In the past few years the Australian government has been increasingly keen to encourage foreign investment in Australia to ensure Australia’s future growth and prosperity. Accordingly, the government has implemented a number of changes to foreign investment policy and law.
This has led to a more streamlined process and reduced compliance costs for foreign investors. This has involved making changes to the assessment of proposals for the acquisition of an interest in residential real estate which had not been updated since 1989.
Foreign Investment Review Board
While the Australian government has been keen to encourage foreign investment in Australia, government approval is required for certain investments, including acquiring an interest in real estate. A potential foreign investor, unless they fall within certain exemptions, is required to submit a proposal for approval prior to acquiring an interest in Australian real estate.
The Foreign Investment Review Board (FIRB) is charged with assessing direct investment proposals and making recommendations to the Australian government on the proposals. In assessing the proposals, FIRB is required to consider the compatibility of the proposal with the Australian government’s foreign investment policy. The approval decision is the responsibility of the Australian treasurer.
Foreign Governments and Their Related Entities Require Approval
Foreign governments and their related entities are required to obtain prior approval before acquiring an interest in Australian real estate regardless of the value of the investment. This includes body politics of foreign countries, companies or other entities that are more than 15 per cent owned by foreign governments, their agencies or related entities and companies or entities otherwise controlled by foreign governments, their agencies or related entities.
Foreign Persons Require Approval Unless Their Acquisition Falls Within an Exemption
Foreign persons, unless their acquisition falls within a specific exemption (as detailed below), are required to obtain approval prior to acquiring an interest in Australian real estate. Foreign persons include natural persons who are not ordinarily resident in Australia, corporations with a controlling interest or aggregate controlling interest held by a natural person or persons who are not ordinarily resident in Australia or are foreign corporation or corporations and trustees of trusts in which natural person or persons who are not ordinarily residents of Australia (or foreign corporations) hold a substantial interest or aggregate substantial interest.
Residential Real Estate
If a foreign person wishes to acquire an interest in residential real estate or vacant land they generally require approval prior to acquisition. The same is true for a foreign person who buys shares or units in Australian urban land corporations or trust estates. Since 18 December 2008, some significant changes have occurred in relation to residential real estate.
Developers are able to apply for approval to sell “new dwellings” to foreign persons. Previously developers could only obtain approval to sell 50 per cent of new dwellings “off the plan” to foreign persons. The 50 per cent threshold has been abolished providing that developers market the dwellings in Australia as well as overseas. This means there is no restriction on the percentage that can be sold to foreign persons. Furthermore, the definition of “new dwellings” has been widened to incorporated dwellings not sold by the developer but which may have been occupied for no more than 12 months. Pre-approvals may be given to a developer to sell to foreign persons, therefore relieving the foreign person from personally applying for approval.
Non-resident foreign persons are not permitted to buy established dwellings as investment properties or as homes except if foreign owned companies intend to acquire established dwellings for their Australian based staff. Approval is normally given if the company undertakes to sell or rent the property if it is vacant for more than six months. Foreign persons are also permitted to buy established dwellings if the interest that is acquired is for the purposes of redevelopment and it is proposed that the redevelopment results in an increase of “housing stock”. Conditions are also likely to be imposed on any acquisition of an interest for redevelopment.
If the foreign person is a temporary resident, they also need to apply to purchase established dwellings. Only one established dwelling can be purchased by a temporary resident and must be used as their residence. Conditions are usually attached to an approval for a temporary resident such as that the property is to be sold when it ceases to be the temporary resident’s residence.
Foreign persons applications to buy vacant land for residential purposes are normally approved subject to conditions. A condition often imposed is the time for development which has been extended from 12 months to two years.
Commercial Real Estate
Foreign persons are only required to submit proposals for approval if acquiring developed non-residential commercial real estate in certain circumstances. If the value of the real estate interest is in excess of A$50 million foreign persons are required to submit an application for approval. If the real estate is heritage listed a A$5 million threshold instead of A$50 million threshold applies. However, for US investors, the threshold is A$1004 million. The threshold amounts are indexed annually.
Since 31 March 2009, accommodation facilities such as hotels, motels, hostels and guesthouses are regarded as developed commercial real estate instead of residential real estate. This has the benefit for foreign investors that applications only need to be made if the interest to be acquired exceeds these thresholds. However, a unit within a hotel that is owner-occupied or rented by the owner privately is considered to be residential real estate as it is not part of the hotel business.
It is also possible for foreign persons to apply under “annual programme” arrangements for real estate acquisitions. The arrangements give a global monetary limit for the foreign person’s acquisitions in place of a threshold for individual acquisitions. This can be of benefit to frequent foreign investors as it alleviates the requirement that they apply for approval for each individual acquisition. Approvals under the annual program arrangements, are often the subject of conditions such as reporting of their actual acquisitions.