Kelly O'Dwyer (Higgins, Liberal Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

On behalf of the Standing Committee on Economics I present the committee's report on foreign investment in residential real estate together with the minutes of proceedings and evidence received by the committee.

Report made a parliamentary paper in accordance with standing order 39(e).

by leave—I am very pleased to be presenting the economics committee report on foreign investment in residential real estate. Residential housing has been, and will always be, an issue that is at the forefront of community debate and discussion. Owning your own home is part of the great Australian dream. For many, it represents the opportunity to build a future. It represents connection with community and security for family. Buying into the Australian dream does not come cheap. According to a recent International Monetary Fund report, the current ratio of housing prices in Australia to average incomes is 31.6 per cent above the historical average. Is it any wonder then, that many Australians now worry that home ownership may be out of reach for them, their children, or their grandchildren? At the same time, Australians worry about rental and interest costs, and their impacts on the cost of living.

There is no one simple explanation for the decline in housing affordability, although lack of land supply, underdevelopment, state planning laws and regulations, local council red tape, and stamp duty and tax arrangements likely all play a part.

Over the years, however, many in the community have asked the question: what role does foreign investment play in residential real estate? It was timely then that on 19 March this year the Treasurer, the Hon. Joe Hockey MP, commissioned the House economics committee to examine: the benefits of foreign investment in residential property; whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers; how Australia's foreign investment framework compares with international experience; and whether the administration of Australia's foreign investment policy relating to residential property can be enhanced.

Under our current foreign investment framework, as it applies to residential real estate, foreign investment is channelled into new housing so that more homes, units and apartments are built—meaning more opportunity for people to purchase. It also contributes directly to economic activity, generating employment for builders and suppliers.

When it comes to existing homes, there are generally prohibitions and restrictions. Non-resident foreign investors are prohibited from purchasing an existing home, and temporary residents—on visas of more than 12 months—can purchase just one existing home to live in while they are resident in Australia, but must sell this home on their visa expiring. All purchases, whether new or existing homes, are required to be prescreened by the Foreign Investment Review Board, supported by the Foreign Investment and Trade Policy Division of Treasury.

According to FIRB statistics, in the first nine months of this financial year, FIRB approved foreign investment into residential property of around $24.8 billion—44 per cent higher than the $17.2 billion approved during all of 2012-13.

Much of this investment is concentrated in the Melbourne and Sydney markets. Most of the increase is attributable to proposed investment in new property, which at $19.3 billion for the first nine months of 2013-14 is 79 per cent higher than 2012-13. The total number of established property approvals for the first nine months of 2013-14 is 5,755 compared to 5,101 for 2012-13.

Over six public hearings, and after considering more than 92 submissions, the committee has four key findings that translate into 12 practical recommendations. First, there is no accurate or timely data that tracks foreign investment in residential real estate. No-one really knows how much foreign investment there is in residential real estate, nor where that investment comes from. A national register of land title transfers that records the citizenship and residency status of all purchases of Australian real estate would fix this and would allow facts to be injected into discussions about foreign investment, rather than just 'best guestimates'. A national register would also help with compliance and enforcement with the foreign investment framework, allowing data to be compared more easily. Other relevant government information should also be captured and made available to FIRB. At present, FIRB cannot access data from the Department of Immigration and Border Protection on departing visa holders. Given the government has this information, this makes no sense. Together, these initiatives would allow authorities to track departing visa holders who may have purchased an existing home but who, under current rules, need to sell that home within three months of leaving.

Second, there has been a significant failure of leadership at FIRB, which was unable to provide basic compliance information to the committee about its investigations and enforcement activity. During the course of the inquiry, it came to light that no court action has been taken by FIRB since 2006. During the entire Rudd-Gillard-Rudd government, not one divestment order was issued, which means not one government sale of illegally acquired property was made. This compares with 17 divestment orders between 2003 and 2007, when foreign investment in residential real estate was at much lower levels. FIRB was also unable to provide basic data on voluntary divestments. It defies belief that there has been universal compliance with the foreign investment framework outlined above since 2007. The systems failure at FIRB needs to be repaired and new resources need to be injected into FIRB to ensure better audit, compliance and enforcement outcomes.

