Introduction

1.1 The Australian Government’s policy is to welcome foreign investment, noting that foreign investment ‘has helped build Australia’s economy and will enhance the wellbeing of Australians by supporting economic growth and innovation into the future.’⁶ Foreign investment proposals are subject to the foreign investment framework and reviewed by the Australian Government on a case-by-case basis. The intention of the framework is to maximise investment flows, while protecting Australia’s national interests. Factors that can be considered when assessing the impact of foreign investment on national interests include national security, the effect on competition, Australian tax revenues, resource use and stock production.

1.2 Foreign investment occurs across a range of markets, including business and land acquisitions (agricultural, mining and commercial), and residential real estate. Figure 1.1 illustrates the total value of foreign investment approvals ($247.9 billion) by sector in 2015–16.

Figure 1.1: Value of foreign investment approvals by sector, 2015–16 ($ billion)

Source: ANAO analysis of Foreign Investment Review Board information.

The foreign investment framework

1.3 Australia’s foreign investment framework primarily consists of the Foreign Acquisitions and Takeovers Act 1975 and Australia’s Foreign Investment Policy, which guide the Australian Government’s decision making process when considering foreign investment proposals.

1.4 The Department of the Treasury (Treasury) is responsible for the foreign investment framework and the Treasurer reviews foreign investment proposals on a case-by-case basis to ensure they are not contrary to Australia’s national interest. The Treasurer can make an order to prohibit a proposed foreign investment that is contrary to the national interest, or impose conditions on an investment on national interest grounds.⁷

1.5 Prior to 2015, Treasury was also responsible for compliance activities and assessing foreign investment applications. In the 2015–16 Budget, the Government announced a package of measures aimed at strengthening Australia’s foreign investment framework. The package was introduced in response to a Senate committee inquiry report in 2013, Foreign Investment and the National Interest, which included 29 recommendations.

1.6 Additionally, the House of Representatives committee Report on Foreign Investment in Residential Real Estate in 2014 included 12 recommendations. In response to the second recommendation⁸ of the 2014 report, Treasury delegated responsibility for residential real estate under the foreign investment framework to the Australian Taxation Office (ATO), including the collection of fees, assessing applications, compliance and enforcement. Treasury retained responsibility for commercial real estate matters and other framework-wide administrative functions, such as external reporting.

1.7 The current foreign investment regime came into effect on 1 December 2015 and introduced the following features:

• stricter and more flexible penalties;
• an application fee regime;
• tighter rules relating to certain sectors (such as agriculture and critical infrastructure);
• an exemption certificate scheme for certain investments;
• a more stringent approach to foreign government investors; and
• creation of a register of foreign held interests in agricultural land and water.

1.8 Additionally, a register for foreign residential investment was established on 1 July 2016 and is expected to provide annual statistical reporting. Unlike the register for foreign investment in water and agriculture, there is no legislative requirement for the residential property register.

1.9 These changes to the foreign investment regime represented a new function within the ATO that required appropriate systems and processes to be put in place. The ATO received $47 million to implement its residential real estate program over four years from 2015–16. In 2015–16, the ATO’s total operating costs for the program were $9.2 million.⁹

Residential real estate

1.10 The foreign investment framework aims to channel foreign investment into new dwellings.¹⁰ The Foreign Investment Review Board states that this can create additional jobs in the construction industry, help support economic growth, and increase government revenues in the form of stamp duties and other taxes.¹¹ The Australian Government’s Foreign Investment Policy states that foreign investment enhances the wellbeing of Australians by increasing production, employment and income.¹²

1.11 The number of applications for foreign investment in Australian real estate has been increasing over recent years, as outlined in Figure 1.2. The total value of foreign investment approvals for residential real estate in 2015–16 was $72.4 billion (as shown in Figure 1.1).

Figure 1.2: Number of applications for foreign investment in residential and commercial real estate

Source: ANAO analysis of Foreign Investment Review Board information.

1.12 Foreign investors are required to gain approval prior to acquiring an interest in Australian real estate¹³, and applications are considered in light of the overarching principle that the proposed investment should increase Australia’s housing stock by creating at least one new additional dwelling.¹⁴ The ATO has administered a new application fee for residential property from 1 December 2015.

Applications and approvals

1.13 Foreign investors can apply to purchase specific residential properties, or can apply for an exemption certificate to allow them to purchase a certain class of property in a specified state or territory. The type of approval required is determined by the type of residential property. Approvals also contain conditions that must be satisfied, such as time periods in which actions must be taken. In addition to approval conditions, an annual vacancy charge for dwellings that are not rented out or occupied for more than six months per year applies from May 2017, with the first 12 month period to end May 2018.

1.14 The approval process and corresponding conditions for foreign investors in residential real estate are outlined in Figure 1.3.

Figure 1.3: Types of residential real estate available to purchase by foreign persons and associated approvals

Source: ANAO analysis of ATO information.

Compliance and penalties

1.15 The ATO is responsible for detecting and investigating non-compliance with foreign investment obligations for residential real estate. Non-complaint behaviour can include purchasing property without approval and not complying with approval conditions. While the ATO promotes voluntary compliance with foreign investment obligations, a number of intelligence channels are in place to assist it to detect non-compliance, including community referrals and referrals from other government departments. The ATO has also established a data matching program using data from other government departments and private sector entities to detect non-compliance.

1.16 Non-compliance with residential real estate obligations may result in the application of retrospective fees, penalties and infringement notices. The Treasurer can also require foreign investors to dispose of their interest in residential real estate in cases of non-compliance, by issuing a disposal order. As part of the reforms to the foreign investment framework, civil penalties were introduced and existing criminal penalties were strengthened.

Audit approach

1.17 The ANAO selected foreign investment in residential real estate for audit because of the extent of parliamentary and public interest in the issue, including concerns that foreign investors were not complying with foreign investment obligations and purchasing properties they were not entitled to own. The audit would also indicate the impact on compliance with foreign investment in residential real estate arising from the change in administrative arrangements.

1.18 The audit objective was to assess the effectiveness of the ATO’s and Treasury’s management of compliance with foreign investment obligations for residential real estate.

