3.1
Chapter 3 sets out the findings of the Joint Committee of Public Accounts and Audit (JCPAA) inquiry into foreign investment obligations in residential real estate, based on Audit Report No. 48, Managing Compliance with Foreign Investment Obligations for Residential Real Estate. The Australian Taxation Office (ATO) and the Department of the Treasury (Treasury) were the audited entities.
3.2
The objective of the audit was to ‘assess the effectiveness of ATO’s and Treasury’s management of compliance with foreign investment obligations for residential real estate’.
3.3
The ANAO stated that it selected foreign investment in residential real estate as an issue to audit due to public and parliamentary interest in the issue including ‘concerns that foreign investors were not complying with foreign investment obligations and purchasing properties they were not entitled to own’.
3.4
In 2015-16 foreign investment approvals in residential real estate were valued at $72.4 billion and accounted for 29 per cent of total foreign investment approvals in Australia.
3.5
Australia’s framework for managing foreign investment in residential real estate is regulated through the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and related regulations.
3.6
The current regulatory framework aims to increase housing supply by channelling foreign investment into new housing. Foreign investors are required to receive an approval prior to purchasing residential real estate in Australia. Foreign investment applications for new dwellings are usually approved but foreign nationals are prohibited from buying established dwellings.
3.7
In 2013, the Senate Rural and Regional Affairs and Transport References Committee issued a report into Foreign Investment and the National Interest, which made 29 recommendations. This was followed, in 2014, by the House Economics Committee’s Report on Foreign Investment in Residential Real Estate, which made 12 recommendations.
3.8
Following these two reports, in the 2015-16 Budget the Government announced that responsibility for regulating foreign investment in residential real estate would move from the Treasury to the ATO.
3.9
The ANAO used three criteria to make an assessment against the objective of the audit:
Compliance and enforcement strategies and detection arrangements were in place to support compliance activities
Activities were undertaken to promote voluntary compliance and effectively address identified instances of potential non-compliance
The effectiveness of compliance arrangements was monitored and reported.
3.10
Chapter 3 comprises:
Committee conclusions and recommendations
Committee Conclusions and Recommendations
3.11
The Committee considers that foreign ownership of residential real estate is a matter of strong community concern and it is important that the broader community have confidence that laws and regulations in this area are being applied and enforced.
3.12
The Committee acknowledges the Australian Taxation Office’s progress since gaining responsibility for foreign investment in residential real estate which is proving to be a significant amount of work.
3.13
The Committee supports the recommendations made by the ANAO and notes that the Australian Taxation Office and the Department of Treasury have agreed to these.
3.14
The Committee recommends that the Australian Taxation Office report back to the Committee on its progress in implementing the recommendations from the Auditor-General’s Report No. 48 (2017-18), complete with timeframes, planned deliverables and outcomes observed to date.
3.15
The Committee notes the ATO’s progress in relation to populating the National Land Register with data of all foreign ownership of residential land in Australia. The ATO plans to report to the Government on the National Land Register in the first quarter of 2019. The Committee will seek a copy of this report if it becomes publicly available.
3.16
The Committee was concerned with the ATO’s lack of data gathering around the intermediary community (defined below, including real estate agents, conveyancers and others commonly involved in the facilitation of property transactions). The Committee understands that this is a recent responsibility for the ATO and there are ‘workarounds’ but the Committee considers more should be done to ensure community confidence in the department and FATA framework.
3.17
The Committee is also concerned by the lack of duty imposed on the intermediary community in the FATA regime to report their clients for breaches, or suspected breaches, of the Act. The Treasury indicated changes in this area could part of a future policy review of FATA. The Committee recommends that Treasury include consideration of this in such a review in the future.
3.18
The Committee recommends that, in a future review of the Foreign Acquisitions and Takeovers Act 1975 (Cth), the Department of Treasury investigate the possibility of including a positive obligation on the intermediary community to report to the Australian Taxation Office, clients who they suspect are in breach of their obligations to report or apply to the Foreign Investment Review Board for approval to purchase property.
