituency pet-issue.

    • Exactly what I was going to post.

      Solid work by Kelly O’Dwyer, but the cynic (realist?) in me wonders whether any of these recommendations will see the light of day.

      The last thing the politburo wants to do is water down housing. Parliamentary enquiries create the appearance of concern without actually having to act on the recommendations. Treasury would have been well aware of the FIRB’s lack of enforcement and visibility over foreign ownership and yet nothing was done.

    • arescarti42MEMBER

      Given that the inquiry was initiated by the Government, and chaired by a Government MP, I’m optimistic that we may see some action.

      Having unearthed all the problems and come up with the solutions, it’d be a pretty bad look if they subsequently decided to do nothing about it.

      The fact they might even save a few million by funding the FIRB through forced divestments and application fees is pretty appealing as well.

      • Mining BoganMEMBER

        Since when has this lot cared about a bad look?

        Nothing will be done. Selling off Oz is in their DNA.

  4. The recommendations look fairly sensible. Unfortunately the noises Ed Husic is making seem to indicate the ALP will not be helpful.

    • The ALP will probably play the race card can call the government a bunch of racists for actually seeking to enforce the existing rules around foreign ownership of existing property.

      What a disgrace the ALP has become

      • I bet they won’t play the race card when your local Chinese agent refuses to present your offer to a local vendor in favour of a foreign buyer, who made an offer $60K lower than yours. Yes the vendor did find out about it.

      • Not me Angry, a mate. Something was real fishy when they made an offer at a reasonable figure above the quoted price. It all went quiet, agent wouldn’t return calls, so they used the S32 details and contacted the owner, who never received the offer. It turns out the Chinese agent was telling the vendor the best they could get was $60K under mate’s quote and it was about to be sold. No point complaining to CAV, they’ll only direct you to the REIV who will file it in wastepaper.

    • The stupidity of this whole exercise is that the most effective fix does not require legislative change (bipartisan support)….just the political will to enforce the existing law.

      • It isn’t so much political as more a matter of competence. This situation demonstrates utter incompetence on the part of FIRB. Government is full of incompetent idiots. I have run into a bunch of them. FIRB was being run by people who couldn’t do the job.

        You need a regulator who actually regulates, the systems to support that regulation, and an appropriate penalty regime.

        FIRB fundamentally failed to regulate, failed to implement even the most rudimentary systems to support its regulation, and the penalty regime was insufficient.

        The recommendations will go a long way to addressing these failures. Now it is a matter of implementation by government which will need to be accompanied by a widespread clean out at FIRB.

      • The Treasurer fundamentally failed to regulate, failed to implement even the most rudimentary systems to support the regulation, and the penalty regime was insufficient.

        FIFY

        As per the Act.

        For example:

        Section 21A
        “(2) Where the Treasurer is satisfied that:
        (a) a foreign person proposes to acquire an interest in Australian urban land; and
        (b) the proposed acquisition would be contrary to the national interest;
        the Treasurer may make an order prohibiting the proposed acquisition.”

        Note that power to prohibit purchase is only available to the Treasurer, unless the Treasurer has specifically delegated otherwise,

        FIRB are not recognised by the act – they are irrelevant to the discussion.

        If they wanted to fix the problem, or even identify it, would they have convened an enquiry?

      • Yes. And that is why Joe asked Kelly to conduct this inquiry. To figure out what was going on..

        FIRB isn’t a statutory agency in its own right but a specialist part of Treasury set up to advise the minister who is the statutory decision maker.

        In practice the minister doesn’t involve himself in day to day administrative functions, such as implementing registers, conducting investigations, etc. The minister relies on the advice of FIRB.

        Treasury is a big place……

  5. The government will be very keen that shows they have some regard for the members of Team Australia after signing up to Ozzie Asset Warehouse agreements left right and centre over the last year.

    One hopes that they will act on these excellent recommendations (bar that temporary residents can still buy existing housing) as quickly as possible.

