Changes to FIRB New Dwelling Exemption Certificates (for apartment developments)

Amongst various announcements in last night's Federal Budget, there are changes to the Government's policy on "New Dwelling Exemption Certificates". A summary of the changes, and a recap of New Dwelling Exemption Certificates, are set out below.

FIRB approval for sale of new apartments limited to 50%

The 2017 Federal Budget imposes a 50% cap on the sale of new apartments to foreign purchasers in a development, where developers are selling under a New Dwelling Exemption Certificate issued by FIRB. The cap will be imposed on all New Dwelling Exemption Certificates which are applied for on and from 9 May 2017.

Previously, New Dwelling Exemption Certificates did not limit the number of apartments which could be sold to foreign purchasers (100% of apartments could be sold to overseas purchasers).

The changes in last night's Budget do not affect existing New Dwelling Exemption Certificates.

Recap on New Dwelling Exemption Certificates

What are New Dwelling Exemption Certificates?

A New Dwelling Exemption Certificate can be issued by FIRB in respect of an development consisting of 50 or more apartments in order to provide pre-approval for a developer to sell to foreign persons.  This avoids the need for each foreign purchaser to seek their own FIRB approval, which is an incentive for purchasers and streamlines the sales process for developers.

New Dwelling Exemption Certificates can be issued in respect of multi-storey buildings (ie. apartments).  Townhouses, house and land packages and greenfield developments are not eligible for New Dwelling Exemption Certificates.

New Dwelling Exemption Certificates can only be sought once Development Consent has been issued for a project.

Fees

Currently, the following fees apply in relation to New Dwelling Exemption Certificates and sales to foreign purchasers pursuant to a New Dwelling Exemption Certificate:

Initial application for the certificate: $25,300

Fee for each apartment in the development sold to a foreign person:

• Per apartment sold for $1 million or less — $5,000
• Per apartment sold for over $1 million and less than $2 million — $10,100
• Per apartment sold for between $2 million and less than $3 million — $20,300

Variation of a New Dwelling Exemption Certificate: $5,000

Who pays the fees?

The developer holding the New Exemption Development Certificate is liable to pay the applicable fee for each apartment sold to a foreign person.  However, (depending on the market), some developers may pass this cost on directly to the purchaser in full, or price a percentage of the fee into the adjustments for the sale of the apartment.

Obligations

When selling apartments under a New Dwelling Exemption Certificate, developers must:

• market the apartments for sale in Australia;
• provide a copy of the New Dwelling Exemption Certificate to each foreign purchaser; and
• report to FIRB on the status of sales in accordance with the conditions of the New Dwelling Exemption Certificate.

Penalties

Significant financial penalties apply for failure to comply with the above obligations.      

What should you do?

Developers with significant reliance on in-bound foreign investors should review their financial models for current and future projects.  The 50% cap does not prohibit the sale of more than 50% of apartments to foreign purchasers, but does limit the level of pre-approval that can be obtained by developers.  Clayton Utz can prepare sales contracts to address both pre-approved sales under a New Dwelling Exemption Certificate and to require purchasers to obtain their own FIRB approval once the 50% cap has been reached.

To avoid penalties, developers should review their practices when selling apartments under a New Dwelling Exemption Certificate.  Clayton Utz's specialised sales team is able to assist developers with tracking and reporting sales to foreign purchasers to assist in compliance with both FIRB requirements and reporting requests from financiers.

You can get more analysis on how taxation changes in the Federal Budget impact property investors and banks here.