3.19
The Committee notes the ATO’s lack of hard data and analysis in relation to many matters it queried during the course of public hearings. The Committee would like to see more analysis of the data collected by the ATO. In particular the Committee is concerned by the lack of analysis around the geographic location of breaches. Data provided to the Committee showed a high disparity in the number of breaches between States and the ATO was not able to adequately explain the variances.
3.20
The Committee notes the ATO is working on creating data matching rules to investigate the practice of foreign purchasers using beneficial ownership in order to avoid their obligations under the foreign investment in residential real estate regime.
3.21
The Committee was particularly concerned by the lack of civil and criminal penalties sought or imposed upon breaching parties or their intermediaries under the FATA regime. To date, the ATO has not applied any civil or criminal penalties for breaches of the foreign investment regime.
3.22
The Committee was also concerned by the responses from the ATO which acknowledged that despite the ATO’s capacity to require foreign investors to pay over capital gain on disposing of property, the ATO has yet to do so. No comment or explanation was provided for this failure to seek to recover capital gains made on illegally purchased property.
3.23
While the Committee understands the lengthy nature of the litigation progress, especially in relation to criminal prosecutions, it considers that this is an area which could enhance public confidence in the residential property foreign ownership regime.
3.24
The Committee recommends that the Australian Taxation Office prioritise and improve processes around:
the collection and analysis of data around the geographic location of breaches
the creation of data matching rules in order to determine if there are foreign purchasers using beneficial ownership in order to avoid their obligations under the foreign investment in residential real estate regime as recommended by the Australian National Audit Office
the application of civil and criminal penalties applied under the same regime
And report back to the Committee on its progress on these matters by the end of October 2019.
Review of Evidence
3.25
This section reviews the evidence received by the Committee regarding the ATO and Department of Treasury’s management of the foreign investment in residential real estate frame work in terms of:
The national land register currently being compiled by the ATO
Compliance and voluntary compliance strategies
Detection and investigation
National Land Register
3.26
In its 2014 Report on Foreign Investment in Residential Real Estate the House Standing Committee on Economics recommended that:
...the Government, in conjunction with the States and Territories, establish a national register of land title transfers that records the citizenship and residency status of all purchasers of Australian real estate. This information should be accessible by relevant agencies from a single database.
3.27
The Federal Government agreed to the recommendation noting that it was working with the states and territories to establish a ‘foreign ownership register of land to include land title transfer information from existing state and territory land title collection processes’.
3.28
The ANAO noted that the National Land Register includes information on agricultural land, water access rights, and residential real estate. The registration of agricultural land and water access rights is required under legislation and the ATO undertook a stocktake of foreign owned agricultural properties. By contrast, the residential real estate register is not backed by legislation and ‘there will be no stocktake of foreign-owned residential real estate for the register’.
3.29
The ANAO also reported that the states and territories were ‘not collecting information necessary to develop the register, such as purchasers’ nationality and other foreign identifiers’.
3.30
The Federal Government introduced legislation to amend reporting arrangements and expand the data being collected for the residential land register. The legislation was implemented on 1 July 2016, however at that time the states and territories (with the exception of New South Wales) had not passed the associated legislative changes to support these new reporting arrangements.
3.31
By February 2018 all states and the Australian Capital Territory were in a position to provide the Federal Government with property transfer information that included relevant foreign identity data. The ANAO noted, however, that the provision of foreign identity data in property transfer reports is optional. The ANAO stated that ‘this may result in lower completion of fields’.
3.32
As an interim measure, while the states and territories passed legislation enabling the collection of foreign identifier data, the ATO developed a self‑registration process for foreign investors purchasing residential real estate. The online form for self-registration was available to foreign investors from 1 July 2016.
3.33
The ANAO compared the numbers of self-registrations with the number of foreign investors who had gained approval to invest in residential real estate. The ANAO found that between July 2016 and December 2017 there were 2549 self-registrations while, between July 2015 and December 2017, there were 35 966 foreign investment approvals for residential real estate. Self-registrations, therefore, ‘represented 7.1 per cent of all approvals over the period’.
3.34
The ANAO acknowledged that the difference between the figures for self-registration and investment approvals could be in part due to the different time periods used and , in part, because ‘application approvals represent proposed investment and not all foreign investment approvals result in a purchase.’
