Chinese abandon Australian property

The Foreign Investment Review Board (FIRB) has released its 2018-19 Annual Report, which shows a big decline in foreign residential real estate investment across established and new dwellings:

As shown above, the number of foreign investment approvals for existing dwellings has collapsed from a peak of 5,876 in 2015-16 to 1,312 in 2018-19, whereas the value of new dwellings approved has collapsed from $7.3 billion to $1.7 billion over the same period.

In a similar vein, the number of foreign investment approvals for new dwellings has collapsed from a peak of 26,253 in 2015-16 to 3,986 in 2018-19, whereas the value of new dwellings approved has collapsed from $57.6 billion to $4.8 billion over the same period.

As shown in the next table, Victoria (read Melbourne) remains the foreign investment hot spot for residential real estate:

FIRB does not provide a break-down of residential real estate investment by country. However, its commentary suggests that the decline has been driven by China:

In 2018-19, the number of approvals and the value of proposed investment from China declined, shifting China to the fifth largest source country by value. The value of approvals fell from $23.7 billion in 2017-18 to $13.1 billion in 2018-19. The number of approvals fell by 1,915 (from 6,816 to 4,901). The value of approvals from China fell across all sectors. This has continued a downward trend in the number and value of proposed investment by Chinese investors since 2015-16. This could be due to a range of factors including China’s domestic policy settings which have increased scrutiny over outbound FDI and stricter capital controls. The effect of these policy settings at a broader level is also reflected in OECD data, which show a 30 per cent year-on-year decline in outbound Chinese FDI over 2017-18.

FIRB also outlines the following residential real estate compliance activities:

During 2018-19, 1,220 cases were identified for investigation (down from 1,710 cases in 2017-18). Of these, 1,068 investigations were completed (1,404 in 2017-18), which identified 600 properties that were in breach of Australia’s foreign investment rules (identical to last year) (see Table 4.1).

Compliance investigations in 2018-19 involved a broad range of residential property and identified varying severity of breaches. Identified breaches include:

• failure to seek approval before the purchase of a property;

• failure to sell an established property once the owner’s temporary resident visa expires;

• temporary resident visa holders owning more than one established property;

• Australian companies and trusts controlled by foreign persons owning established properties;

• failure to comply with the conditions of an approval, such as not adhering to the requirement to use a property as a principal place of residence, renting out a dwelling or failing to commence construction or to redevelop a property within specified timeframes;

• failure to undertake certain actions within a specified period; and

• the lodgement of a vacancy fee return with incorrect or false information.

Outcomes of investigations that identified breaches included divestments, retrospective approvals, variations of conditions and raising a vacancy fee liability. These outcomes are reported in Table 4.4…

Infringement notices

There are two levels of infringement notices which impose different financial penalties on a foreign person. A Tier 1 infringement notice may be issued where a foreign person notifies of a breach before an infringement notice is issued, while in cases where the ATO identifies a breach as a result of compliance activity, a Tier 2 infringement notice may be issued.

As you can see, there were only 83 divestments (forced or voluntary sales) in the 2018-19 year, whereby the seller is allowed to keep any capital gain.

Moreover, the average fine issued was a mere $6,903 – basically a slap on the wrist and more like a cost of doing business than a meaningful deterrent.

The ATO’s lack of enforcement comes despite the legislation explicitly stating that a foreign national found having purchased an established dwelling without prior Foreign Investment Review Board (FIRB) approval, or having failed to dispose of a property once they have left Australia (in the case of temporary residents), faces the following penalties:

• Criminal penalty of $135,000 or 3 years imprisonment; or
• Civil penalty of the capital gain made on divestment of the property or 25% of the purchase price or market value of the property (whichever is greater).

Third parties that knowingly assist foreigners to illegally purchase Australian homes are also supposed to face penalties of $45,000 individually or $225,000 for a company, under the legislation.

It is quite frankly astonishing that the ATO can vigorously pursue small businesses and individuals for minor avoidance or errors in tax returns, but turn a blind eye to illegal foreign buyers scooping-up Australian homes, in the process reducing opportunities for younger Australians.

Of course, this comes on top of the Coalition Government also shelving the promised implementation of anti-money laundering rules for real estate gate-keepers, despite warnings from the global regulator, the Paris-based Financial Action Taskforce, that Australian homes are a haven for laundered funds, and similar warnings from AUSTRAC.

Clearly, the Australian Government has little interest in actually policing illegal foreign buyers of real estate, and is tacitly complicit with dirty money infesting Australian real estate.

The only upside is that Chinese capital controls appear to have done the job for us.