Third, if you are not prepared to enforce the rules, then it is less likely that people will comply with the rules. This is especially true if the consequences of a breach are not meaningfully adverse. The ability to more easily sanction people who have breached the foreign investment framework is critical. Hence, the need to bring in a civil penalty regime for breaches of the foreign investment framework, along with the need to capture those people who have previously stood outside the framework but who materially impact the integrity of our foreign investment regime—for instance, third parties who knowingly assist foreign investors to breach the rules.

Currently, non-resident foreign investors can profit from the illegal purchase of property. Given this, the current financial penalty that can be applied to a property, regardless of its value, is seen by many as simply the cost of doing business. Fines and pecuniary penalty orders should directly relate to the value of the property concerned. Furthermore, investors who breach the framework should not be able to profit.

Fourth, currently the Australian taxpayer foots the bill for the administration of the FIRB and FITPD, not foreign investors applying for approval. This has, arguably, contributed to underinvestment in FIRB's audit, compliance and enforcement activities.    Just as other regulators adopt a user-pays model, the committee recognises that a modest administration fee can be implemented to fund enhanced audit, compliance and enforcement capacity within FIRB, as well as other new measures outlined in the recommendations.

The Parliamentary Budget Office analysis suggests that a modest application fee of $1,500 would generate revenue of $158.7 million over four years, yet amount to 0.27 per cent or 0.20 per cent of the purchase price for an average home in Melbourne and Sydney respectively. These practical measures will send a strong message about Australia's commitment to its foreign investment framework in practice as well as in words.

This is important. Too often, the signals in recent years have been in the opposite direction. For instance, in 2008, then Assistant Treasurer, the Hon. Chris Bowen MP, removed the requirement for temporary residents to notify FIRB of all residential purchases. This rule change allowed temporary residents to purchase existing homes without notifying FIRB. Perhaps recognising that this neutered FIRB's capacity to monitor compliance with the sale on departure condition under our foreign investment framework, his successor, Senator the Hon. Nick Sherry, reversed the change and, in the lead-up to the 2010 election, announced a range of proposed measures to tighten monitoring and enforcement. Some of them are not dissimilar to those being recommended by the committee. Regrettably, most of those announced measures were not pursued by his successor, the Hon. Bill Shorten MP, nor by any of the subsequent assistant treasurers in the last government. The committee strongly recommends that the government pursue the package of measures canvassed in this report.

Given the recent successes in delivering free trade agreements for the benefit of Australia, lest there be any confusion it is important to note that residential property has never been part of any free trade agreement. Accordingly, none of the recent agreements with Japan, South Korea and China impact the screening arrangements for residential property.

In conclusion, the committee found that the current foreign investment framework should be retained. In practice, the framework has been undermined due to poor data collection, along with a lack of audit, compliance and enforcement action by FIRB. Australians are entitled to expect that the rules are properly enforced, and our committee recommendations strengthen the ability to do this.

I would like to acknowledge and thank all of those people who have helped inform this inquiry. In particular, I thank those people and organisations that made submissions and presented evidence; those who sent letters and provided their views; the Parliamentary Library and the Parliamentary Budget Office for their efficient professionalism; and of course, members of the committee, who took a very collegiate approach to this task. Special thanks go to committee secretary, Mr Peter Banson; inquiry secretary, Dr Kilian Perrem; and the House Standing Committee on Economics secretariat team for their diligent work on this report and their willingness to assist both the chairman and committee members to enable the report to be as comprehensive as possible. Finally, I give a thank you to my incredibly hardworking staff, Tania Coltman and Sarah Nicholson, for their consistently excellent work.

I look forward to the government's response to this report and the many practical recommendations that are contained in it. I commend the report to the House.

Ed Husic (Chifley, Australian Labor Party, Shadow Parliamentary Secretary to the Shadow Treasurer) Share this | Link to this | Hansard source

I also extend my thanks, on behalf of members of the Standing Committee on Economics, to the committee secretariat for all their hard work and their continued diligence. It is very much appreciated. However, I must say the one good thing about this inquiry is that it is over. It was an inquiry less focused on good policy and more on glaring publicity. Three things underpinned it. Firstly, there was a highly questionable and alarmist report by Credit Suisse into projected levels of Chinese foreign investment in residential property; secondly, there was a constant attempt to prove that there were systemic flaws within the way FIRB was enforcing compliance with investment laws; and thirdly, and levering off this last point, there was an obsessive drive to introduce a new tax on foreign investors at a time when the focus should be on improving trade and investment relationships.