3.35
In addition, the ATO noted that meaningful comparison between self-registrations and approvals was also hampered by the settlement periods for off-the-plan purchases that often occur 2-4 years after approval is granted. The ATO added that it would be a ‘flawed assumption’ to conclude that the difference between approvals and self-registration implied significant under-registration.
3.36
Further, in order to mitigate the risk of under registration through the self-registration process, the ATO has done extensive data matching manually using State and Territory property information. This was done in order to fill the land register with information before automation of the process commenced.
3.37
Mr Jessica Robinson from the Department of the Treasury confirmed that Foreign Investment Review Board (FIRB) approvals do not always correlate with a property acquisition. Applicants can have multiple approvals for property as well, though the introduction of fees associated with FIRB applications has reduced this practice. The Treasury agreed with the ATO’s comments on this issue.
3.38
Ms Robinson said further:
I don't think we can give you with any precision the exact gap between actual investment and approval rates, and that is a good reason that the government is putting in the register, so that we have a much clearer sense of actual investment as opposed to approval data. That register is an important remedy to fix that issue of not having clarity around what the actual investment is.
3.39
The Auditor-General pointed to the challenges the ATO face in populating the National Land Register with reliable data:
I think what we were trying to do with the analysis was put that together with the other pieces of evidence within the chapter…which was simply that they [the ATO] face considerable challenges in populating the register with reliable data. I certainly wouldn't say that 7.1 per cent is the exact number…But if you combine it with the rest of the analysis in the chapter I think the findings and conclusions of the analysis are robust and that they stand.
3.40
Mr Konza said that the primary mechanism for populating the Register with data should be ‘the voluntary registration by purchasers through the state and territory land registers,’ which remains a challenge for the ATO.
3.41
Once information from State and Territory governments has been standardised in 2019, the ATO intends to report annually on the Register.
3.42
At the time of providing their supplementary submission, the ATO stated that both South Australia and Western Australia had not passed legislation to collect foreign ownership information during residential property transactions. In Western Australia the legislation is being drafted.
3.43
In South Australia the Statutes Amendment and Repeal (Budget Measures) Bill 2018 (SA), which included amendments to the Taxation Administration Act 1996 (SA) and the Stamp Duties Act 1923 (SA) to allow collection of information on foreign ownership for reporting to the Federal Government, was assented to on 22 November 2018. ‘These amendments will come in to operation on a day to be fixed by proclamation.’
3.44
The Northern Territory will not be collecting foreign identifier data, as it did not agree to participate in the National Register of Foreign Ownership of Land Titles project.
3.45
The ATO continues to use alternative methods of data matching and self-registration in order to populate the Register with relevant foreign ownership data from these States and Territories.
3.46
Mr Mark Konza of the ATO said:
…while there have been delays by states and territories in collecting and remitting foreign identity information to the ATO, we have implemented effective strategies to ensure that the register is populated with sales to foreign persons. This process will become more efficient over time as the states and territories all start to collect and remit foreign identity information.
3.47
Mr Konza pointed out that the computer programing and procedural changes as well as education needed to address the changes in FATA have slowed the process of gaining data from the States and Territories. He also made note that foreign purchases of residential real estate make up a very small portion of property purchases and were perhaps not a high priority for these governments. This is why voluntary self-registration is so important to populating the Register.
3.48
Despite difficulties in populating the Register, the ATO is on track to prepare a report to the Federal Government on this issue in the first quarter of 2019.
3.49
Ms Robinson of the Treasury clarified that due to differences in the levels of information available from different jurisdictions, the Report will only be based on data from 2016-2017 onwards.
3.50
Mr Konza added that this report will be the first report completed by the ATO on this issue and, although the data will be complete, it will likely result in ‘a barrage of questions’ from the government which will need to be addressed.
Compliance Strategies and Voluntary Compliance
3.51
The ATO does not currently have a compliance and enforcement strategy for foreign investment in residential real estate; however it does have a documented risk assessment and corresponding risk treatment plan which were completed in December 2016.
3.52
The ANAO recommended that the ATO implement a compliance and enforcement strategy, drawing upon their existing risk assessment and treatment documentation for foreign investors in residential real estate. The ATO agreed with the recommendation as discussed further below.