    If they wish to stem the 2PP bleeding they need to act quickly.

  6. “..the recommendations would address virtually all flaws in Australia’s foreign investment monitoring/surveillance regime.”

    Whoa Nelly.

    Let’s look at the detail first.

  7. This is a fundamentally positive outcome which (while perhaps not perfect) is a big step forward.
    It seeks to address current flaws while not throwing the baby out with the bathwater (contribution of foreign investment to expand housing supply).

    While not a ban on temporary residents owning property, requiring divestiture within 3 months of it no longer being their principal place of residence should address international students holding dozens of houses for offshore investors. This is still good.

    Now to clean the trash out of FIRB and implement the systems to do its job….

  8. Ok. Am i missing something here.
    This report says in essence the current regime is fine it just needs to be enforced.

    But the current regime allows Foreign purchase of existing real estate with FIRB approval. And no one who has bothered to apply has been rejected.
    ISNT THAT A HUGE PROBLEM !!!!!

    And why are we adding extra work and checking requirements at our cost with allowing temporary residents to purchase existing housing. Why are we wearing the cost for policing this.
    There needs to just be an outright ban on it.

    And what about the purchase by proxy scam where citizens purchase property here on behalf of foreigners. Anyone who has been a citizen or resident less than 15 years should need to provide proof for the money source if they purchase residential real estate beyond their current home.

    And there needs to be legislation to allow the immediate forfeiture of assets transferred in someone else name that was previously purchased illegally.

    And whats this rubbish about only capital gains forfeiture. The entire asset needs to be forfeited and the persons involved immediately deported.

    • I’d be happy with that as phase 2. The penalties need to be severe to both purchaser and all accomplices including proxies.

    • At the moment applying is purely optional, so it would be irrational for anyone to apply if they weren’t very sure they would be approved. Forcing the remainder to apply ought to weed out quite a few, and simply increasing the time and money required will also be a deterrent.

      It may not take all that much – one theory on the end of the tulip bubble is that buyers were kept from an auction by illness.

      EDIT: How the Chinese language media report on this is probably the key.

  9. You people are so naive, it’s almost comical.

    To get around these rules, all a foreign buyer has to do is set up an Australian company that does the buying for them. The company then rents the buyer the place for free.

    Why haven’t they done this to date if it’s so easy? Because there are costs involved in setting up and maintaining companies, and companies don’t get the PPR CGT exemption. This is annoying, but hardly a deal killer if you are determined to invest.

    Aaah, I hear you say, no bank is going to lend for a mortgage to a $2 shelf company that owns the property. This is true, so the buyer will have put up a personal guarantee if they want a loan. Of course, most foreign buyers are cashed up anyway and so there’s no need to go the bank in the first place.

    Of course, you could always say that you’ll stop foreigners buying equity in Australian companies, but that, for obvious reasons, will not happen.

    • “Why haven’t they done this to date if it’s so easy?”

      Because there is no need to. There is nothing preventing an unapproved foreign national from registering the transfer of title of an existing dwelling in their own name.

      There still isn’t.

    • Acme, If they did that they would have to appoint a company director. And the company director has to be an Australian resident…
      It doesn’t seem like an obvious loophole to me.

  10. “Requiring that any capital gains from the sale of an illegally held property be forfeited to the Government.”

    Could this lead to a lot of property being dumped onto the market prior to the new rule coming into play?

  11. And if you’d like to read something truly idiotic on the topic, Pascoe’s latest column is up. I’m not sure how he does it but gets worse and worse as time goes on.

    Summary: we don’t know how many foreigners have been buying our properties as FIRB is useless. But we can ignore that minor point and safely conclude that this buying has no effect on the market even though we don’t know what or how much the foreigners are actually buying.

    http://www.theage.com.au/business/the-economy/foreigners-sausages-and-the-great-australian-dream-20141127-11v4a8.html