firb – the rules have changed! - real estate perth - the rules have changed.pdf · residential...

FIRB – the rules have changed!

© Copyright 2009, Deacons.

www.deacons.com.au

Overview of presentation1. Recap on the FIRB rules

2. Recap on commonly used terms (foreign person, urban land and rural land)

3. Overview of changes to the FIRB rules

4. Practical Tips and Comments

5. Questions


The information and opinions contained in this presentation are for general information purposes only, are not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. They are also provided on an as is basis without any warranties of any kind. Deacons does not accept any liability which may arise from the use of or reliance on this presentation.

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Recap on the FIRB rulesGeneral The Foreign Investment Review Board (FIRB) administers the Foreign

Acquisitions and Takeovers Act 1975 (Cth) (FIRB Act) and the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) (FIRB Regulations).

FIRB provides for the examination of proposed foreign investments in Australian businesses and assets (including real estate) to ensure that they are not contrary to the national interest.

Real estate includes residential, commercial, rural, accommodation facilities and urban land corporations/trusts.

FIRB has been established to regulate and control foreign investment into Australia; not to limit or deter it.



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Recap on the FIRB rules continuedApprovals & Applications

Contracts must be conditional upon FIRB approval if buyer is a foreign person – allow at least 40 days to receive approval (unless prior approval obtained).

Otherwise, breach of the FIRB Act and may be subject to a penalty.

Prior FIRB approval may be obtained for properties to be purchased at auction.

Applications for prior FIRB approval require an undertaking from the applicant that:

– they will not enter into a contract until they have received FIRB approval to purchase the property; and/or

– if they do enter into a contract prior to receiving FIRB approval, they will ensure that it is subject to FIRB approval and forward a copy of the signed contract to FIRB.

If prior FIRB approval granted, parties must advise FIRB whether they were successful in acquiring the property or not, and if successful forward a copy of the signed contract to FIRB within 30 days.



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Statistics Residential real estate makes up to more than 92% of applications

received by the FIRB.

During 2006-07:– 2991 proposals were approved by the FIRB for the acquisition of developed

residential real estate and 24 proposals were rejected.

– 2523 proposals were approved by the FIRB for acquisitions of residential real estate for development and 14 proposals were rejected.

– 50 proposals were approved by the FIRB for the acquisition of developed commercial real estate.

– 48 proposals were approved by the FIRB for the acquisition of land for commercial development and 1 proposal was rejected.



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Definition of a foreign personUnder the FIRB Act, a foreign person includes a:

natural person not ordinarily resident in Australia;

corporation where a non-Australian resident person or a foreign corporation hold a controlling interest (that is, a holding of 15 per cent or more);

corporation where 2 or more persons, each of whom is either a non-Australian resident person or a foreign corporation, hold an aggregate controlling interest (that is, a total holding of 40 per cent or more);

trustee of a trust estate where a non-Australian resident person or a foreign corporation holds a controlling interest; or

trustee of a trust estate in which 2 or more persons, each of whom is either a non-Australian resident person or a foreign corporation, hold an aggregate controlling interest.



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Acquisitions of urban land Urban Land is defined as “all land situated in Australia other than rural land”.

FIRB approval is required for foreign persons wishing to acquire an interest in urban land unless exempted under the FIRB Regulations.

Examples of urban land acquisitions that require FIRB approval include:– residential real estate;– vacant land;– developed commercial property valued at $50 million or more, or $953 million for

US investors (for commercial heritage listed properties the threshold is $5 million where the acquirer is not a US investor);

– accommodation facilities (for example, hotels and guest houses);– residential and commercial leases where the likely term of the lease is more than 5

years (including options to renew);– any profit sharing arrangement held over urban land;– shares in a company or units in a trust that holds more than half its total assets in

urban land (that is, Australian urban land corporations and trust estates); or– proposals where any doubt exists as to whether they are notifiable.



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Acquisition of an interest in a primary production business (rural land) Rural Land is land that is used “wholly and exclusively for carrying on a substantial

business of primary production”

Examples of primary production businesses include production resulting from the cultivation of land, animal husbandry/farming, horticulture, fishing, forestry, viticulture and dairy farming.

Does not include vacant land (even if zoned ‘rural’), hobby farms, ‘rural residential’ blocks or land used for stock agistment or mining.

FIRB approval is required for the acquisition of an interest in a primary production business where the total assets of the business exceed:

– $100 million; or

– $953 million for US investors.



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Overview of changes to the FIRB rules Federal Government announced changes to the FIRB rules on 18 December 2008.

Changes to FIRB’s policies occurred immediately whilst some changes to the FIRB Regulations are yet to come into effect (were anticipated to be early 2009 – Deacons will advise REIWA).

Why the change?

– 2006 Banks Taskforce on deregulation found that the real estate framework “imposes costs on applicants and taxpayers, creates uncertainty, unnecessarily delays transactions, and creates distortions between domestic and foreign investors for little apparent public benefit”.