ATO Risk Assessment and Risk Treatment
3.53
The ATO’s risk assessment included assessments of individual’s psychological traits, cultural influences, and other risk drivers, such as a lack of knowledge about the obligations to report foreign ownership.
3.54
The risk assessment outlined the types of controls the ATO used to mitigate, detect and prevent risks relating to foreign investment. The ATO lacked evidence to determine if these controls were actually effective, so the assessment done was on the ‘expected’ effectiveness of these controls. Examples of these controls were:-
Preventative: self-disclosure, a dedicated telephone helpline, education and information activities, a new penalty regime, intermediary and other third party involvement
Mitigative: legislative changes to the Act, reduced application processing times
Detective: A community referral telephone line, case selection through data matching, compliance activities
3.55
The ATO’s assessment of its controls was that the mitigative and detective controls were effective while the preventative controls were partially effective. However, the ANAO felt the effectiveness of the detective and mitigative controls was overstated, due to the data matching program being in its early stages and that the ATO had not properly addressed the risks posed by the intermediary community.
3.56
The ATO’s risk treatment plan involved both preventative and detective strategies, as well as penalties, to address non-compliance by foreign investors. All of these treatments were being implemented by April 2018, with their due date listed as ‘ongoing.’
The Intermediary Community
3.57
The ‘intermediary community’ were identified as potential compliance risks by the ATO’s risk assessment framework.
3.58
The term ‘intermediary’ is not defined in the FATA. However, in response to Questions on Notice, the ATO stated:
The intermediary community can refer to those that are authorised to deal with the ATO on behalf of clients for FATA purposes, or even those that engage with foreign investors during the marketing process for their business activities.
3.59
Mr Mark Konza of the ATO stated that the ‘intermediary community’ is largely made up of conveyancers and real estate agents. These two groups are particularly important due to the roles they play in the sale of properties to foreign investors. There are specific real estate practices which target foreign property purchasers and conveyancers play a vital role in recording data correctly.
3.60
In response to questions on notice, the ATO stated that the intermediary community can also include ‘tax agents, accountants … solicitors, migration agents, and developers.’
3.61
There was interest at public hearings about the duties on intermediaries to report clients who they believe or suspect are engaged in breaches of the foreign investment regime. Ms Robinson of the Treasury confirmed that there was no positive obligation on the intermediary community to report their clients for suspected breaches of FATA, but there are penalties for intermediaries who facilitate non-compliance.
3.62
Mr Konza was not aware of any particular obligations of intermediaries to report their clients for breaching of foreign investment obligations.
The obligation falls on the purchaser and then they owe professional obligations to their client to ensure that they don't lead their client into breaking the law. So they have a secondary responsibility.
3.63
Ms Robinson of the Treasury added that the reforms that were introduced in 2015 strengthened the regulation of investment in real estate. She noted that there are other government agencies who are investigating intermediary obligations through the anti-money laundering regime.
3.64
She added further that reforms in this area may be taken into account as FATA is modernised in the future. There is no specific proposal to do so at this time, but ‘it is the kind of thing we would put on our list.’
3.65
Mr Konza stated there is regulation against assisting a client in the avoidance of foreign investment obligations but creating a law requiring a positive obligation on intermediaries to report their clients would be a matter for government to legislate on.
3.66
In response to questions asked on notice, the ATO reported that since May 2015, 1,536 referrals have been received from the broader community.
3.67
Community referrals are largely provided anonymously and the ATO does not keep information about the source of these referrals. Although there is some anecdotal evidence of referrals coming from the intermediary community, the ATO stated that referrals often relate to neighbouring properties where members of the community have suspicions about a potential breach of the FATA after an auction or purchase.
Communication Strategies
3.68
In September 2015, the ATO developed a communication strategy for foreign investment in both residential and agricultural real estate which targets foreign investors and the intermediary community through a variety of methods. These include:
Social media posts and webpages
In person education and engagement activities
A foreign investment telephone line and email inbox
Other specialist channels
3.69
These communication strategies are revised on a yearly basis in order to reflect changes in legislation and foreign investor’s obligations.