1.19 To form a conclusion against this objective, the ANAO adopted three high-level criteria:

• compliance and enforcement strategies and detection arrangements were in place to support compliance activities;
• activities were undertaken to promote voluntary compliance and effectively address identified instances of potential non-compliance; and
• the effectiveness of compliance arrangements was monitored and reported.

1.20 The audit did not examine the:

• implementation of legislative changes to the foreign investment framework in 2015;
• assessment of applications;
• implementation of the annual vacancy charge; and
• responsibility of Treasury to administer the foreign investment framework in relation to business, agricultural land and commercial land proposals.

Audit methodology

1.21 The audit methodology included reviewing internal ATO guidance, reporting, communication and evaluation plans, and interviewing key ATO and Treasury staff and stakeholders. The ANAO undertook data analysis of the application and self-registration data sets as well as state and territories land titles data. The ANAO did not receive any contributions from the public through its website in relation to this audit.

1.22 The audit was conducted in accordance with the ANAO Auditing Standards at a cost to the ANAO of approximately $380 000.

1.23 Team members for this audit were Kylie Jackson, Renee Hall, Sonya Carter, Dung Chu, Fei Gao, Haydn Thurlow and Andrew Morris.

Is the ATO effectively compiling a land register of residential real estate?

Background

2.1 As noted in Chapter 1, the Government agreed to a recommendation from a 2014 House of Representatives Standing Committee on Economics report that the ATO would establish a foreign ownership register, drawing from state and territory land title data collection processes.¹⁵

2.2 A key finding from the report was that there was no accurate or timely data that tracked foreign investment in residential real estate. Recommendation 8 was that the Government, in conjunction with the states and territories, establish a national register of land title transfers that records the citizenship and residency status of all purchasers of Australian real estate.¹⁶

2.3 The Government indicated that working with data from the states and territories would avoid duplication and reduce regulatory costs for purchasers of property. The Government’s response outlined that the intent of the register would be to provide essential information to better understand foreign investment trends and to aid in the detection of non-compliance with the foreign investment rules.

2.4 The national land register of foreign ownership consists of three components—agricultural land, water access entitlements and residential real estate. The registration of agricultural land and water access entitlements is required under legislation.¹⁷ To meet this requirement, the ATO established an online self-registration channel and completed a stocktake of foreign-owned agricultural property.¹⁸

2.5 There is no legislation underpinning the development of the residential land register. The ATO leveraged off the agricultural self-registration channel to require foreign investors to also register residential real estate acquisitions from 1 July 2016.

2.6 There will be no stocktake of foreign-owned residential real estate for the register. The volume of historical real property transactions was considered too time consuming and costly to capture.¹⁹ As indicated in paragraph 2.3, the intent was to rely on data from the states and territories, which is provided to the ATO for various purposes (including capital gains tax) to compile the residential land register. However, the states and territories were not collecting information necessary to develop the register, such as purchasers’ nationality and other foreign identifiers. Instead, a requirement for foreign investors to register details of a successful acquisition 30 days after settlement was introduced for approvals after 1 July 2016. This requirement was enforceable as a formal condition of approval for approvals after 1 July 2017.

Third-party data sharing arrangements

2.7 In 2013–14, the Australian Government announced a measure for the ATO to expand third-party data matching and reporting arrangements, which was deferred for one year in the 2014–15 Budget.²⁰ The measure was intended to introduce a legislated reporting regime for the provision of real property data from the states and territories to replace the ‘inadequate approach’ of acquiring data using the ATO’s general powers of acquisition.²¹ Accordingly, there was a need to amend taxation legislation to provide the basis for the legislated reporting regime.

2.8 The measure was also expected to improve the integrity, and increase the quantity, of data reported by the states and territories to the ATO. The extended information reporting requirements were intended to: expand the data matching capability with third-party reporter information; improve integrity of the foreign resident capital gains tax regime; improve compliance for capital gains tax, goods and services tax and other taxable events; and support data sharing between government entities.

2.9 The revised data collection and reporting arrangements expanded the data provided by the states and territories to include information about the foreign identity of property purchasers and vendors, and was therefore expected to also support the compilation of the residential land register. The states and territories agreed to revise their respective legislation as they were otherwise unable to collect the additional data provided for under the new reporting arrangements, such as property vendor identity data or foreign entity data.²²

2.10 While the Commonwealth legislative changes to support the revised reporting arrangements were implemented by 1 July 2016, most states and territories had not passed associated legislative changes by that time. Consequently, the revised reporting arrangements were not implemented from 1 July 2016, with the exception of New South Wales that was able to revise its legislation in time. Table 2.1 outlines the timing of the legislative changes and the number of real property transfer reports received by the ATO since 1 July 2016.

Table 2.1: Status of states and territories land holdings data sharing arrangements

Note a: The legislation passed in the Northern Territory enables collection and reporting of all information not previously collected, except for the foreign identity data.

Note b: All jurisdictions except Northern Territory commenced property data reporting from 1 July 2016 using the legislated Real Property Transfers Report. Only New South Wales reported foreign identity data during 2016–17.

Source: ANAO analysis.

2.11 As illustrated in Table 2.1, as at February 2018 all states and the Australian Capital Territory were in a position to provide the expanded real property transfers reports.²³ Real property transfers reports include the following information:

• property details, including land title information, property address and other descriptors;
• transactional information, including transfer price, contract date and settlement date;
• identity data of the purchaser/transferee and vendor/transferor, including:
  • name, address and date of birth for individuals;
  • name, address and Australian Business Number for non-individuals; and
  • foreign identity details.²⁴

2.12 Real property transfers reports include mandatory, optional and conditional fields. Optional fields must be completed by the intermediary²⁵/reporting party if the data is available, and conditional fields become mandatory when the condition is met.

Accuracy of foreign identifier data in real property transfers reports

2.13 As shown in Table 2.2, foreign identifier information in the real property transfers reports are all optional fields.²⁶ This may result in lower completion of fields²⁷, but needs to be balanced with the time and cost involved across all property purchases in completing property transfer reports. Table 2.2 also shows the number of foreign identifier fields that had been completed in the New South Wales (NSW) property data from 1 July 2016 to 30 September 2017. NSW was the only jurisdiction that had collected foreign identifier data for that period.

