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GUEST OBSERVATION
The federal government’s proposal to charge foreign investors a minimum of $5,000 on residential property investment applications has been couched in terms of <a href="https://jbh.ministers.treasury.gov.au/transcript/033-2015/" target="_blank">ensuring the integrity Australia’s foreign investment regime</a>.
The fees, announced by treasurer Joe Hockey and Tony Abbott while touring a house for sale in Sydney this week, add to the already-revealed <a href="https://www.pm.gov.au/media/2015-02-11/government-tightens-rules-foreign-purchases-agricultural-land" target="_blank">changes around agriculture land ownership</a> that have included reducing the purchase threshold for Foreign Investment Review Board (FIRB) oversight from $252 million to $15 million, and an ATO “stocktake” of foreign-owned agricultural land.
The Treasury has released an <a href="https://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2015/Strengthening%20Australias%20foreign%20investment%20framework/Key%20Documents/PDF/Strengthening%20Australias%20foreign%20investment%20framework.ashx" target="_blank">options paper</a> seeking consultation on the proposed changes to residential property investments by 20 March 2015. This is a short timeline for such consultation.
Introduction of fees
Introducing fees for the first time for foreign investment applications to the FIRB is intended to support administration on a user-pays basis. For residential property and agricultural land, the fee would be up to $5000 for each application and increase to $10,000 for every additional $1 million.
For other business, including agribusiness, the initial fee would be $25,000, and $100,000 would be charged where “the value of the target’s assets are greater than one billion dollars”. This includes “sensitive sectors” such as the media, telecommunications, transport, defence and those related to it, as well as “uranium, plutonium or the operation of nuclear facilities”.
No evaluation appears to have taken place in order to establish whether the introduction of fees would act as a deterrent to application, or change the pattern of investment across sectors. In these terms, it is not clear what the intentions of the government are, given that the criteria for evaluation remain open as they are currently.
For applications of large value, the fees proposed remain small. Nonetheless it incurs costs to foreign investors which domestic investors do not bear and it’s hard not to read a subtext of xenophobia, particularly around the level of Chinese investment, a fear which is not largely borne out <a href="https://theconversation.com/dont-be-misled-on-chinese-foreign-investment-read-the-facts-25316" target="_blank">by the evidence</a>.
The fee is higher than that recommended by last year’s Federal Parliamentary Committee into affordable housing and foreign investment, which suggested a “<a href="https://www.aph.gov.au/~/media/02%20Parliamentary%20Business/24%20Committees/243%20Reps%20Committees/Economics/44p/Real%20Estate/Report/Report%20Final.pdf" target="_blank">modest administration fee</a>” of up to $1500, which it said would generate revenue of $158.7 million over four years.
I conservatively estimate the revenue obtained from charging the residential fee - based on <a href="https://www.firb.gov.au/content/Publications/AnnualReports/2012-2013/index.asp" target="_blank">approval numbers</a>, and making the (possibly highly optimistic) assumption that applications would continue to increase above the nearly 13,000 in 2012-13 - would be more than $63 million per year. It is not clear how the expected revenue from the new fees <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/news/2015-02-25/foreign-real-estate-buyers-to-pay-fees-up-to-10000-dollars/6260748" target="_blank">as given by the government</a> of $200 million a year was arrived at.
Still, the government expects to use this to cover the costs of the ATO unit. This is still not large compared with the total value of $135.7 billion for foreign investment approvals in 2012-13.
Extending the role of the ATO
The government has announced a specialist unit within the Australian Taxation Office to support compliance with and enforcement of the foreign investment rules. The government proposes this on the basis that the ATO has the skills, data-matching systems and court experience. Presumably it has consulted the ATO in order to ascertain how well the ATO aligns with this, given that its functions are entirely oriented toward tax collection.
Involving the ATO in this way might call for legislation that determines the functions of the ATO to be amended, as well as changes to the Foreign Acquisitions and Takeovers Act, which regulates FIRB.