3.70
The ANAO stated that there is some misalignment between the ATO’s risk assessment and risk treatment plans and its communication strategies which the ATO should consider addressing:
The ATO and FIRB websites should be identified as part of the risk assessment and risk treatment plans
The ‘key agent program’ should be a part of the communication strategy
3.71
The ATO has webpages that provide information about the obligations of foreign investors under the Act both before and after the purchase, as well as changes of circumstances and what to do in the case of a breach. These webpages contain simplified information which links to more complex information on the Foreign Investment Review Board’s website, and also has links to Chinese language information sheets.
3.72
The ATO also has webpages primarily aimed at the intermediary community that were used to provide information about foreign investment obligations. These have not been used since early 2016.
3.73
At the time of changes in the foreign investment regime, the ATO used a variety of social media platforms to provide information about the changes. However, since 2016 the ATO has not used social media posts in relation to this matter.
3.74
The ANAO suggested that the ATO would benefit from undertaking a broader evaluation of their communication program regarding residential foreign investment.
ATO Response
3.75
The ATO contends that it has undertaken significant work to identify the risks associated with foreign investment into residential real estate and has developed treatment plans for those risks.
3.76
Since the ATO was delegated the responsibility for foreign investment in residential real estate, the following compliance actions have occurred:
3 940 investigations were completed in the period from May 2015 to January 2018, resulting in 1 158 breaches
1 067 financial penalties were imposed, worth a total of $5.5 million
75 forced disposal orders were given for foreign property owners not in compliance with the framework
156 voluntary disposals of properties by foreign investors occurred as a result of ATO investigations
The total worth of these compulsory and voluntary disposals was $284.9 million
Working with the Australian Government Solicitor and other external counsel, a litigation program has been established in order to apply civil and criminal penalties for investors in breach
3.77
Despite this, the ATO agreed with the ANAO’s recommendation and has commenced work in creating a compliance and enforcement strategy.
3.78
The compliance strategy will be implemented through three deliverables:
1
Designing the strategy by drawing from the ATO’s existing risk assessment and treatment plans for foreign investment and assessing past compliance plans
2
Consulting with the Department of Treasury and other key stakeholders
3
Implementing the strategy, including educating foreign investors and the intermediary community though ‘communication strategies’ about the ATO’s approach to managing compliance. These activities will be monitored to assess their effectiveness
3.79
The ATO plans to have the ANAO’s recommendation to design a compliance and enforcement strategy implemented by March 2019.
3.80
Regarding communication activities, the ATO has made the following changes since the ANAO’s report was published:
It has published guidance about new vacancy fees for foreign ownership on its website, supported by social media posts and live webinars
It has also started a large education campaign targeting intermediaries with both in person and telephone meetings to update them on the FIRB processes
Detection and Investigation
3.81
The ANAO examined whether the ATO’s detection and investigation activities were effective at finding non-compliance with foreign investment reporting obligations.
3.82
It found that while the ATO had established a data matching program to find non-compliance, more work was required as the program had not addressed all of the key compliance risks.
3.83
Mr Konza of the ATO stated that when the ATO received the functions of the foreign investment regime, they also received the agricultural land register and water rights register, which had created a huge amount of work for the Department. He said:
…there probably is a need for us, going forward, to put in a more strategic approach to what we're doing. But there were a tremendous number of applications received when the new regime came in… so we had to put on a workforce and create processes to properly screen those.
3.84
Foreign investment in residential real estate screening was delegated to the ATO in December 2015. The ANAO did not include a review of these screening processes as a part of the audit.
3.85
For the period 2016-17, the ATO screened over 13,000 foreign investment applications worth a proposed $25 billion.
3.86
For the period from May 2015 to January 2018:
4,258 cases of potential non-compliance were reported to the ATO
3,940 cases were investigated by the ATO and closed
318 cases remain open at 31 January 2018
3.87
The ATO receives information about non-compliance from a number of sources:
Self-disclosure – notifications from property purchasers who have breached FATA
Community referral – notifications from the public of suspected breaches
Other referral – notifications from other external and internal ATO sources, such as ATO business lines, local and State government officials and other government departments
Screening infringement – notifications from foreign investors who advise the ATO they have entered into unconditional contracts prior to seeking approval
Breach monitoring – the ATO’s monitoring of people who have already breached the framework
Data matching – the ATO’s internal program which compares data from Government departments, State and Territory governments and the private sector
Data Matching
3.88
Although most non-compliance is found through referrals or self-disclosure, data matching is the ATO’s primary method of actively detecting breaches of foreign ownership regulations.