Table 2.2: Reporting fields in New South Wales property data for foreign investment

Note a: There can be multiple owners for each property transaction, and permanent residents (exempt from gaining foreign investment approval) may declare nationality other than Australian, as well as provide passport and visa details.

Source: ANAO analysis of ATO data.

2.14 The ANAO’s analysis identified 23 431 properties in the NSW data with at least one potential foreign identifier. This number is almost twice as high as the number of foreign investors who applied for residential real estate in NSW from 1 July 2015 to 13 December 2017 (12 278 as shown in Figure 2.2). The difference may reflect reporting of information in the foreign identifier fields by non-foreign investors (particularly for the nationality or citizenship and passport number fields). It may also reflect instances where foreign investors had purchased residential real estate without applying to do so.

2.15 The ANAO suggests that the ATO closely examines the accuracy of foreign identifier data in state and territory real property transfers reports and takes steps to make it more immediately useable for the purposes of the register of residential real estate. This may require substantial liaison with state and territory land titles offices to improve the accuracy of the foreign identifier data, including to ensure that it only includes foreign investors, and increased communication with intermediaries.

Self-registration of foreign ownership of residential real estate

2.16 The ATO advised that it had been relying on the information collected through the self-registration process as an interim measure until the states and territories were able to collect and report the complete new property data including foreign identifiers. The ATO further advised that the foreign identifier in the data from the states and territories is intended to match an existing FIRB application and should streamline the process of compiling the register.

2.17 Foreign investors submit information regarding their acquisitions through an online form on the ATO’s website. The online registration form was originally developed to register information on agricultural land holdings and the ATO designed the form to also collect residential real estate registrations from 1 July 2016.

2.18 The registration form provided on the ATO website has a range of information fields relating to: application information; contact details; ownership interest details; and land details. Of the 81 fields presented online, 36 were mandatory and 25 were conditional fields.

Extent of self-registration

2.19 The ANAO examined the extent of self-registration by comparing the number of self-registrations from 1 July 2016 to 17 December 2017 with the number of approvals for foreign investments in residential real estate from 1 July 2015 to 13 December 2017, shown in Table 2.3. The ANAO acknowledges uncertainty in this calculation relating to the selection of different time periods for approvals data (1 July 2015 to 13 December 2017) compared to self-registration data (1 July 2016 to 17 December 2017)²⁸, and because application approvals represent proposed investment and not all foreign investment approvals result in a purchase.

Table 2.3: Proportion of the ATO’s self-registrations of approvals for foreign investments in residential real estate

Note a: From 1 July 2015 to 13 December 2017.

Note b: From 1 July 2016 to 17 December 2017.

Source: ANAO analysis of ATO data.

2.20 As shown in Table 2.3, self-registrations represented 7.1 per cent of all approvals over the period. While it is not known how many approvals have resulted in a purchase, and therefore what percentage would represent full registration, the 7.1 per cent recorded provides some basis for considering there may be significant non-registration by foreign investors in residential real estate.²⁹ Accordingly, there would be merit in the ATO assessing the potential extent of non-registration and taking steps to improve the level of registration through education and other means (which could include simplifying the registration form to reduce a potential deterrent to self-registration).

2.21 The ATO advised in May 2018 that it had implemented strategies to increase the rate of self-registration, including through email prompter campaigns and visits to intermediaries. The ATO also advised that to mitigate risks to the integrity of the land register from under self-registration, it had conducted a comprehensive manual data matching exercise to identify property transfers that relate to a foreign investment approval.

Compiling the national residential land register

2.22 As illustrated in Figure 2.1, to compile the residential land register the ATO matches state and territory land titles data to foreign investment application data, and manually verifies the information submitted through the self-registration process with:

• application data sets to confirm compliance with approval conditions; and
• states and territories data to confirm the residential real estate purchase details.³⁰

Figure 2.1: Residential land information compiled for the national land register

Source: ANAO analysis.

2.23 Of the 2653 self-registrations shown in Table 2.3, 2128 registrations (80.2 per cent) exactly matched the FIRB numbers in the application data, and 525 (19.8 per cent) did not have matched FIRB numbers.³¹ However, the extent of non-exact matches also highlights the need for considerable effort by the ATO to cleanse the data in compiling the register in coming years.

2.24 The ANAO extended the matching of FIRB numbers for self-registrations, foreign investment applications and NSW real property data only.³² This matching aimed to identify the number of foreign investors with approval who subsequently purchased a dwelling and also self-registered. The matching identified a small number and percentage of application numbers consistent across the three data sets, as illustrated in Figure 2.2.

Figure 2.2: Data matching of potential foreign investor properties

Source: ANAO analysis of ATO information.

2.25 This analysis identified serious deficiencies in populating the register with reliable data, and further emphasises the importance of the ATO taking steps to improve the accuracy of data in real property transfers reports³³, and also in self-registrations.

2.26 The ANAO also matched information other than the application number between the FIRB application data and NSW real property data. As shown in Table 2.4, the ANAO developed degrees of confidence by matching the following information:

• name of purchaser;
• passport number;
• address of purchaser; and
• address of property purchased.

2.27 Table 2.4 indicates that the number of high and medium confidence matches for NSW (51 and 122 or 113 respectively) represented a small proportion of the number of self registrations and applications (504 and 12 278 respectively from Figure 2.2), and there was considerable variation in the three types of low confidence matches for NSW.

Table 2.4: Potential matches of data from foreign investment applications with NSW real property data

Source: ANAO analysis of ATO information.

2.28 In the context of the large number of properties purchased between 1 July 2016 and 30 September 2017 (427 946 properties for NSW), the ANAO’s testing revealed considerable levels of non-matches that will require manual verification by the ATO.

2.29 The ATO intended to provide an interim report on the register of foreign investment in residential real estate to Treasury in March 2018, however the report is yet to be prepared. The ATO aims to populate the register by December 2018 and prepare yearly reporting on the register once the states’ and territories’ information is standardised from 2019 onwards.³⁴

Does the ATO have an effective compliance and enforcement strategy in place?