On the user-pays basis claimed, $200 million suggests a fairly decent-sized unit at the ATO. The costs for the FIRB and its Division of the Treasury are a mere $4.5 million for 2012-13. <a href="https://www.accc.gov.au/publications/accc-aer-annual-report/accc-aer-annual-report-2013-14/accc-and-aer-annual-report-2013-14/part-1-year-in-review/finance-and-staffing-snapshot" target="_blank">By comparison</a> the entire ACCC cost $182 million in 2013-14. (The <a href="https://annualreport.ato.gov.au/05-financial-performance/financial-statements/cash-flow-statement" target="_blank">ATO cost a whopping $3.8 billion</a> in 2013-14, although consider the Commonwealth tax take of<a href="https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5506.0Main%20Features22012-13?opendocument&amp;tabname=Summary&amp;prodno=5506.0&amp;issue=2012-13&amp;num=&amp;view=" target="_blank"> $338 billion in 2012-13</a>.)
Lack of hard data around rorts
New penalties are proposed for non-compliance with the foreign investment requirements. On its own admission, there is “limited evidence to suggest non-compliance” so it is not clear what the impact would be. The government clearly believes that improved monitoring might unearth it.
Hockey told the <a href="https://mpegmedia.abc.net.au/rn/podcast/2015/02/bst_20150226_0735.mp3" target="_blank">ABC’s Radio National</a>: "There is some evidence that foreigners have been buying existing residential real estate in Australia. That is unlawful and we have at the moment not got the resources at the moment to properly track that, we have no register of foreign ownership of residential land in Australia."
I have written before about <a href="https://theconversation.com/little-hard-data-in-the-hard-area-of-foreign-investment-28893" target="_blank">the lack of hard data</a> in foreign property ownership. The main questions are whether a register means better information will be collected and how the information might be used.
The only measure which looks useful is the proposed improvements to obtaining and keeping an inventory of foreign investment in property by liaising with state titles' offices and other sources of data. This might have been useful as an exercise prior to any other proposals, in order to gain an idea of the scale, value and purpose of land purchase. Again, this would only be meaningful if the equivalent exercise is done in order to compare with domestic purchase.
For instance in existing estimates, foreign purchases of agricultural land remain small. This sort of investment inventory would clarify exactly the differences in treatment of foreign and domestic purchases, and how these align with policy objectives. Availability of such information about land and other resource use would also allow other objectives, for instance in regional, industry, and environmental policies, to be strengthened.
In the end, we need to be able to analyse whether these changes will help us identify the number of foreign investors breaking the rules.
FIRB is already able to prevent any foreign investment above the low existing thresholds on the grounds of (unspecified) public interest. Yet very few proposals are knocked back. It is hard to see how this might change.
None of the measures suggested are backed up by clear evidence as to where they fix existing inadequacies or just what those are. The public interest criteria are not tightened.
<img src="https://counter.theconversation.edu.au/content/38031/count.gif" alt="The Conversation" width="1" height="1">Margaret McKenzie is lecturer, School of Accounting, Economics and Finance at Deakin University.
This article was originally published on <a href="https://theconversation.com">The Conversation</a>.
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MMcKenzie-5kQhUd2GMj

Foreign investment changes should expose the rorters: Margaret McKenzie

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GUEST OBSERVATION
A large portion of commentary on foreign investment in Australia is based on scant data, as recent submissions to the <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=economics/foreigninvestment/index.htm">inquiry</a> into foreign investment in residential property show.
At the moment it seems the only body collecting any data on this sensitive issue is the Foreign Investment Review Board, and that appears limited. Even the Australian Bureau of Statistics and Reserve Bank <a href="https://www.canberratimes.com.au/federal-politics/political-news/abs-has-patchy-figures-on-foreign-investment-in-homes-20140625-3atp4">admitted</a> to the O'Dwyer inquiry its staff rely on trade magazines and newspapers to identify foreign real estate purchases.
The concept of foreign investment
In economics investment means the flow of additions (positive or negative) to a stock of assets, or store of value, over time in the economy. Investment is important because it contributes to the productive capacity of the economy. Residential property investment increases the flow of services from housing.
The term foreign investment is very often loosely used. It includes additions to assets by foreigners, such as internally financed additions or improvement to the assets, or externally through the purchase of new equity. But it also may include transfer of ownership of existing assets from local to foreign, such as through purchase of existing equity. By itself this would leave the stock of assets unchanged.