3.89
Mr Konza stated that the data-matching process is currently manual but there are plans to automate it in the future. ‘In the medium term’ the ATO hopes to increase the amount of voluntary compliance with the regime.
3.90
The ATO is developing data-matching rules in order to detect non-compliance and has identified 32 potential rules which are currently in varying stages of development. Of these, there are nine rules under development to detect serious compliance risks.
3.91
The ATO advised in April 2018 that it would assess the likely magnitude of non-compliance when it had finished implementation and there was a reliable data set to draw from.
3.92
Mr Konza said the ATO could not provide an estimate when it would be able to determine the level of non-compliance with the foreign investment regime.
3.93
The Auditor-General stated it would take another few years before the ATO could provide accurate estimates of non-compliance.
3.94
Although intermediaries were identified as potential compliance risks in the ATO’s own risk assessment (see above), including in the areas of organised crime, facilitating money-laundering, and other financial crimes, it has not developed relevant data matching rules targeted at intermediaries.
3.95
The ANAO’s second recommendation, which was agreed to by the ATO, was that:
The Australian Taxation Office prioritises developing and finalising data matching rules to address key compliance risks to foreign investment in residential real estate.
Non-compliance processes
3.96
The ANAO found the ATO has a largely effective non-compliance program for the foreign investment regime. It identified that the issue going forward for the ATO will be dealing with more serious, wilful non-compliance, and the imposition of civil and criminal penalties.
3.97
The ATO applies priority levels to cases of potential non-compliance based on the source of information. The priorities from highest to lowest are:
2
Non-community referrals (eg from media reports, Members of Parliament, the Inspector General of Taxation etc)
3
Data matching cases with an expected disposal outcome, cases with time limits
4
‘Data matching cases with an expected retrospective approval outcome’
3.98
However, these rankings do not reflect the cases which have resulted in investigations with higher levels of non-compliance findings. Application screenings represented 48.7 per cent of investigations which resulted in a penalty, 40.5 per cent for data matching and 39.3 per cent for self-disclosure.
3.99
From May 2015 to January 2018, 29.4 per cent of cases investigated by the ATO found breaches had occurred. Of these breaches, a majority (70 per cent) were for a failure to seek FIRB approval before entering into a contract, and 30 per cent were for breaches of approval conditions.
3.100
As the total amount of non-compliance is not known by the ATO, it is unknown what portion of total breaches these investigations make up.
3.101
In cases where non-compliance is found, the ATO has the following penalties:
Civil and criminal penalties
3.102
At the time of the Audit report, no penalties had been issued to intermediaries or property developers, only to foreign investors. Total financial penalties for non-compliance were $5.5 million for the period May 2015 to January 2018.
3.103
Disposal procedures have resulted in 231 foreign owned properties being sold, with a total value of $284.9 million. Of these, 26 were as a result of disposal orders, 49 were concessional disposals as a result of an amnesty period, and 156 were self-divested.
3.104
The ATO has not applied any criminal or civil penalties for breaches of the FATA regime to date.
3.105
The ATO and Treasury were questioned at public hearings about non-compliance processes, and in particular about the lack of civil and criminal penalties imposed.
3.106
Ms Sophie Lewis stated the relatively short time period the ATO has had conduct of the foreign investment regime accounts for the lack of civil and criminal penalties. She also stated that the majority of breaches occur from individuals who do not fully understand their obligations under the Act, though the ATO is looking to impose stronger penalties on more egregious breaches and has recently ‘escalated’ a number of cases to the Australian Government Solicitor to endorse.
3.107
Mr Konza reiterated the difficulty of prosecuting breaches of the foreign ownership regime, though he conceded the community may feel more confident if prosecutions could be seen to be happening. He added though that forced disposal of property is a significant penalty, due to the time constraints for disposal under the Act.
3.108
Mr Konza gave an example of recent potential litigation. In that case, the ATO found that the ‘front person’ being used to bypass foreign ownership obligations was an elderly person with limited literacy and English language skills. The ATO received advice that the prospects of success at litigation were poor and decided not to pursue the case.