3.1 The ATO does not have a compliance and enforcement strategy but has a documented risk assessment for foreign investment in residential real estate and a corresponding risk treatment plan (both completed in December 2016).

Risk assessment of foreign investment in residential real estate

3.2 The ATO’s risk assessment of foreign investment in residential real estate outlines risk drivers³⁵, as well as cultural influences and individuals’ psychological traits. It also identifies potential risk participants and the non-compliance risks associated with those participants, as outlined in Figure 3.1.

Figure 3.1: Potential non-compliance risks and participants for foreign investment in residential real estate

Source: ANAO analysis of ATO’s risk assessment of foreign investment in residential real estate.

3.3 The risk assessment also outlines the controls in place to prevent, detect and mitigate risks associated with foreign investment in residential real estate. The assessment was of the expected effectiveness of those controls, as there was lack of evidence to determine actual effectiveness. On this basis, the ATO identified and assessed ten controls as being effective or partially effective, as shown in Table 3.1. No controls were assessed as being ineffective.³⁶ Going forward, the ATO’s risk assessments should incorporate an assessment of the demonstrated effectiveness of controls, and in doing so could include some of the measures outlined in Table 3.1.

Table 3.1: The ATO’s assessment of risk controls for foreign investment in residential real estate, and rating of effectiveness

Note a: The amnesty period included reduced penalties for foreign investors who voluntarily disclosed breaches of the foreign investment framework. The amnesty period was from 2 May 2015 to 30 November 2015 and had concluded prior to the dates of the risk assessment and risk treatment plan (December 2016).

Source: ATO risk assessment of foreign investment in residential real estate and ANAO analysis.

3.4 The ATO’s December 2016 risk assessment for foreign investment in residential real estate also identified four future controls, as shown in Table 3.2.

Table 3.2: Future controls for foreign investment in residential real estate, and status as at January 2018

Note a: Other information provided by the ATO indicated that of the 32 data matching rules, as at March 2018: 15 had been developed; eight were under development; six had not yet been started; two were considered redundant; and one remained under consideration (see Chapter 4).

Note b: The ATO advised that the database combines the foreign investment approvals completed by Treasury with the foreign investment approvals completed by the ATO.

Source: ATO risk assessment of foreign investment in residential real estate.

3.5 Overall, the ATO’s risk assessment was that the preventative controls were partially effective, while detective and mitigative controls were effective. The risk assessment noted a gap in the coverage of mitigative controls to be addressed by the implementation of the future controls (which have subsequently largely been implemented).

3.6 The ANAO considers that the ATO had overstated the effectiveness of the detective and mitigative controls as: detection activities had not addressed risks posed by intermediaries; and the ATO’s data matching program was at an early stage in addressing key compliance risks (as discussed in Chapter 4).

3.7 Strengthening the ATO’s risk assessment processes to be informed by evidence demonstrating the effectiveness of controls will provide greater confidence in the accuracy of assessments as well as assist to identify controls that need to be improved or introduced. The ATO advised the ANAO that while the assessment of effectiveness of controls was initially necessarily prospective in nature, subsequent risk assessments will incorporate evidence of the effectiveness of controls where practical.

Risk treatment plan

3.8 The risk treatment plan identifies treatments to address the non-compliance risks for foreign investment in residential real estate that were identified in the risk assessment, as illustrated in Figure 3.2.

Figure 3.2: High-level treatments to address compliance risks for foreign investment in residential real estate

Note: NDEC is New Dwelling Exemption Certificate.

Source: ATO risk treatment plan for foreign investment in residential real estate.

3.9 Some of these high-level treatments are supported by lower-level treatments. For example, improving the knowledge of investors and intermediaries is supported by targeting specific audiences through relevant communication channels. For 11 of the 14 lower-level treatments, responsibility is assigned to ATO officers for implementation in a project plan attached to the treatment plan.³⁷ As at April 2018, all treatments were being implemented, and had ‘ongoing’ listed as their due date.

Compliance and enforcement strategy

3.10 While the ATO has not compiled a compliance and enforcement strategy, the risk assessment and treatment plan provide a reasonable basis for developing one. The ATO advised the ANAO that it intends to update its risk assessment and treatment plans on an annual basis. Leveraging off this process, the ATO could prepare a compliance and enforcement strategy that reflects current compliance risks and intelligence, for example:

• analysing compliance outcomes to inform targeted compliance approaches including geographic areas to target or particular types of foreign investment (refer Chapter 4); and
• identifying key compliance messages to be communicated, such as legislative changes.

3.11 Developing a compliance and enforcement strategy that clearly links types of non-compliant behaviour with penalties and the ATO’s detection and investigation activities would assist the ATO to prioritise its activities to encourage compliance with foreign investment obligations for residential real estate.

3.12 The ATO could also consider how to use elements of the strategy in activities to educate stakeholders of their obligations and the penalties for non-compliance. There is limited publicly available information about the ATO’s residential foreign investment compliance and enforcement approach, and where information is available, it is disseminated in some of the 50 guidance notes published on the Foreign Investment Review Board’s website.³⁸ Thirty-seven of these guidance notes are relevant to residential foreign investment, of which:

• thirty indicate that penalties may apply to breaches of Australia’s foreign investment framework;
• one contains information in relation to an ATO investigation activity³⁹;
• eleven provide examples of non-compliant behaviour and the relevant penalties; and
• ten provide examples of non-compliant behaviour but do not identify the relevant penalties.

Are voluntary compliance activities effective and well-targeted?

Communication strategies

3.15 The ATO developed a communication strategy in relation to foreign investment in September 2015 for the 2015–16 year, and has prepared a revised strategy for each subsequent financial year. The strategies cover foreign investment in both agriculture and residential real estate. The strategies outline communication approaches to target foreign investors and intermediaries through various channels, including social media, face-to-face educational opportunities, specialist channels to reach diverse audiences, and a foreign investment specific help line and email inbox.⁴⁰ Key messages are revised to reflect communication priorities such as changes to legislation and foreign investors’ obligations.⁴¹

3.16 The ATO’s foreign investment communication strategies have matured over time, as demonstrated by the inclusion of improved implementation plans with status sections for recording progress, and evaluation plans that identify communication objectives (see paragraph 3.40). Over time, the number of communication activities has decreased, with 58 activities in the period July 2015 to July 2016, 13 activities in the period July 2016 to July 2017 and one activity from July 2017 to January 2018.