Changes are not intended to limit foreign investment into Australia, rather, they are intended to reduce costs for applicants, minimise the uncertainty and unnecessary delays in transactions, and remove the distortions between domestic and foreign investors.

Amendments will clarify the operation of the foreign investment screening regime; and ensure that the FIRB Act applies equally to all foreign investments irrespective of the way they are structured.



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Change 1: Definition of new dwellingsChange to FIRB policy effective 18 December 2008

Previously

Acquisitions of new dwellings were normally approved provided that they had never been occupied or sold and no more than 50% of the dwellings in any one development were sold to foreign interest

New dwellings include:– new homes, units or townhouses;– house and land packages (where construction has commenced); and– strata titled/motel units in a new development, either ‘off the plan’, during the

construction phase, or when the dwelling is newly completed.

Currently

The definition has now been extended to include dwellings that have not been sold but that have been rented out for 12 months or less (for example, the temporary rental of units by developers until a buyer is found).



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Change 2: Foreign purchase of off-the-plan real estateChange to FIRB policy effective 18 December 2008

Previously

Only 50% of new dwellings in a development were permitted to be sold to foreign persons off-the-plan.

Currently

Developers can now sell more than 50% of new dwellings to foreign persons off-the-plan provided that developers market the real estate both locally and overseas.

A developer’s marketing activities locally must be equal to or more than their marketing activities overseas.

Sellers no longer required to concurrently develop a similar dwelling in order to be able to sell a new stand-alone dwelling to foreign persons (to be reviewed by FIRB after two years).



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Change 3: Removal of developer advance approval for sales of new dwellingsAmendment to FIRB Regulations, not yet in effect

Currently Developers of 10 or more dwellings can apply to FIRB for advance approval to sell up to

50% of new residences to foreign persons.

Proposed amendment Pre-approval for developers will no longer be available for sales of new dwellings to foreign

persons.

However, pre-approvals issued prior to 18 December 2008 will continue to have effect.

Non-resident foreign persons will be required to submit individual applications.© Copyright 2009, Deacons.


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Change 4: Foreign purchase of established dwellings for Australian based staffChange to FIRB policy effective 18 December 2008Previously Foreign companies only permitted to purchase established dwellings for their named senior executives. Unless there were special circumstances, foreign companies not permitted to buy more than 2 dwellings

for employee accommodation.

Currently Foreign companies can now purchase established dwellings for the use of all Australian based staff (not

just named senior executives) provided that they sell or rent the dwelling if it is expected to remain vacant for more than 6 months.

No limit to the number of established dwellings that may be purchased. To be eligible under this category:

– foreign companies must still have a substantial Australian business;– staff must still be continuously resident in Australia for periods longer than 12 months; and– the property must not represent a significant proportion of the company’s assets.



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Change 5: Foreign purchase of single blocks of vacant residential landChange to FIRB policy effective 18 December 2008A “single block” of vacant land is a block of land on which only a single dwelling can be constructed.

Previously

Foreign persons must commence development (build a dwelling) within a period of 12 months

50% of the value of the purchase price of the land was required to have been spent on construction of the dwelling.

Currently

Foreign persons must build a dwelling within a period of 24 months.

No 50% development expenditure requirement.

Please note, the FIRB rules for foreign acquisition of vacant commercial land have not changed. Although normally approved, the acquisition will be subject to the following requirements:

There must be continuous construction, and construction must commence within 5 years.

Foreign investors must spend a minimum amount equivalent to 50% of the acquisition cost or current market value (whichever is the greater) of the land on development costs.

Once construction is completed, FIRB must be advised of the completion date and actual expenditure on the development.

© Copyright 2009, Deacons.The information and opinions contained in this presentation are for general information purposes only, are not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. They are also provided on an as is basis without any warranties of any kind. Deacons does not accept any liability which may arise from the use of or reliance on this presentation.

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Change 6: Redevelopment of an established dwellingChange to FIRB policy effective 18 December 2008

Previously

A proposed redevelopment of an established dwelling by a Foreign Person must increase the number of dwellings.

No rental income can be obtained from the established dwelling prior to demolition.

Demolition and construction must commence within 12 months of the purchase of the property.

Development expenditure must be at least 50 per cent of the value of the purchase price of the property.

Currently

Demolition and construction must now commence within 24 months of the purchase of the property. All other requirements remain the same.



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Change 7: Definition of temporary residentChange to FIRB policy effective 18 December 2008

Previously

A person with a visa of at least 12 months duration.

Does not include short-term visitors such as:

– Tourists

– Business people

– Visitors in Australia for medical procedures

Currently

Now includes all foreign persons living in Australia on a valid visa, irrespective of the expiry date of the visa.

Shorter term visas and long term bridging visas now included.

The definition still does not include short-term visitors as described above.© Copyright 2009, Deacons.


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Change 8: Temporary resident exemptionAmendment to FIRB Regulations effective 31 March 2009

Previously

Only allowed to purchase, with FIRB approval, an established dwelling that is to be used as their principal place of residence.

Established dwelling can not be rented and must be sold immediately when their visa expires, they no longer reside in the property or when they cease to reside in Australia.