3.109
He said further that the prosecution process can be slow, also saying:
I can recall other contexts where the ATO has been criticised for failure to get prosecutions and then, three or four years after the event, suddenly 30 or 40 have come through. That's the nature of the prosecution process.
3.110
Mr Konza stated the ATO has four investigations on foot currently.
3.111
Although there has not been a penalty imposed by the Courts, the ATO has issued $7 million in penalties for non-compliance and has recently established a foreign investment litigation section to look into possible civil and criminal penalties.
3.112
Ms Robinson stated that some criminal behaviour around foreign investment might be caught by other regimes, such as money laundering offences being pursued by the ATO and Australian Federal Police.
3.113
Before the regime introduced in December 2015, the only penalty available to the ATO for people in breach of FATA was disposal of property. Under the new regime, the ATO has the capacity to require the breaching party to pay over capital gain made on disposing of the property as well.
3.114
Since 1 December 2015, 36 properties have been divested by foreign investors as a result of ATO compliance orders. The ATO provided details of 20 of these divestments and found:
10 property divestments resulted in a gain and 10 resulted in a loss
The total capital gain for the 10 profitable sales was $1.13 million
‘The highest capital gain was $338,500, the largest capital loss was $500,000
3.115
The ATO stated in response to questions on notice:
The ATO has not yet sought a court-imposed civil penalty for a contravention of the Act, including to recover a capital gain amount made by a foreign person who has been forced to dispose of their property.
3.116
Ms Lewis confirmed that the ATO has the power to issues penalties to intermediaries and property developers but has not yet issued any. Any offence by an intermediary would be only in facilitating the investor’s breach.
3.117
The ATO works with intermediaries who have been ancillary to breaches to ensure they understand their and their client’s obligations in the future.
3.118
Mr Konza stated that there is a need to prove that intermediaries had intention or were reckless or negligent in their conduct when pursuing prosecution. These matters require investigation and are often hard to prove from an evidentiary standpoint.
3.119
The ATO can require a potential foreign buyer to show the source of the funds they plan to use to buy property. Mr Konza stated that the ATO has used this power in the past and has had success with it in preventing purchases which would be in breach of the regime.
3.120
Mr Konza stated the ATO will continue to work hard on the issues of non-compliance and the use of ‘front persons’ but the extent of their existence in Australia may be unknowable ‘because it is a fraud…it’s built on telling us the wrong thing.’
Beneficial Ownership of Foreign Property
3.121
Concerns were also raised at the public hearings about beneficial ownership of property and whether this could be used to avoid obligations under the FATA, as well as the ATO and Treasury’s plans to investigate these matters.
3.122
Mr Andrew Morris of the ANAO stated that there were some data-matching rules which had not been completed at the time of the audit, one of which was on beneficial ownership. The ATO was working towards completing this process at the time of the audit.
3.123
Ms Sophie Lewis of the ATO stated that Treasury have assisted the ATO in this area. In cases where companies are buying residential property, the ATO will look at the board of directors and their nationality to determine where the beneficial ownership is originating from.
3.124
Mr Robinson enlarged on this point, saying there are strong tracing provisions and information-gathering powers in the foreign investment regime. If information about beneficial ownership is not provided voluntarily then the Treasury and ATO can compel that information.
3.125
Further to this, the ATO has well established arrangements with the AUSTRAC database for sharing information and Treasury has arrangements with intelligence and crime agencies. These assist both agencies in identifying money-laundering or other criminal activity. As FATA is jointly administered by both the Treasury and the ATO, some screening is done through one agency, and some through the other.
3.126
In response to questions on notice the ATO further outlined how they determine beneficial ownership of properties purchased by foreign companies, stating:
The tracing provisions in section 19 of the Foreign Acquisitions and Takeovers Act 1975 (FATA) ensure that the FATA cannot be avoided by having an Australian incorporated company with foreign beneficial ownership. The tracing provisions mean that foreignness may be traced back through the ownership structure of applicants.
3.127
The ATO will not issue a foreign investment approval until it has determined the beneficial owners of the property and it is satisfied there are no ‘unmitigated national interest issues.’
