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