Could the Government’s Foreign Property Investor Crackdown Be Working Already?

The Foreign Investment Review Board says the new rules about foreign property buyers are already yielding results.

According to Treasurer Joe Hockey, the actual FIRB is investigating 195 cases.

It’s not clear how many offenders there are. Mr Hockey said that the actual FIRB has ‘identified one foreign investor who appears to be linked to more than 10 properties ranging from a $300,000 unit to a home worth $1.4 million.‘ Still, that’s 195 properties that the federal government could force those traders to sell.

The tough new rules

It’s almost a month since the strict brand new rules were announced. On Budget Night, Hockey said ‘We are making changes to strengthen Australia’s foreign investment framework by presenting a new fee regime, much better enforcement and stricter penalties. This will deliver $735 million of revenue to the Budget.’

The fee regime he’s referring to is the application fee potential investors will have to pay to have their FIRB application looked at. The penalty is a significant $135,000 or three years in jail. Or for properties valued at more than $1 million, the penalty may be the capital gain or 25% from the value of the property — whichever is bigger.

And businesses could have it much worse. A 500% mark-up applies on penalties for companies.

Source: budget.gov.au
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The thing that’s going to net the most bogus investors is the ATO’s data coordinating program. The program will cross-reference ATO data on FIRB applications, with info from the Department of Immigration and Border Protection, the Australian Transactions Reports as well as Analysis Centre (AUSTRAC), and other related agencies. The idea is that it will reveal patterns that show a possibly dodgy property transaction.

How effective is it really?

Hockey said that, from the 195 cases, ‘24 are foreign traders who have voluntarily come forward to identify that they may have breached the international investment rules‘, and 40 more were from people who experienced dobbed on dodgy deals with the FIRB’s compliance reporting form or hotline.

So really, only 131 cases come from the data matching program. Which may be impressive, if it only covered the period Budget Evening to today. But based on the ATO website, it’s everything from This summer 2010: ‘The collection of data below this program protocol is expected to occur in May 2015 (for historical data) and then periodically throughout 2015-16 for prospective data.’

And the FIRB gets ‘25,000 to 30,000 applications by foreign investors seeking to acquire residential or even agricultural land in Australia every year.’

So of the 135,000 odd applications that have been through information matching, only 131 of them have been discovered to be dodgy.

And then, there is the purchases that have been made without a FIRB application. According to official and private sources, around 500,000 residential properties change ownership each year.

Some sources, including real estate agents, accountants and lawyers, say that most foreign buyers transfer funds to a trustee, shelf company, or perhaps a relative who has permanent post degree residency or citizenship. Last year, FIRB chair John Wilson said ‘The properties can be bought in a variety of ways: they can be bought through individuals; they can be bought through trustees, disclosed or not; they can be purchased by corporations; they can be purchased by friends, family members, family members, solicitors, etc.’ And of course, some developments get pre-approval to sell to foreign investors. So there aren’t any separate applications to tell all of us how many apartments in a new building are being bought through foreign investors.

He also noticed that nowhere along the transactional chain will anyone check for residency status. Real estate agents aren’t obliged in order to report anything at all. Neither tend to be accountants or lawyers that set up shell companies for foreigners to buy properties along with. And as Wilson said, ‘The only state land titles office which has a foreign or domestic mark in it is Queensland. None of the others do‘.

Then there’s the fact that the actual FIRB doesn’t actually have that many staff. Wilson said ‘The Foreign Investment Review Board on residential real estate has eight staff.‘ Although the number may have risen since that time, it’s still not what you’d want to monitor the issue.

There’s no army of people looking through all legally available data sets. It is simply eight folks in a room relying on applications and data in the ATO.

Things will have to change a lot for the government to catch a significant number of dodgy sales.

What does it imply for local property investors?

The difficult new rules include an amnesty time period. Until November 30, foreign investors can voluntarily come forward and say they believe they might have broken the guidelines. If they have broken the rules, they’re going to have up to 12 months to sell the property. After November 30, they will face the same quick divestment and criminal penalties as everyone else.

So up to the end of November, you can see a few more properties on the market. Properties in strategically chosen areas. The Treasurer said that ‘The worth of the properties in question range from the prestige market to real estate in the suburbs of our capital cities.A So there’ll be a few more of these mega mansions, like Villa del Mare. But there will also be a few suburban houses and apartments.

If you can’t ‘wait and see’ to add to your own portfolio, there are other ways you can acquire exposure to residential property without overinvesting. In his report ‘The Three Best Investments in Australia for 2015 and Beyond’, Kris Sayce shows you how you can buy into property on the Aussie stock market. Click here to find out how to get your free duplicate.

Eva Mellors,
Contributor, Money Morning