The federal government faces a backlash from the property sector over plans to charge foreign homebuyers a tax of up to 1 per cent tax to fund the scrutiny of purchases by the Foreign Investment Review Board.
Declaring the changes necessary to ensure the “Australian dream” of home ownership could continue, Prime Minister Tony Abbott and Treasurer Joe Hockey launched a series of proposals on Wednesday and gave every indication they would be adopted following four weeks of consultation.
Foreign buyers of new or existing residential properties and farmland would have to pay a $5000 application fee to the Foreign Investment Review Board for properties valued up to $1 million.
A $10,000 application fee would apply to properties valued at over $1 million and would increase in increments of $10,000 for each additional $1 million in property value.
The fees, estimated to raise $200 million a year, would enable FIRB to enforce existing rules which decree foreigners, other than temporary residents, cannot buy established homes. Temporary residents must sell properties when they leave.
To help with enforcement, a new civil penalty regime has been proposed. Any one caught breaching or circumventing the rules would be forced to sell the house and pay fines of whichever was highest:the capital gain, 25 per cent of the house’s market value, or 25 per cent of the purchase price.
Mr Abbott said the application fees were “not there to deter people” but were “to ensure that foreigners are paying their way”.
“It will mean that foreigners who aren’t playing by the rules won’t be there in the system,” he said.
“We do want Australians to be operating on a level playing field.”
The Property Council of Australia said while it supported the enforcement of existing rules on foreign ownership the application fees were excessive and a stamp duty by stealth that would drive up house prices and rents.
The council was especially angry about the proposal to apply the fees to new residential housing, saying it would exacerbate an already growing housing shortage.
“Foreign investment, be it from the UK or China, underpins new residential housing supply in Australia,” said council chief executive Ken Morrison.
Ray White Real Estate chairman Brian White said the proposed fees had the potential to “shock the market”.
“And no market appreciates or responds well to shocks. It has connotations back to the aborted vendors tax proposed by the NSW Treasurer Michael Egan that needed to be abandoned due to market response,” he said.
The NSW government imposed a 2.5 per cent tax on investment properties in 2005 but was forced to abandon the tax a year later.
CBRE residential projects chairman Justin Brown said the new taxes were counterproductive and ill-thought through.
“There is significant global evidence from recent times including Canada, Singapore and Hong Kong where these types of taxes on foreign investment have been totally counterproductive, caused significant corrections within the markets and harmed the construction industry,” Mr Brown said.
Mr Abbott said the proposed fee structure was comparable with a system in New Zealand but less punitive than regimes in Singapore and Hong Kong.
“We are open to foreign investment but it’s got to be foreign investment that is in our national interest,’ Mr Abbott said..
Melbourne-based buyers advocate David Morrell said the fees were not high enough.
“I’m bidding at one auction on Saturday and my due diligence has uncovered that up to three foreign investors are looking at the property. The new fee schedule will just be deemed the cost of doing business and frankly 1 per cent is pathetic. It’s hard to even value property within 1 per cent,” he said.
“Clearly they know there is a problem. It hasn’t been fixed and I’m not sure the framework is tough enough to realistically do it.
“Civil penalties will work but only if they’re substantial and easily enforced. What would really threaten third parties is if they lost their relevant licences. It looks like it’s a long way to go till something with real teeth can work. In the meantime, we continue to give the farm away.”
The Real Estate Institute of Australia also welcomed the resolve to enforce the current rules but took issue with the application fees as being “on the high side”.
Master Builders Australia chief executive Wilhelm Harnisch was supportive.
“I am more relaxed now – this is not about anti-foreign investment, it’s about making sure there is compliance.”
“The FIRB hasn’t been able to deal with alleged breaches. The FIRB should be appropriately resourced so the levy has to be looked at in that context.”
“It is very important that the fee be transparently allocated to the FIRB to fulfil compliance obligations.”
The proposed fees are higher than the maximum $1500 recommended on a bipartisan basis by a Parliamentary committee. Mr Abbott said the increased fees were recommended by a committee of his backbenchers.
The government will establish a compliance unit within the Australian Taxation Office, a register of foreign ownership of farmland, houses and agribusiness, and improve information between agencies to help with enforcement.
The government is also considering extending civil penalties to the purchase of business and commercial real estate even though there is limited evidence to suggest non-compliance in these areas.
Also on Wednesday, new Treasury secretary John Fraser blamed the surge in Sydney property prices on cheap money and wealthy Chinese investors, factors making real estate expensive in other cities around the world.
Mr Fraser said surging prices in pockets around Sydney Harbour and elsewhere mirrored similar developments in London and New York.
“It’s a worldwide phenomenon,” he said, noting that causes include very loose monetary policy and money coming out of China.
Mr Fraser said he did not rate Australia’s housing market “that highly as a risk” to the economy, and has spoken with bank regulators, who last year announced plans to introduce restraints on lending to riskier markets and investors.
“I’m confident the measures they’re bringing in will help,” the treasury secretary told a senate committee in Canberra on Wednesday.
Phillip Coorey and Matthew Cranston with Samantha Hutchinson
SOURCE: The Australian Financial Review
PUBLISHED: 26 Feb 2015 05:58:08 UPDATED: 26 Feb 2015 08:53:01