Foreigners seeking to invest in real estate will face fees and tough penalties for rule breaches under a plan to ease upward pressure on house prices for domestic buyers.
Prime Minister Tony Abbott said the proposed changes were not a "magic wand", but the government was keen to give Australians seeking to enter the housing market "the fairest possible go".
Currently non-resident foreign investors are banned from purchasing an existing home.
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.
But since 2006 there have been no government sales of illegally acquired property.
And there are concerns that foreign buyers are paying grossly inflated prices.
It is understood there is one active case of illegal purchasing, with details expected to be released soon.
All purchases, whether new or existing homes, are required to be pre-screened by the Foreign Investment Review Board.
In the first nine months of this financial year, the Foreign Investment Review Board approved foreign investment into residential property worth around $24.8 billion - mostly in Melbourne and Sydney.
Under the changes, foreign investors will face a hurdle that won't apply to Australian buyers - a $5000 application fee to buy a residential property under $1 million.
For properties over $1 million, it will be $10,000 for every extra million dollars in the purchase price.
Anyone breaking the law will be fined up to 25 per cent of the value of the property and forced to sell it.
"We need to make sure that all foreign investors are following the rules, and that those foreign investors who break the rules are not able to profit from breaking the law," Mr Abbott said.
Treasurer Joe Hockey said the new fees would raise more than $200 million a year, which would go to better enforcement of the rules.
He said in some cases foreign purchases of property were linked to criminal activity such as money laundering and terrorism financing.
Residential property transactions will be added to a new national register, which also includes agricultural property held by foreign investors.
The government is taking soundings on the proposals and will make a final decision after March 20.