Inquiries can be very useful means to spotlight areas demanding reform or improvement, but they need firm foundations to achieve this. This inquiry was sparked by an exaggerated publicity-seeking report by a firm you would expect better of, Credit Suisse. In March, Credit Suisse issued claims that inflated the projected scope of likely Chinese investment in residential property. When the committee sought to question them on the report, they had to be dragged to the inquiry to appear, which is not surprising, because they were no doubt embarrassed by their own claims. They used flagrantly emotive language in their report, including claims that 'The Chinese want to buy your house' and 'The dragon discovers the quarter acre dream'. This fanned reporting of contestable claims that $44 billion of Chinese investment would be ploughed into Australian residential real estate. After sustained questioning at a public hearing we learnt that Credit Suisse had included in its calculations purchases made by permanent residents who were of Chinese background. A lot of people would wonder how permanent residents can be classified as foreign investors. It defies belief.

The problem is that this type of hype reporting helped prompt this inquiry, and the inquiry then became a launching pad for a new tax grab. Make no mistake, the coalition wanted to grab a much bigger tax slice out of foreign investors than was finally recommended. You only have to refer to the media coverage generated during the course of the inquiry to know this to be the case. The new tax has been scaled back for now. What this inquiry heard on countless occasions was that foreign investment adds to housing supply in this country. It generates demand, spurs growth in jobs and economic activity. It is beneficial to the nation and our economy.

The rules around foreign investment in residential real estate are clear-cut. It is permissible for new developments, and strict rules prohibit the purchase of existing residential property other than for temporary residence. Whilst some marginal changes can be contemplated to these rules, there was little evidence submitted to the inquiry of widespread, systemic noncompliance. This is despite the fact that FIRB's compliance capabilities were subjected to regular public criticism by the coalition and little procedural fairness was extended to FIRB to put public criticisms directly to them and allow them to respond. It was extraordinary that the minister with direct oversight of FIRB and Treasury, no-one less than the Treasurer himself, either failed to defend them from these criticisms or he was happy for his coalition colleagues to launch them. Even more extraordinary was that after the coalition levelled those criticisms the report acknowledged that FIRB has an advisory role, and Treasury needs to shoulder more responsibility for compliance.

The concerns about compliance are being used to justify an up-front impost on investors. I would make a number of points about this. First, the government has to work out if it is in favour of foreign investment or not. It has driven foreign companies, such as Holden's, out of the country, it has blocked investment proposals, such as GrainCorp, and now it wants to siphon funds out of foreign investors. No-one for one minute should be fooled by the words used in this report of a 'modest application fee', which, by the way, the coalition tried to suggest would be between $500 and $1,500, and today it is a firm $1,500.

You cannot trust that this government, which has introduced a range of surprise new taxes or sudden tax increases, will not be tempted to milk revenue out of these investors at a higher rate down the track. The coalition argue that they will use the funds raised by the impost to improve compliance. This does not stack up. There is scope for the Australian National Audit Office, for example, to be engaged to review compliance processes and procedures utilised by both Treasury and FIRB. ANAO can and does conduct performance reviews and could have easily been engaged, and recommended to have been engaged, to assess the way that both Treasury and FIRB undertake compliance and determine if resource allocation for this activity is appropriate. In fact, it should be recommended that ANAO consider doing this as a matter of course ahead of the imposition of any new fee or tax. I would certainly urge them to consider this. They can undertake the activity and they, again, should consider to do so. But all of these reasonable suggestions have been ignored by a coalition determined to find new taxes.

Some of the other recommendations will have questionable effect. The big issue with data in this space is time lag—the distance between an intent to purchase and construct and then the actual construction occurring. A new national register that simply logs residential status of investors will probably do little to alter or change the impact of data lags in this area. While some good might have a chance to emerge from the inquiry, and some modest compliance measures might see the light of day, one hopes this report dissolves from memory, and fast.

Kelly O'Dwyer (Higgins, Liberal Party, Parliamentary Secretary to the Treasurer) Share this | Link to this | Hansard source

I move:

That the House take note of the report.

Ian Goodenough (Moore, Liberal Party) Share this | Link to this | Hansard source

In accordance with standing order 39(c), the debate is adjourned. The resumption of the debate will be made an order of the day for the next sitting.