3.17 The 2017–18 communication strategy outlines a new program of communication activities, including articles and public relations activities, and social media posts, which focus on renewed messaging about the water register and the introduction of the vacancy charge. In its 2018–19 communication strategy, the ATO could consider increasing the number of communication activities (subject to the evaluation suggested in paragraph 3.41), as well as placing a greater emphasis on messages in relation to foreign investment obligations for residential real estate, including the residential land register⁴² to assist in improving data quality.

3.18 The communication strategies generally address compliance risks identified in the ATO’s foreign investment in residential real estate risk assessment and treatment plan (see paragraphs 3.2 to 3.11). As illustrated in Table 3.3, some areas of misalignment that the ATO could consider addressing include identifying the: ATO and Foreign Investment Review Board (FIRB) websites in the risk assessment or treatment plans; and key agent program⁴³ in the communication strategy.

Table 3.3: Identification of communication activities in the ATO’s foreign investment in residential real estate risk assessment and risk treatment plans

Note a: Activity mentioned as a data source, not a treatment.

Note b: Activity mentioned in the risk event, not as a control.

Source: ANAO analysis of ATO communication strategies, risk assessment and treatment plans for foreign investment in residential real estate.

3.19 The activities outlined in the 2015–16 and 2016–17 communication strategies have been implemented, except for the prompter campaigns that were partly implemented (see paragraphs 3.28 to 3.29). The 2017–18 communication strategy was being implemented at the time of audit fieldwork.

Online guidance

The ATO’s website

3.20 The ATO’s website has webpages to inform foreign investors of their obligations under the Foreign Acquisitions and Takeovers Act 1975, including a page specifically relating to residential foreign investment.⁴⁴ These pages include information on foreign investors’ obligations before and after investment as well as in relation to breaches and changes of circumstances.

3.21 The ATO’s webpages in relation to foreign investors are readily accessible, and though containing limited detail, link to the more comprehensive information available on the Foreign Investment Review Board’s website. The ATO’s website also includes links to fact sheets in traditional and simplified Chinese (as investors from Chinese speaking countries comprise 65 per cent of residential foreign investment applications and 54 per cent of breaches). There is an opportunity to publish material in other languages for the benefit of investors who reflect a significant proportion of the foreign investment application population. For example, as at January 2018, six per cent of breaches were committed by Malaysian investors and three per cent of breaches were committed by Indonesian investors.

3.22 The ATO’s website also includes webpages dedicated to legislative, corporate and administrative tax news. These webpages were used to distribute information during 2015 and early 2016 on the foreign investment obligations, and are primarily aimed at educating intermediaries.⁴⁵ The ATO has not used these webpages to distribute foreign investment information since early 2016. The ATO should consider using these webpages to disseminate new information such as changes to legislation, particularly as they focus on targeting intermediaries and are the primary way of addressing the risk of intermediaries assisting in breaches according to the ATO’s risk treatment plan for foreign investment in residential real estate.

Foreign Investment Review Board (FIRB) website hosted by Treasury

3.23 Most information about residential foreign investment obligations is available on the Foreign Investment Review Board website.⁴⁶ The guidance notes available on the website provide a significant amount of information on a range of topics relevant to residential and other areas of foreign investment. For example, the guidance notes include information on the legislative obligations of foreign investors, application fees, penalties, definitions and exemptions.⁴⁷

3.24 Treasury is responsible for drafting guidance notes and since May 2015 the number of notes increased from five to over 50. The guidance notes are accessible and consistent. However, they would benefit from embedded hyperlinks to allow readers to quickly access other relevant documents and guidance notes, and it would be worthwhile for Treasury to consider either having an interactive flow chart for investors to determine what rules apply to them, or otherwise clustering the guidance notes into categories (for example, buying an established dwelling) to improve access to related information.

3.25 While guidance notes define how the legislation will work in most circumstances, the ATO and Treasury are not bound by them. There is a risk that the intended audience (both foreign investors and ATO staff) will perceive these as strict representations of the law. The ATO and Treasury should consider whether the status of these notes solely as guidance should be made clearer.

Social media and other campaigns

Social media

3.26 As illustrated in Figure 3.3, the ATO has used social media platforms to communicate key messages relating to foreign investment obligations, including for residential real estate. The messages included the introduction of new obligations, fees and penalties for foreign investors in residential real estate. From July 2015 to July 2016, the ATO made 16 tweets, 15 LinkedIn notifications, three Facebook posts and a YouTube video relating to foreign investment obligations. The ATO estimated that collectively these 35 posts reached more than 170 000 people.

Figure 3.3: Content of the ATO’s foreign investment-related social media posts

Source: ANAO analysis of ATO documentation.

3.27 Since July 2016, the ATO has made no social media posts in relation to residential foreign investment obligations. The ATO advised that it would consider reinvigorating its social media presence in relation to foreign investment obligations for residential real estate.

Prompter campaigns

3.28 The ATO identified three types of prompter campaigns⁴⁸ in its risk treatment plan for foreign investment in residential real estate, and had commenced two of those by April 2018:

• notifying foreign investors who owned vacant properties of their obligations; and
• targeting investors who had acquired a property prior to seeking approval, requiring them to provide evidence to the contrary otherwise an infringement notice would be issued. A pilot conducted in early 2016 resulted in a 50 per cent infringement rate.⁴⁹

3.29 As prompter campaigns can be an effective method of encouraging voluntary compliance, the ATO should continue to consider this approach to address other compliance risks, such as the use of properties subject to redevelopment conditions.

Community and stakeholder engagement

Activities

3.30 Since July 2015, the ATO has conducted engagement activities to communicate to foreign investors their foreign investment compliance obligations.

3.31 The ATO conducted an Understanding your Australian Taxation Obligations and Foreign Investment in Australia program between October 2015 and June 2016. The program was co-designed with industry representatives, and aimed to present information to taxpayers and professionals to assist them to comply with their foreign investment and tax obligations.⁵⁰ It included nine community engagement events, in English and Chinese, which reached 1750 people.