Currently

New definition of temporary resident applies. Temporary residents may purchase, without FIRB approval:

– an established dwelling for their own residence (not for investment purposes); – any new dwellings; and – single blocks of vacant residential land (other acquisitions of vacant land will require notification

and will normally be approved subject to development within 24 months). Temporary residents may purchase the property via their wholly owned trust or Australian incorporated

company.

© Copyright 2009, Deacons.The information and opinions contained in this presentation are for general information purposes only, are not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. They are also provided on an as is basis without any warranties of any kind. Deacons does not accept any liability which may arise from the use of or reliance on this presentation.

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Change 9: Foreign students purchasing established dwellingsChange to FIRB policy effective 18 December 2008

A foreign student is defined as being at least 18 years old, holding a valid visa and studying courses of more than 12 months duration at a recognised tertiary institution.

Previously

Foreign students were prevented from purchasing an established dwelling property valued at over $300,000.

Currently

No limit on the value of an established dwelling purchased as their principle place of residence.

Note: now that the FIRB Regulations have been amended in respect of the temporary resident exemption, foreign students may purchase other types of dwellings without FIRB approval



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Change 10: Accommodation facilitiesAmendment to FIRB Regulations effective 31 March 2009Previously Acquisitions by foreign persons of resorts, hotels, motels and other accommodation facilities required FIRB

approval. Note: guest houses and holiday flats were examined under policy applying to the residential real estate.

Currently Accommodation facilities are now treated as commercial real estate. Commercial real estate currently includes vacant land for commercial development and developed

commercial property Acquisitions of commercial real estate are exempt from FIRB approval if property is valued at less than:

– $5 million for heritage listed properties where the acquirer is not a US investor;– $50 million for non-heritage listed properties;– $953 million for US investors.



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Change 11: Administrative proceduresAmendment to FIRB Regulations effective 31 March 2009

Streamlined administrative procedures have begun to be established for Foreign Persons to notify and receive approval for proposed acquisitions of vacant residential land and newly constructed dwellings.

New application forms, statutory notices and information guides have been introduced and will be made available on FIRB’s website to facilitate the streamlined procedures.

FIRB website: www.firb.gov.au



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Quick Recap

Acquisition of Urban Land Acquisition of Commercial Land Acquisition of Rural Land



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Practical Tips and CommentsContracts of Sale Ensure that the contract contains a FIRB Approval clause providing that:

– if the buyer is not a foreign person, the buyer represents and warrants this to the seller;

– if the buyer is a foreign person, the contract is conditional upon the buyer obtaining FIRB approval within x days of the date of the contract;

– the buyer must use its best efforts to obtain FIRB approval by the relevant date; and

– if FIRB approval is not obtained by the relevant date, either party may terminate the contract.

What happens if the buyer has not sought FIRB approval? A buyer did not know they needed approval and had already entered an unconditional contract to purchase property.

– The contract will remain valid, but by entering an unconditional contract the buyer has technically breached the FATA.

– The buyer will need to submit what FIRB calls a “retrospective application” and if the buyer meets the eligibility criteria, retrospective approval is generally granted.

– That is, no action will be taken with respect to the breach as long as the buyer complies with the standard conditions.



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Practical Tips and Comments - continued… A buyer did not know they needed approval and have already purchased property.

– The buyer will need to submit a retrospective application. – If the Buyer meets the eligibility criteria, retrospective approval will generally granted.– Again, no action will be taken with respect to the breach as long as the buyer complies with the

standard conditions.

The action that FIRB may take will depend on whether the acquisition would have been approvable under the current guidelines. The action that FIRB can take includes:

– the buyer being made to sell the property acquired (potentially at a significant loss) and/or– the buyer may be liable for substantial fines (maximum of $55,000 and possibly a term of

imprisonment.

Where a buyer has been ordered to sell the property, provided they sell within the required time, prosecution is unlikely. However, details of the breach will be sent by FIRB to the immigration authorities for any action they deem necessary.

Also, if the buyer has knowingly provided any false or misleading information, they may be subject to a fine or term of imprisonment.



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Practical Tips and Comments - continued…As a real estate agent, what is your responsibility?

Under the Agents Code of Conduct an agent must:

– act fairly and honestly; and

– not knowingly mislead or deceive any parties in negotiations or a transaction.

Therefore, if you suspect or are aware that the buyer could be a foreign person you should inform the buyer of their requirement to obtain FIRB approval (important if acting for a buyer).

Otherwise you could be subject to disciplinary action under the Real Estate and Business Agents Act 1978 (WA) for breach of the Code.

It is always worth making inquiries to determine if the buyer is a foreign person. If unsure,

make contract conditional on FIRB approval.



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Practical Tips and Comments - continued…Increased uncertainty in contracts

The abolition of advanced approval for off-the-plan sales to foreign persons requires each contract to be subject to FIRB approval.

The abolition of 50% limit of sales to foreign persons is welcome –however requirement for individual applications is an additional burden on developers/real estate agents/sellers.



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