Prices in transactions are subject to supply and demand. They can vary from increases or improvements to production, through to speculation as in the lead up to the global financial crisis. This is another reason why the measurement of foreign investment may not be able to easily distinguish between additions to assets and the exchange of existing assets. Moreover the foreign exchange transactions which may be used to identify foreign investment do not record the reasons for the transaction.
Many foreign investment transactions involve selling and buying by entities which are themselves a mixture of domestic and foreign ownership. The IMF has rules about the how to categorise the various levels of foreign ownership involved in the transactions. “Direct investment” is that where a resident in one economy has control or a significant degree of influence directly or indirectly in the management of an enterprise resident in another economy. A rule of thumb is more than 10% of the worth of the entity is involved in the transaction.
Data collection needs resources
As in the case of any data, the quality of foreign investment data is only as good as the amount of resources devoted to the collection, and that has been determined historically. There are primarily two sources of data for foreign investment in Australia, the FIRB and the ABS.
The state titles and transfers offices do not record the nationality of parties in property transfers. The addition to cost for improving data collection needs to be weighed up against the benefits of the additional information gained from that data. For national data, this is invariably a political question, not only in determining the total funding or addition for data collection, but also within that the allocation to each area, as indicated in the ABS submission.
The Treasury budget <a href="https://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2013/PBS%202013-14/Downloads/PDF/02_ABS.ashx">documentation</a> provides no plan to increase ABS resources, nor is the purpose of expenditure identified (except for the Census).
This article continues on the next page. Please click below.
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Property as a special category of foreign investment
The difficulties of recording foreign investment data are widespread - Australia is one of the few countries that produce data of any sort on foreign ownership of land.
In the case of real estate, the stock of assets includes land (and improvements), buildings and other constructed physical structures. A problem for measurement of property as foreign or domestically owned arises because the land itself has to stay on Australia’s national balance sheet as an asset even though it may have a foreign owner. This involves separate valuation of the land. Otherwise the land would appear in the balance sheets as an asset of another country.
The ABS data on real estate cannot be split between foreign and local ownership, nor between commercial and residential. The ABS includes foreign investment in property in purchases of Australian equity in “other business services” which includes legal, accounting, marketing, computing and scientific services, amounting to about A$33 billion in 2013. The data is obtained by survey of the businesses involved.
FIRB data is collected for a different purpose
The ABS also makes use of data from the FIRB on investment intentions by foreign investors outside the Australian corporate structure, estimated at a value of A$24 billion for 2013. The FIRB data are based on applications it receives. It would only include the value of foreign investments where the amounts are greater than the threshold requirement for applications, currently A$248 million for business investment from most other countries. Lower or zero thresholds apply for real estate or for government investors. It is not clear how repeat and unsuccessful applications are accounted for.
Emigrating Australians increase foreign investment assets - by another A$48 billion. Overall foreign holdings of Australian real estate appear to add about 3% to total foreign investment. The RBA estimates that foreign investment is at most 5-10% of dwelling turnover value and half that in volume because the investment is in higher value houses. This leaves the likely proportion of total housing stock which is foreign owned unknown but likely to be very small.
What is needed?
The ABS recommends that if comprehensive data on foreign investment in real estate is a priority, the FIRB and the state offices for transfers and titles could be required to collect the data. The data required, according to the ABS, would include:
<ul>
<li>the market value of property transacted</li>
<li>settlement date</li>
<li>residency of investor</li>
<li>Australian residency status of purchaser</li>
<li>seller residency, and</li>
<li>whether purchaser is a corporation or individual.</li>
</ul>
Whether the foreign investor is a government could be added to the list. While the ABS proposal would need to be costed and the political will to be implemented, it appears to be a sensible suggestion to improve the data in this area.
Margaret McKenzie is lecturer, School of Accounting, Economics and Finance at <a href="https://www.deakin.edu.au/" target="_blank">Deakin University</a><a href="https://theconversation.com/institutions/deakin-university"></a>.
This article was originally published on <a href="https://theconversation.com" target="_blank">The Conversation</a>.
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Margaret McKenzie

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