3.128
If the ATO determines foreign investment approval was obtained though fraud or misrepresentation then the approval may not be valid and compliance action may be taken.
Locations of breaches
3.129
In public hearings, the ATO and Treasury were questioned about the location and frequency of breaches of the foreign investment regime on a state and postcode level.
3.130
In response to questions on notice, the ATO provided a table showing the number of breaches, broken down by State or Territory and percentage of total breaches. This table is reproduced in Table 3.1, below:
Table 3.1: Breaches by State identified by the ATO
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|
VIC
|
877
|
55
|
42
|
|
NSW
|
321
|
20
|
29
|
|
QLD
|
234
|
15
|
18
|
|
WA
|
108
|
7
|
6
|
|
SA
|
26
|
2
|
3
|
|
ACT
|
8
|
0.5
|
1
|
|
TAS
|
6
|
0.5
|
1
|
|
Total:
|
1580
|
100
|
100
|
Source: Australian Taxation Office (ATO), Submission 1.2, Answer to Questions on Notice, p. 1.
3.131
The ATO also provided a full list of foreign investment obligation breaches, broken down by post code. It showed that of the top twenty postcodes where breaches had occurred, 18 were in Victoria.
3.132
There were concerns at public hearings about the high level of breaches which had occurred in Victoria as compared to other states and the possible reasons for this.
3.133
Ms Sophie Lewis of the ATO explained that the number of breaches in the States was in proportion to the number of applications received. She added that a breach may not necessarily indicate money laundering or other criminal activity. The breaches listed would also include breaches of approval conditions. There could also be a lack of education around the issue in certain areas, leading to an investor not attempting to get approval.
3.134
Ms Lewis could not provide an answer for why foreign investors were more likely to invest in Victoria than other States.
3.135
Ms Jessica Robinson of the Treasury made note that New South Wales was one of the first jurisdictions to amend its legislation to bring its definition of ‘foreign person’ in line with FATA, which could account for their lower level of breaches.
3.136
She also said that higher levels of community education around the issue might lead to more applications and less breaches of the regime.
3.137
Contrary to this though, Western Australia and South Australia have very small numbers of breaches, despite not having legislated on the issue at all. (See 3.40 – 3.41 above)
Monitoring and Reporting
3.138
Audit Report 48 examined the ATO’s and Treasury’s monitoring and reporting on compliance with the FATA regime and found that both Departments have strategies in place which are largely effective.
3.139
The ATO has 20 success indicators for foreign compliance which it measures for internal communication and compliance processes. The ANAO found the following:
…the ATO has not yet used the results to broadly assess its effectiveness in managing the overall compliance risk that ‘failure of foreign persons to comply with residential real estate foreign investment rules will undermine the integrity of the foreign investment framework and community confidence’. Similarly, Treasury has not measured effectiveness in achieving the stated policy intent of encouraging foreign investment in new residential dwellings.
3.140
The ANAO suggested the following improvements:
That future reports could delineate between compliance activities conducted on agricultural investments and those activities conducted for residential real estate
That the ATO improve their internal and external reporting and their ability to assess the effectiveness of compliance processes by establishing targets and baselines
That Treasury report on whether the Federal Government policies about foreign investment in residential property have been met ‘particularly with regard to the increase in new housing stock’
That the ATO could improve their reporting by including the value of fees for disposal
That the ATO move to releasing their data on a quarterly basis in order to allow faster analysis of emerging trends. The slow release of public reporting has been noted by stakeholders
3.141
The ATO advised in April 2018 that a lack of historical information had limited its assessment of effectiveness, but it will consider establishing baselines to allow trends to be measured going forward.
Other matters
3.142
The Law Council of Australia submitted to the Committee that it has become aware of issues where large amounts of residential land are acquired by commercial investors who are also foreign investors.
3.143
It stated that the ATO’s residential screening unit is not geared towards complex commercial transactions, particularly complex residential transactions involving commercial investors.
3.144
The Law Council suggested that large commercial residential transactions involving sophisticated foreign investors be screened by the ATO’s commercial screening unit.
3.145
Ms Lewis of the ATO confirmed that it has adopted the Law Council’s suggestion.
21 March 2019