Changes to residential land fees 7 min read
On 10 December 2023, the Federal Government announced changes to the Foreign Investment Review Board (FIRB) residential land fee rules, designed to 'improve housing affordability and supply'. The changes involve a proposed increase in FIRB application fees to purchase established dwellings, a proposed increase in vacancy fees for foreign-owned dwellings, reduced FIRB application fees for build-to-rent (BTR) projects, and enhanced compliance activities.
In this Insight, we explain and comment on the changes.
- Proposed tripling of application fees for established dwelling purchases and doubling of vacancy fees.
- Reduced application fees for BTR housing projects from 14 December 2023.
- It is not clear if the proposed tripling of application fees for established dwelling purchases will apply to property developers who purchase land for the purpose of redeveloping it into new housing, aged care facilities, student accommodation or disability accommodation.
As a general rule, foreign persons seeking to purchase Australian residential land can only do so with prior FIRB approval – whether in the form of a transaction-specific no objection notification or a multi-transaction exemption certificate – and after payment of an application fee.
In almost all cases, the purchase of an established dwelling (such as one that has previously been occupied) will need to be approved via a no objection notification, rather than being covered by an exemption certificate.1 Whereas the purchase of a new dwelling (such as purchasing an off-the-plan apartment) is often covered by an exemption certificate obtained by the developer.
The application fee for a no objection notification depends on the purchase price – the higher the price, the higher the fee. For purchase prices of $1,000,000 or less, the fee is $14,1002, and for purchase prices of $2,000,000 or less, the fee is $28,200. The fee then increases by $28,200 for each additional $1,000,000 in the purchase price and caps out at $1,119,100 for purchase prices of $40,000,000 or more. The fee is the same irrespective of whether the residential land contains an established dwelling or a new dwelling, or is vacant land. Where a foreign person purchases a new dwelling in reliance on a developer exemption certificate, the developer must pay a fee equivalent to what the foreign person would have paid to seek a no objection notification for the same new dwelling. Such fees can be, and are often, passed onto the purchaser.
The Government intends to introduce legislation in 2024 to triple FIRB application fees for the purchase of established homes. This would result in the maximum fee being $3,357,300 (subject to annual indexation). Fees for the purchase of new dwellings and vacant residential land would not change.
As a general rule, each foreign person who owns an established dwelling and who purchased it after 9 May 2017 with FIRB approval, or who needed FIRB approval for the purchase, can be liable to pay an annual 'vacancy fee' if the dwelling is not residentially occupied, or genuinely available for rent (for a term of at least 30 days), for at least 183 days in a 12-month period.
The vacancy fee, if payable, will generally be equal to the FIRB application fee paid to obtain FIRB approval to purchase the property. The fee is intended to encourage foreign owners of established dwellings to make their properties available for rent if they are not occupied as a residence, so as to increase the number of properties available for Australians to live in.3
The Government intends to introduce legislation in 2024 to double the annual vacancy fee. The objective is to (further) encourage foreign investors to make their unoccupied residential properties available to renters. This would mean a six-fold increase in vacancy fees for future purchases of established dwellings by foreign persons who need FIRB approval.
Currently, foreign persons who need FIRB approval to invest directly or indirectly in a BTR housing project can be subject to the very high application fee tiers for residential land, rather than the much lower commercial land tiers. For example, a foreign person seeking FIRB approval to acquire an interest in residential land will need to pay a $253,800 fee if the investment amount is $10,000,000. The fee for the same investment amount would be $14,100 if the acquisition is of an interest in commercial land.
This mostly affects two types of foreign investors:
- A developer who is a foreign person and seeks to acquire land to redevelop into BTR housing – in many cases, the land will be vacant or developed commercial land, such that the commercial land fee tiers apply. But if the land already contains dwellings (such as apartments), the land will be considered residential land, such that the very high residential land fee tiers apply.
- An investor who is a foreign person and seeks to invest in a specialist BTR fund that has seed assets that are already developed – for instance, a developer might have a mixture of developed projects (which would often constitute residential land4) and development projects (which would commonly constitute commercial land), and might transfer all of those projects as seed assets in a BTR fund that would be marketed to investors. If residential land represents the 'dominant land' in terms of value, then the residential land fee tiers would apply for the acquisition by a foreign person of an interest in the fund.
