This article was written by Suzanne Gibson, Jacqueline Field and Malcolm Brennan.
A series of recent developments means that tax is now a key part of the Australian foreign investment regime and the foreign investment rules have significantly more bite. When determining whether a foreign investment proposal is “contrary to the national interest”, the Foreign Investment Review Board (FIRB) actively considers the impact of the proposal on tax revenues. The Australian Taxation Office (ATO) has a renewed focus on identifying tax evasion by non-residents, and plays an increasingly significant role in the enforcement of Australia’s foreign investment rules, particularly in relation to residential real estate. With the increase of information reporting on non-residents under the OECD Common Reporting Standard, and the proposed new withholding tax on purchases of Australian property from non-residents, foreign investors who do not comply with Australian laws will find it harder to hide and may face substantially tougher penalties for non-compliance.
Tax revenue relevant to the “national interest”
Australia’s foreign investment regime empowers the Australian Treasurer to block foreign investment proposals, or impose conditions on the way proposals are implemented, to ensure that they are not contrary to the national interest. There is no definition of what constitutes Australia’s “national interest”. Rather, the national interest is determined on a case by case basis.
Until recently, FIRB typically focussed on factors such as the impact of the proposal on the community and the economy (e.g. jobs, level of Australian participation) when considering whether a proposal was contrary to the national interest. However, in February last year, the then-Treasurer Joe Hockey warned that he would take foreign investors’ tax affairs into account when considering Australian foreign investment proposals. The potential for loss of tax revenue has become an increasingly important consideration.
In particular, FIRB now pays much closer scrutiny to corporate reorganisations which involve a foreign person or foreign government investor, and raises sophisticated queries on the drivers for such reorganisations, even though there may not be a change in ownership of the relevant entity. This focus on tax arrangements aligns with the government’s aim to reduce base erosion or profit shifting and the release on 16 September 2015 of the draft Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill. The Bill implements a country-by-country reporting regime and new transfer pricing documentation standards and aims to ensure that certain multinationals operating in Australia pay tax in Australia, even if they are booking revenue offshore.
Increased compliance and enforcement: the ATO’s role in foreign investment
The ATO assumed responsibility for approving foreign investment in residential real estate in May this year. During the first month of the ATO’s involvement in data-matching and compliance functions, FIRB investigated 195 suspected breaches and by August, the former Treasurer had ordered the sale of 6 residential properties unlawfully held by foreign nationals. The former Treasurer reported that the ATO had identified one foreign investor who appeared to be linked to over 10 properties ranging from a A$300,000 unit to a house worth A$1.4 million.
The ATO’s effectiveness as an enforcer of Australia’s foreign investment laws is due in large part to its ability to undertake data matching of FIRB approvals with other government-held information to identify any tax evasion by non-residents as well as non-compliance with foreign investment requirements.
Its effectiveness is likely to be substantially enhanced through the additional information it will receive under the OECD Standard for Automatic Exchange of Financial Account Information (known as the Common Reporting Standard (CRS)) and in relation to the proposed new withholding tax imposed on purchasers of property from foreign residents.
- CRS reporting on non-residents
Under the CRS, Australian financial institutions will be required to conduct due diligence on their account holders and report information to the ATO about account holders who are not Australian resident (non-residents). Generally, this will capture information about deposit accounts held with Australian banks, units in managed funds, shares in investment entities, custodial arrangements and certain insurance contracts. The ATO will then exchange this information with the relevant foreign tax authorities.
Broadly, the CRS builds on the U.S. Foreign Account Tax Compliance Act (FATCA) arrangements to expand the reporting obligations from U.S. persons to any person resident in a country that has committed to the CRS.
Access to this additional treasure trove of information should significantly assist the ATO with identifying and enforcing foreign investment laws through data matching of these supplementary information streams.
- Proposed non-final withholding tax on purchasers of property from foreign residents
The Australian Government has released exposure draft legislation to impose a non-final withholding tax on transactions involving the disposal of ‘taxable Australian property’ by foreign residents. If enacted, from 1 July 2016, a purchaser of taxable Australian property from a foreign resident will be required to remit 10% of the gross proceeds to the Commissioner of Taxation on account of the foreign resident’s Australian tax liability on the disposal.
This will add a further layer of data to the ATO’s resources, enabling it to hone in on sales made by non-residents to determine whether the non-resident has complied with foreign investment and tax laws.
Tougher penalties for non-compliance
The consequences for non-compliance with Australia’s foreign investment laws may be significantly harsher come 1 December 2015 if the Government’s proposed foreign investment reform package is passed. The proposal includes substantial increases to existing criminal penalties (including both significant fines and imprisonment) and a new civil penalty regime aimed at ensuring that foreign persons do not profit from non-compliance. There are also plans to introduce new civil and criminal penalties for third parties who assist investors to contravene the rules.
Foreign investors should carefully consider their Australian foreign investments and tax affairs. There is a current amnesty for foreign investors in Australian residential real estate who voluntarily disclose their non-compliance with foreign investment laws before 30 November 2015. After this date, anyone who does not comply risks forced property sales and the full extent of a strengthened penalty regime.
Further information about the proposed foreign investment changes is available here.
Further information about Australia’s commitment to the OECD Common Reporting Standard is available here.
Further information about the proposed non-final withholding tax on foreign residents is available here.
In an interview published by The Australian newspaper on 25 February 2014 (available here).
Media Release dated 8 August 2015 (available here).
Media Release dated 9 June 2015 (available here).