3.32 The ATO also conducted a range of education sessions, seminars, presentations and webinars primarily aimed at intermediaries from 2015 to 2017. Audiences for these activities included solicitors, real estate agents and other government entities. Topics covered in these sessions included application fees, the land register and the ATO’s compliance function.⁵¹ The ATO also set up information booths at events such as the Australian Business Forum.

Foreign Investment Reforms Working Group

3.33 The Foreign Investment Reforms Working Group was formed in July 2015 to develop and maintain ongoing relationships between relevant business and industry representatives and the ATO.⁵² Currently the group meets quarterly, having met monthly from July 2015 to mid-2016. The working group was initially scheduled to cease in November 2016 but was extended at the request of the participants. The minutes of the working group are published on the ATO’s website.

Residential foreign investment real estate help line and email inbox

3.34 The residential foreign investment real estate help line is a dedicated phone service for foreign investors, intermediaries and the general public to enquire about matters related to foreign investment in residential real estate. The help line is available from 8am to 6pm Monday to Friday, and there is also a residential foreign investment enquiries email address available to the public to submit queries.

3.35 Usage data from the phone service and email inbox are reported in monthly project status reports.⁵³ The ATO received approximately 400 calls per week in June 2017 and approximately 30 call centre escalations per week.⁵⁴ Email enquiries totalled around 80 per week for the period. Response timeframes are in place; however, adherence to these is not regularly monitored and reported.⁵⁵

Measuring the effectiveness of communication activities

3.36 The communication strategies outline an approach for measuring the effectiveness of communication activities, including reporting on letters sent, articles published, media articles generated, web analytics, webinar or roadshow feedback.

3.37 As illustrated in Table 3.4, the ATO’s approach to measuring the effectiveness of communication activities has matured. The ATO’s approach outlined in its 2017–18 plan includes communication objectives, deliverables and metrics. However, the metrics could be improved as they do not:

• identify targets or benchmarks to measure against; or
• specify qualitative indicators of success, such as whether foreign investors know where to go for assistance, and intermediaries are engaged and well-informed regarding residential real estate ownership for foreign investors.

3.38 In future communication plans, the ATO could include targets and benchmarks to measure improvement, and identify qualitative indicators that reflect the underlying intent of the communication activity.

Table 3.4: Evaluation objectives and data sources of communication activities

Source: ANAO analysis of ATO documentation.

3.39 The ATO has prepared communication reports on a monthly basis since August 2016.⁵⁶ These reports include the results of those data sources outlined in Table 3.4 that have been undertaken.

3.40 The ATO evaluated one component of the communications approach in the form of a closure report for the Understanding your Australian Taxation Obligations and Foreign Investment in Australia sessions (see paragraph 3.31). The evaluation outlined effectiveness measures and identified information sources to inform measures.⁵⁷ In addition, the ATO mapped the behavioural impact of communication messages.

3.41 The ATO would benefit from undertaking a broader evaluation of the residential foreign investment communication program. In particular, it could assess the comparative effectiveness of activities including measuring the behavioural impact of messages. Such an assessment would enable a more informed approach for future communication strategies.

Are effective processes in place to detect non-compliance?

Information sources used to detect potential non-compliance

4.1 The ATO receives information relating to potential non-compliance through a number of sources, as shown in Table 4.1.

Table 4.1: Information sources for detecting non-compliance with foreign investment obligations for residential real estate

Note a: Foreign Investment Review Board, Self-disclosure form – residential real estate [Internet], Foreign Investment Review Board, 2018, available from <http://compliance.firb.gov.au/self-disclosure/> [accessed 28 February 2018].

Note b: Foreign Investment Review Board, Reporting a breach of the foreign investment rules [Internet], Foreign Investment Review Board, 2018, available from<https://compliance.firb.gov.au/compliance-reporting/> [accessed 28 February 2018].

Source: ANAO analysis of ATO information.

4.2 From May 2015 through January 2018, the ATO reported receiving 4258 cases of potential non-compliance with foreign investment obligations for residential real estate, as indicated in Table 4.2. Of these, 3940 had been investigated and closed, with 318 cases remaining open and being investigated as at 31 January 2018.

Table 4.2: Number of total cases of potential non-compliance with foreign investment obligations for residential real estate per investor, by source of information, May 2015 through January 2018

Source: ATO information.

4.3 Most cases of potential non-compliance with foreign investment obligations for residential real estate have been identified through the ATO receiving referrals (particularly community referrals and self-disclosures) or anomalies in approval processes. The ATO’s data matching program is its primary active detection approach.

Use of data matching

4.4 The ATO undertakes data matching to detect non-compliance with foreign investment obligations for residential real estate, using its own data and data from other Australian government entities (such as the Department of Home Affairs and AUSTRAC), state government entities (such as New South Wales Fair Trading (Rental Bonds)) and private sector entities (such as banks).

4.5 The ATO obtains data from third-party entities through:

• formal/legislative arrangements where external bodies are required to report to the ATO. For example, banks are required to provide an Annual Investment Income Report to the ATO; and
• special purpose acquisition where the ATO obtains information from entities: using formal information gathering notices; under legislation that allows the other entity to provide the data; or voluntarily.

4.6 To develop data matching rules to detect non-compliance with foreign investment obligations for residential real estate, the ATO assessed potential compliance risks, as discussed in Chapter 3. The assessment included identifying 38 potential types of breaches and any relevant available data sets that could be analysed to detect those breaches.⁵⁸ The ATO identified 32 potential data matching rules⁵⁹ to detect the potential breaches. These were under varying stages of development as at March 2018, as shown in Table 4.3.

Table 4.3: Status of potential data matching rules for detecting non-compliance with foreign investment obligations for residential real estate, as at March 2018

Source: ANAO analysis of ATO information.

4.7 Those data matching rules under development at that time included some that were identified to detect serious compliance risks, such as:

• property purchased without approval;
• an Australian citizen or temporary resident purchased a property on behalf of a foreign investor; and
• property developers with New Dwelling Exemption Certificates⁶⁰ breached the conditions of their approval, including failing to market properties in Australia and failing to report to the ATO.

