The budget achieves what may be a world first with the imposition of a tax on foreign investment. It is styled as a “user charge”, but the $735 million it will raise during the next four years far exceeds the cost of running the Foreign Investment Review Board.
Hong Kong and Singapore have surcharges on the stamp duty paid by foreign investors in real estate, which were copied in the first budget of the Labor government in Victoria. But no other advanced nation levies a fee on foreigners wanting to bring money into their country to buy an asset or build a business.
The government started with a proposal for a $1500 fee for foreign purchasers of real estate that had been made by the House of Representatives inquiry led by Kelly O’Dwyer, who subsequently was appointed Treasury parliamentary secretary.
With the hunt on for savings, this was upped to $5000 for properties under $1m and $10,000 for every $1m beyond that.
The Nationals wanted equal treatment for foreign buyers of farms and agribusiness, so the government decided to put fees on everything. After all, foreigners have no vote.
By the Labor Party’s count, there are now 22 screening thresholds and 33 levels and categories of fees ranging from $5000 up to $100,000. It rightly asks whether this is the action of a deregulatory government.
It is the first time since the Foreign Acquisitions and Takeovers Act was implemented in the peak of economic nationalism during the final days of the Whitlam prime ministership that a government has seen foreign investment as a revenue-raising opportunity.
The fees are 1 per cent or less so most investors will not be deterred. However, the hurdles are rising for foreign-owned agricultural businesses and property developers. A foreign-owned farm business that was already at, or above, the minimum threshold for foreign investment approval of $15m would have to seek fresh approval and pay another fee any time they wanted to add a paddock. A foreign-owned property business could be up for fees and approval on every transaction.
The crackdown on foreign investment in residential real estate ostensibly was about ensuring long-established rules were obeyed. The fees were accompanied by steep fines for breaches of the rules that say established property can be bought by temporary residents only if they sell it when they depart.
There have been stray comments from government members about wanting to ensure our children can afford to buy into the real estate market that suggest the new fees and fines are calculated to chill the flow of foreign investment into real estate.
The FIRB annual report shows there were 23,000 residential real estate approvals in 2013-14, of which one-third were temporary residents wanting to buy somewhere to live and the remainder were for developers or people buying apartments off the plan.
It was only three years ago that the level of council approvals for new housing was the lowest since the late 1990s, while in NSW they were the lowest on record. Helped by foreign investment, new apartment approvals are running at record levels and, in NSW, more than three times their trough.
Fear over the crackdown could make it harder for apartment developments to proceed.
In Victoria, the government’s new 3 per cent stamp duty for non-resident purchases, when added to the commonwealth’s fee, will put another $20,000 on the cost of a $500,000 apartment, on top of the $25,000 stamp duty already being charged. It would be surprising if this did not slow the residential building industry, which is one of the few parts of the economy performing really well.
There may come a time when we want all the foreign investment we can get. Falling house prices cause a lot more political and economic damage than rising house prices.
The tightening of foreign investment rules governing the rural sector, including food processing companies, is hard to fathom. A foreign investor buying a $10m farm will face a $100,000 fee, or the same as would be levied on an investor buying a $1 billion non-agricultural business. Investment in agribusiness now has a lower threshold of $55m before approval is required than investment elsewhere in the economy, where the threshold is $252m.
There was debate in cabinet about how an agribusiness would be defined. Agriculture Minister Barnaby Joyce wanted it to include downstream manufacturing and transport and storage industries related to farm production. He won on manufacturing, so vineyards, the dairy industry, the sugar industry and meat processing will all be caught.
Nationals MPs liken it to stopping the boats, saying rural Australia will have confidence the national interest is being respected if government controls what foreign investment comes here, and how it comes. That foreign investment will enhance rural productivity, which lags Canada and the US, has not entered the debate. There is nothing more than populism at the root of this. One may have hoped for better.
This article originally appeared in The Australian Business Review.