In response to the findings of a recent report on Foreign Investment in Residential Real Estate (Report) by the House of Representatives Standing Committee on Economics (Committee), the Commonwealth Government of Australia is proposing a number of reforms to Australia's foreign investment framework.

The proposed reforms in the Government's Options Paper on Strengthening Australia's Foreign Investment Framework (Options Paper) include:

• the introduction of an application fee for all foreign investment applications
• increased enforcement measures particularly in the real estate area, as well as new civil penalties
• increased criminal penalties for foreign investors and third parties who assist with a breach of the Foreign Acquisitions and Takeovers Act 1989 (Cth) (Act), its Regulations and Australia's Foreign Investment Policy (together Foreign Investment Framework or Rules).  

Application Fees
Currently there are no fees or charges for foreign investment applications, with the cost of administering Australia's Foreign Investment Framework funded through consolidated government revenue. By introducing fees on applications, the Australian Government is seeking to shift this administration cost from taxpayers to applicants. Under the proposed fee structure, applications for new business proposals and interests in urban land (including mining and onshore petroleum tenements) would incur fees of AUD10,000, with business acquisitions and investment in commercial real estate incurring fees of AUD25,000. A fee of AUD100,000 would be imposed on business acquisitions that involve a target with assets greater than AUD1 billion. Urban land is defined as land that is not Australian rural land and rural land is defined as land used for primary production.

For residential real estate and rural land investment applications, a fee of AUD5,000 would apply for property valued under AUD1 million, with property valued over AUD1 million to incur fees of AUD10,000 increasing in increments of AUD10,000 for each additional AUD1million in property value.

The proposed fees would be payable before a foreign investment application is processed and the 30 day statutory time period for Foreign Investment Review Board (FIRB) assessment would only begin after payment has been received. The Options Paper has flagged a willingness to avoid applicants paying multiple fees for a single proposal which may be withdrawn and re-submitted in order to extend the statutory timeline.

Increased Enforcement Measures
Aside from covering the cost of administering Australia's Foreign Investment Framework, the imposition of fees is also aimed at funding a new compliance and enforcement unit within the Australian Taxation Office (ATO). This measure seeks to address the Committee's findings on the lack of investigations into, and enforcement of, Australia's Foreign Investment Rules.

At present, FIRB undertakes the upfront screening of foreign investment applications with the decision to block investment proposals made by the Commonwealth Treasury. Under the proposed changes, the screening process would be supplemented by an enforcement unit focused on detecting and following up instances of potential non-compliance within the real estate sector by using data from land titles, taxpayer information and immigration movements. To aid with the detection of breaches of Foreign Investment Rules, the Government announced that from 1 July 2015, the ATO will start collecting information on all new foreign investments in agricultural land and will commence a stocktake of existing agricultural land to establish a foreign ownership register of agricultural land.

Civil Penalties and Increased Criminal Penalties
To further facilitate the enforcement of Australia's Foreign Investment Rules, the Government is also considering the introduction of civil pecuniary penalties and infringement notices. Currently, the only enforcement tools available for breaches of the Act are divestment orders and criminal penalties. The lower burden of proof for civil penalties will make it easier for punishment to be pursued. The proposed penalty tiers are as follows:

• Tier 1 infringement notices - AUD10,200 fine (AUD2,040 for individuals) imposed on those who voluntarily declare their failure to comply with a condition of approval, make a business acquisition or acquire properties without approval (where approval would normally have been granted)
• Tier 2 infringement notices - AUD51,000 fine (AUD10,200 for individuals) where the relevant breach is identified through compliance activities.

Maximum civil penalties of AUD212,500 (AUD42,500 for individuals) are proposed should court action be pursued instead of infringement notices in the context of business acquisitions.

For real estate transactions, maximum civil penalties equal to the greater of the capital gain made on divestment of the property, 25% of the purchase price or 25% of the market value of the property, are suggested for breaches of conditional approvals and property acquisitions made without approval where approval would normally be granted. Where approval would normally be granted, maximum civil penalties based on the greater of 10% of the property's purchase price or market value have been proposed. Developers are also subject to additional civil penalties, as well as criminal penalties of AUD85,000 fines and/or imprisonment for breaching advanced off-the-plan certificates.

The Options Paper also included proposals to impose civil penalties on third parties who assist foreign investors to breach Foreign Investment Rules. The maximum civil penalty suggested for third parties is a AUD212,500 fine (AUD42,500 for individuals).

Agricultural Reforms
Under the current Foreign Investment Framework, investments by private investors in rural land are generally subject to the same screening thresholds (AUD252 million as at 1 January 2015) that apply to other foreign acquisitions of Australian companies or business assets. A higher threshold of AUD1.094 million applies to investments by private investors from the United States, Chile and New Zealand pursuant to the terms of free trade agreements (FTAs) made with these nations. However, more recent FTAs have imposed lower screening thresholds on investments involving rural land. For example, a AUD50 million screening threshold applies to Singapore and Thailand and a AUD15 million threshold applies to investments by private investors from Korea, Japan and China. In response to community concern around foreign investment in the agricultural industry, the Government has announced that from 1 March 2015, a AUD15 million threshold for rural land will apply to all proposed acquisitions by privately owned investors from countries that are not subject to FTAs which include higher thresholds for rural land. This lower threshold means that private foreign investors (except those from the United States, Chile, New Zealand, Singapore and Thailand) must obtain prior approval for proposed acquisitions of rural land where the cumulative value of the rural land owned by the foreign investor (including the proposed purchase) is AUD15 million or more. The Government has also indicated that it will introduce a new AUD55 million screening threshold for investments in agribusinesses.

It should be noted that, at present, urban land, including mining and onshore petroleum tenements, are still subject to foreign investment screening from dollar zero. zero dollars?

Broader Review
The Options Paper also signals a desire to make even more fundamental amendments to the Foreign Investment Rules, including promoting harmonisation with other legislation, exploring other enforcement regimes and whether more detailed regulatory guidance is required to improve investor certainty and confidence. In this way, the Options Paper can be seen as a first step in a long journey of foreign investment regulatory reform.

Conclusion
With the Government seeking to more closely scrutinise foreign investment applications, business and foreign investors should carefully consider the application of Australia's Foreign Investment Rules to future transactions. Submissions on the Options Paper are due by 20 March 2015.