The data matching rules not started (or redundant/under consideration) involved more minor risks, such as a redevelopment failing to complete within four years.

4.8 At the time of audit fieldwork, the ATO was developing these data matching rules⁶¹ but more work was required to mature its processes for actively detecting non-compliance. The ATO had also not yet estimated the likely magnitude of non-compliance with foreign investment obligations for residential real estate, which would provide a basis for assessing and addressing compliance risks. The ATO advised in April 2018 that it would assess the likely magnitude of non-compliance when it had finished implementation and there was a reliable data set to draw from.

Detection of non-compliance facilitated by intermediaries

4.9 Intermediaries were identified as potential compliance risks in the ATO’s risk assessment for foreign investment in residential real estate (see Chapter 3), but the ATO did not identify potential breaches in relation to intermediaries as part of its risk assessment and subsequently has not developed relevant data matching rules specifically targeting intermediaries.⁶²

4.10 While third-party details are captured by ATO systems, there is currently no guidance for compliance officers to record these details as part of investigations, which potentially limits the systemic data collection of the details of intermediaries that are linked to multiple non-compliance investigations.

4.11 The ATO has also identified intermediaries as potential compliance risks in the serious and organised crime environment, including in facilitating money laundering, other financial crimes and improper ownership in property. Analysing the ATO’s foreign investor self-registration data for residential real estate, the ANAO tested a number of possible risk factors associated with 420 identified intermediaries, and identified:

• eight intermediaries that had assisted with purchases in three states and another 17 intermediaries that had assisted with purchases in two states; and
• 63 intermediaries that had assisted with ten or more purchases, including eight that had assisted with 50 or more purchases—of which 101 purchases was the largest number of purchases an intermediary had assisted.

4.12 The ATO advised that in January 2018 it appointed a complex case officer whose role is to examine intermediaries in a ‘structured manner’, including recommending potential changes to the ATO’s data matching to improve the identification of potential cases. The ATO also advised that its main focus for intermediaries was on education, as it considered that most breaches occurred after the involvement of an intermediary had ceased.

Compliance reporting by developers

4.15 From 1 December 2015 to January 2018, the ATO issued 78 New (and Near-New) Dwelling Exemption Certificates.⁶³ A New Dwelling Exemption Certificate has a condition that requires developers to report to the ATO biannually from the date of issue until all dwellings in the relevant development are sold.⁶⁴ The ATO advised that as at 5 January 2018, 71 developers were reporting to the ATO and 726 of a potential pool of 23 170 dwellings has been reconciled.⁶⁵ Developers are required to provide purchasers’ full name, date of birth, current address, nationality, and details of the property sold, including its address, purchase price and date of sale.

4.16 The ATO advised that it manually checks the information reported by developers, including the sale price, number of dwellings sold and contract date. Based on the reporting submitted by the developer, the ATO calculates and advises the developer of the fee payable, which is due within 30 days of the reporting date.⁶⁶

4.17 As at 5 January 2018, the ATO advised that many developers that had been issued a New Dwelling Exemption Certificate had been required to report only twice and no developers had failed to report.⁶⁷ The ATO further advised that it had been working to educate developers and resolve any issues, such as payment of incorrect fees, and no developers had been issued breach notices or penalties to January 2018.

Are effective processes in place to address non-compliance?

4.18 The ATO investigates all detected cases of potential non-compliance with foreign investment obligations for residential real estate—3940 of the 4258 potential cases or 92.5 per cent have been investigated from inception through January 2018. The remaining 318 remained open for investigation at that time (see Table 4.2).

Prioritising cases for investigation

4.19 To escalate cases of potential non-compliance for investigation by compliance officers, the ATO applies priority levels distinguished according to the source of information, as outlined in Table 4.4.⁶⁸

Table 4.4: Prioritisation for escalating potential cases of non-compliance with foreign investment obligations for residential real estate

Note a: The ATO advised that requests from foreign investors to vary a condition for an existing foreign investment approval granted by Treasury prior to 1 December 2015 are treated with equal priority as these referrals.

Note b: The case selection team predicts the potential outcome of cases after profiling and assessing each case. To assess the potential outcome of a case, the case selection team determines whether a foreign investor has obtained a valid approval. If an approval is invalid, conditions noted in that approval are not legally enforceable and may warrant a different compliance treatment. An approval may be invalid where an application indicated a property had not yet been purchased when in fact it had, and the approval was issued before the Foreign Acquisitions and Takeovers Act 1975 had been amended to allow retrospective approval in certain circumstances.

Note c: The ATO can issue an infringement notice for a Tier 2 penalty where non-compliance has been detected and confirmed through compliance activities rather than self-disclosure. A Tier 2 infringement notice is where the foreign investor has not notified the ATO of the alleged contravention of their foreign investment obligations prior to an infringement notice being issued. Tier 2 infringement notices incur higher penalties than Tier 1 infringement notices.

Note d: The ATO is required to apply a penalty within 12 months of a point-in-time breach; that is, where a breach is not continuing. An example of a point-in-time breach is where a foreign investor does not advise the ATO of a visa change within 14 days. An example of a continuous breach is where a redevelopment approval condition is that a dwelling remains vacant and the dwelling becomes occupied—the breach is continuous for the period the dwelling is occupied.

Note e: Retrospective approvals are generally granted where a foreign investor has purchased a property without approval but probably would have received approval had it been sought approval prior to purchase. The ATO advised that these cases would generally not be allocated if cases with an expected disposal outcome were available.

Note f: The ATO advised that the proportion of community referral cases that are confirmed as non-compliant is low and therefore these cases are a lower priority than other types of cases. Cases containing serious allegations may be prioritised for allocation.

Source: ATO information on prioritising compliance work.