Obviously, the imposition of residential land fees operates as a material disincentive to foreign investment in the BTR sector. This has previously been raised with the Government by various BTR players.
Therefore, the Government's announcement that it 'will make sure foreign investment application fees for Build to Rent projects are at the lowest commercial level – no matter the kind of land involved' is a much welcomed development. Also welcome is the proposal to ensure that the high agricultural land fee tiers also would not apply to BTR projects.
The Government has stated that the application of the commercial land fee tiers to all BTR projects will apply after 14 December 2023. At this stage, it is not clear if the change will be reflected in revisions to the fee regulations or instead be effected administratively via upfront partial fee waivers.
The Government also announced an 'enhancing [of] the ATO’s compliance regime to ensure foreign investors comply with the rules, including selling their residence when required.' This comes as no surprise, given the Government's increasing focus on compliance and enforcement activities across the FIRB regime generally. The Government's announcement did not provide further detail on what the 'enhancement' would involve. But we may start to see more infringement notices being issued, and a greater willingness by the Government to apply to the court for criminal and civil penalties and to do so more often.
As set out in FIRB Guidance Note 6 (Residential Land), one of the (limited) situations in which FIRB approval might be granted for the purchase of established dwellings is where the purchase is for redevelopment that will genuinely increase housing stock.
It is not uncommon for foreign-owned property developers to purchase, with prior FIRB approval, residential land containing established dwellings for the purpose of redeveloping the land into new housing (including but not limited to BTR housing), aged care facilities, student accommodation or disability accommodation. In many of these cases, the redevelopment increases housing stock and/or accommodation.
It is not clear if the Government's proposal to increase application fees for established dwelling purchases will apply to such property developers. We consider that it should not. The high residential and agricultural land fee tiers already act as disincentives for property developers. Where property developers proceed with paying high application fees, the fees may well be passed onto purchasers, thereby affecting property prices.
The purchase of land that happens to have one or more established dwellings on it is treated as residential land for fee purposes, unless:
- the land is used wholly and exclusively for a primary production business (not likely in urban areas) – in which case, the slightly lower agricultural land fee tiers apply; or
- all of the dwellings on the land are 'commercial residential premises' within the meaning of the GST legislation (which covers only hotels or similar accommodation providers) – in which case, the significantly lower commercial land fee tiers apply.
It is incongruous that the availability of the commercial land fee tiers for the acquisition of land in urban areas is dependent on the GST treatment of the land. We consider that the commercial land application fee tiers should apply to all property developers proposing to redevelop residential or agricultural land with the objective of increasing housing stock and/or accommodation. The same should apply to persons directly or indirectly investing in such development projects. In other words, the Government's proposal to reduce application fees should not be confined to the BTR sector.
In light of Australia's current housing crisis, there appears to be bipartisan political support for the proposed changes (which are expected to be implemented without opposition). Particularly welcome in this regard are the proposed changes for BTR projects, which will also assist in the consistent application of the FIRB framework to the sector.5 As the Government has stated that these changes are part of a 'broad and ambitious agenda to improve housing affordability and supply', we look forward to hearing what other initiatives are announced as part of this agenda – in particular, whether there will be measures aimed at encouraging foreign capital to be invested in developments, to address the crisis in the longer term.
As set out in FIRB Guidance Note 6 (Residential Land), there are limited situations in which FIRB approval might be granted. These are: temporary residents can apply to purchase one established dwelling to use as their place of residence while they live in Australia; foreign persons can apply to purchase an established dwelling for redevelopment, if the redevelopment will genuinely increase Australia’s housing stock; and foreign controlled companies can apply, in limited circumstances, to purchase an established dwelling to house their Australian based staff.
There is a de minimis fee of $4,200 for purchase prices of less than $75,000. However, very few residential land purchases will fall within this fee tier. Note also that all fee amounts in this Insight are subject to annual indexation.
See FIRB Guidance Note 6 (Residential Land).
Many completed BTR projects will be considered residential land, as they do not satisfy the requirements for being 'commercial residential premises' within the meaning of the GST legislation (note that if they satisfied those requirements, the land would be treated as commercial land for fee purposes). The reasons for this can include: rights of exclusive possession under residential tenancy agreements; tenants often having lengthy terms and security of tenure; insufficient level of included services provided by the BTR operator to tenants; and apartments being leased out on an unfurnished basis.