In a recent case, The Federal Court of Australia issued the first penalty order for breaches of Australia’s foreign investment rules, attracting a penalty of $250,000 for the breach. The investor has been penalised for purchasing several properties in outer Melbourne without obtaining authorisation from the Foreign Investment Review Board (FIRB). Attwood Marshall Lawyers Commercial Litigation Senior Associate Georgia Taylor discusses Australian foreign investment rules and the ramifications if investors do not comply with the law.
The Case
Mr Balasubramaniyan moved to Australia on a temporary visa in 2015 before marrying his Australian wife in 2017. From July 2016 to April 2018, he spent over $1.4 million on three residential properties and one block of residential land in Melbourne’s outskirts.
Being in Australia on a temporary visa meant Mr Balasubramaniyan should have notified the Foreign Investment Review Board when he purchased each of the properties. Unfortunately, Mr Balasubramaniyan failed to meet his disclosure requirement and in doing so breached the foreign investment rules six times – including four breaches for the purchases he made and a further two for owning established properties.
In July 2020, following a compliance investigation, the ATO filed proceedings concerning the six breaches of the Foreign Acquisitions and Takeover Act 1975 by Mr Balasubramaniyan.
Mr Balasubramaniyan admitted to buying into three properties from 2016 to 2018 and failing to give notice to Foreign Investment Review Board, as required under the Foreign Acquisitions and Takeover Act 1975. As a result of the failures, so ensued one of the first prosecutions of such a case under the FIRB regime. Penalties were ordered against Mr Balasubramaniyan of $250,000, comprising of four $30,000 penalties and two $65,000 penalties. The amount was considerably higher than the $162,839 that Mr Balasubramaniyan proclaimed was his net gain for his property investments.
This judgment sets a precedent from which the ATO will progress their penalty litigation work as part of its overall compliance approach into monitoring foreign investments.
This judgment is the first ruling since the government amended the Foreign Investment Review Board Act in 2015 to introduce civil penalties for foreign investors trying to fly under the radar when making their investments.
Foreign investors are restricted in the type of residential property they can acquire in Australia and must apply before buying property or land. Foreign investors in contravention of the Foreign Acquisitions and Takeover Act 1975 encounter civil penalties to enable the government to recoup capital gain or 25% of the property’s value, whichever is greater.
The Decision
In this case, the Court found Mr Balasubramaniyan, made capital gains amounting to $710,300 in gross terms. Making various deductions, the Commissioner said that the investor’s net gain was approximately $425,000. Mr Balasubramaniyan had admitted to the contraventions and disposed of each property prior to the hearing, which the Judge considered in when ordering the penalty.
Justice Beach was satisfied that a figure of around $250,000 represents no less than the investor’s net gain, which he wiped out by the total penalty he imposed. He stated that, “It is necessary to do so in order to achieve the principal objective of general deterrence.”
Key Takeaways
ATO Assistant Commissioner Keir Cornish embraced the decision concerning the first penalty order under the Foreign Acquisitions And Takeover Act 1975 and said that it served as a clear deterrent.
Mr Cornish stated, “There are obligations under Australian law for foreigners that have invested in, or plan to invest in Australian residential real estate. The ATO promotes voluntary compliance of the rules by foreign persons, but where foreign investors resist compliance action, stronger enforcement action is taken.”
This case shows that the ATO are commencing their investigations into purchasers by foreign investors and imposing significant and deterring penalties to those found to have not complied. The primary objective of the legislation is to keep property in the market for Australian buyers. The ATO and the Foreign Investment Review Board are the co-administrators of the Foreign Acquisitions and Takeover Act 1975 and have been responsible for monitoring foreign investment compliance in residential real estate since 2015. From 2015 to 2021, 434 properties were disposed of because of ATO compliance action and put back onto the market for compliant buyers.
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