Federal Budget 2017 – Changes to foreign investment framework

A number of changes to the foreign investment framework have been announced in the 2017-2018 Federal Budget.

These changes include:

• a 50 per cent cap on the total amount of dwellings a developer can sell to foreign persons under a New Dwelling Exemption Certificate (NDEC); and

• the introduction of an annual vacancy charge.

50 per cent cap for NDECs

Foreign or Australian developers can apply for a NDEC for developments of more than 50 dwellings. A NDEC will generally allow the sale of the dwellings to foreign residents without the need for individual foreign investors to seek foreign investment approval up to a cumulative total of $3 million in the development. A foreign person who intends to purchase interests in the development in excess of $3 million will need to seek individual foreign investment approval to do so.

Unlike previous NDECs, the new NDECs will cap the sale of the dwellings to foreign persons. Developers will only be able to sell 50% of the total dwellings in the development to foreign persons.

This condition applies to any new application for a NDEC received after 7:30pm (AEST) on 9 May 2017, it will not apply to existing approvals or applications received before this time.

For the purposes of a NDEC, a “development” may include one or more multi-storey buildings built under one development approval but will not include house and land packages or townhouses.

Applications for a NDEC will be considered on a case-by-case basis to ensure the issue of a NDEC will not be contrary to the national interest.

A NDEC will usually be issued subject to the following conditions which require a developer to:

• provide a copy of the NDEC to each foreign purchaser;

• market the dwellings for sale in Australia; and

• report on dwellings acquired by foreign persons covered by the NDEC (including purchaser details and the value of dwellings).

The initial application fee for a NDEC will be $25,300 with any application for variation of a NDEC requiring an additional fee of $5,000.

The developer will also be liable for the following reconciliation fees for each dwelling sold to a foreign person:

• per dwelling acquired for $1 million or less - $5,000;

• per dwelling acquired for over $1 million and less than $2 million - $10,100; and

• per dwelling acquired for between $2 million and less than $3 million - $20,300.

The developer may however reach an agreement with the foreign person acquiring the dwelling to pay the fee.

Annual Vacancy Charge

A foreign person who purchases residential property that is not used for more than six months per year will be subject to an annual charge.

Liability for the charge will be assessed annually, using the settlement date of the residential property as the start date for each year.

Foreign investors must report annually about the use of their residential property for the previous year and may be required to provide evidence that the residential property was used.

A residential property is considered to be “used”:

• where it is rented out, used as a residence or otherwise occupied;

• where it has genuinely been made available for rent, including by advertising the residential property, engaging a leasing agent and setting the rent at a market rate; or

• during the construction period for the building of new dwellings or redeveloping of existing dwellings.

The person who occupies or uses the residential property does not need to be the person who purchased the residential property and there is no requirement for a rental agreement to be in place and the six month period in which the property must be used does not need to be six consecutive months.

The charge will be the same amount as the fee payable for the foreign investment application for the residential property or, if purchased under a NDEC, the same as the reconciliation fee paid for the residential property. This charge therefore can range from $5,000 to more than $91,000 depending on the purchase price for the residential property at the time it was acquired.

The charge will apply to foreign persons who make a foreign investment application for residential property (or in the case of purchasing in a development with a NDEC, where contracts were entered into) after 7:30pm on 9 May 2017.