4.20 In practice these priority ratings have not closely aligned with the case sources that have generated investigations with higher proportions of outcomes that demonstrate non-compliance. As discussed later in this chapter (refer paragraph 4.30), of all information sources, application screening had the highest proportion of closed investigations that resulted in a penalty (48.7 per cent); data matching had the second highest proportion (40.5 per cent) and self-disclosure the third highest proportion (39.3 per cent).⁶⁹ The ATO appropriately places community referrals as a low priority because the referrals do not often result in a non-compliance outcome. However, the ATO does not apply the same approach to the remaining sources. In particular, cases from other referrals⁷⁰ are considered to be a level 2 priority but only 1.8 per cent of those closed cases have resulted in a penalty.

4.21 The ANAO suggests that the ATO reassesses its approach to prioritising investigations into potential non-compliance with foreign investment obligations for residential real estate so that there is better alignment with investigation outcomes. The assessment could also include whether source of information remains the distinguishing criteria for determining priority levels, and clarify the purpose and use of the model used to prioritise cases, given that all cases are investigated.

Investigation outcomes

4.22 Where investigations find non-compliance with foreign investment obligations for residential property, outcomes include:

• disposal of property—either a self-disposal or forced disposal (type of penalty). Disposal orders are issued for forced disposal, where a property was acquired without approval and had approval been sought, it is likely that it would not have been granted;
• changed approval conditions—amendments to previously approved foreign investment applications, such as extension of time to redevelop land;
• infringement notices—which result in a financial penalty to investors.⁷¹ These are generally issued for minor offences including: acquiring a property without approval; failing to report the purchase of a property; breaching a condition of approval; purchasing property after the approval expires; and disposing of property to another foreign person without advertising it for sale in Australia;
• criminal or civil penalty—which can result in custodial sentences or financial penalties. These can apply to more serious non-compliant behaviour, for example where foreign investors knowingly breach the foreign investment framework;
• retrospective approval—where an investor did not apply for approval prior to purchasing a property but probably would have received approval had they applied⁷²; and
• screening breach—recorded for properties that have been acquired prior to approval and resulted in a Tier 1 infringement for the investor.

Where investigations do not find non-compliance with foreign investment obligations for residential property, no breach is identified or reported.

4.23 Of the 3940 closed investigations from May 2015 to January 2018, compliance breaches were found in 1158 cases (29.4 per cent). Of these breaches, 810 (70 per cent) were for failing to seek approval before entering a property contract and 348 (30 per cent) were of approval conditions.⁷³ A range of outcomes have arisen from those breaches, as shown in Table 4.5. Of note, in 231 cases the breach resulted in properties being sold, in 221 cases approval conditions were changed, and there were 350 retrospective approvals.

Table 4.5: Outcomes of investigations into potential non-compliance with foreign investment obligations for residential real estate, 2015–16 through January 2018

Note a: Year to date was to 31 January 2018.

Note b: Change of conditions refers to amendments to previously approved foreign investment applications.

Note c: The row and column totals do not reconcile for the total number of cases investigated and closed. Data for 2016–17 and 2017–18 YTD had not yet been published in a FIRB Annual Report and the ATO advised that the data was still to undergo verification and assurance processes.

Note d: Tier 1 penalties are when an investor self-discloses and Tier 2 penalties are where a breach is uncovered through ATO investigation.

Note e: Application fees payable for retrospective approval are reported by the ATO as a penalty.

Source: ATO information.

4.24 As the ATO has not estimated the size of the non-compliance pool, the proportion of potential instances of non-compliance that these investigations represent is unknown.

Imposition of penalties

4.25 Financial penalties can apply where non-compliance is found, including:

• Tier 1 and Tier 2 penalties, where there are differential penalties for individuals and companies, as outlined in Table 4.6;
• disposal orders, which require the foreign investor to pay a penalty equal to the application fee that was appropriate to the value of the property, as outlined in paragraphs 4.33 and 4.34;
• retrospective approvals, which require the foreign investor to pay the application fee that would have been payable had they sought approval; and
• criminal prosecution and civil penalty orders, for contravention of sections 84 and 85, and section 94 of the Foreign Acquisitions and Takeovers Act 1975 respectively.⁷⁴

4.26 As indicated in Table 4.5, to 31 January 2018 the ATO had imposed 1067 penalties in response to identified non-compliance with foreign investment obligations for residential property. These included 75 forced disposals of property, 250 application fee penalties and 742 Tier penalties but no criminal or civil penalties.

Infringement notices

4.27 Infringement notices were introduced as part of the foreign investment reforms on 1 December 2015. Infringement notices are generally issued for minor offences as outlined in paragraph 4.22, and can result in Tier 1 or Tier 2 penalties. Tier 1 infringement penalty amounts are 80 per cent less than Tier 2 infringement penalty amounts as illustrated in Table 4.6.

Table 4.6: Tier 1 and Tier 2 infringement notice penalty amounts

Note: When a foreign person should have applied for approval to acquire the property and the application fee would have been paid as part of the application process, the application fee will be charged as a component of the penalty.

Source: ATO information.

4.28 As at January 2018, the ATO had issued 742 infringement notices for penalties totalling $3.5 million, of which: 596 were for Tier 1 infringements and 146 were for Tier 2 infringements. Of the Tier 1 infringements, 71.3 per cent were identified through the screening process; 14.4 per cent were identified through self-disclosure and 10.2 per cent were identified through data matching. The majority of Tier 2 infringements (71.9 per cent) were identified through data matching, with community referrals accounting for 21.9 per cent of Tier 2 infringements.

4.29 The ATO’s guidance on infringement notices is that a Tier 2 notice cannot be issued when a foreign investor has been contacted during the course of an investigation as this interaction is treated as a self-disclosure.⁷⁵

4.30 Financial penalties issued by the ATO from May 2015 to 31 January 2018 for non-compliance with foreign investment obligations for residential property totalled some $5.5 million⁷⁶ as outlined in Table 4.7. All penalties were issued to foreign investors, and none to intermediaries or property developers. Further, the main sources of information leading to the penalties were: screening infringement (48.7 per cent); data matching (40.5 per cent); self-disclosure (39.3 per cent); and other referrals (8.4 per cent).

4.31 To assist compliance officers in determining whether to issue a penalty, the ATO has developed guidance including a decision-making tree and an infringement decision matrix that identifies specific breach conditions and the relevant infringement timeframes.

4.32 Prior to the ATO gaining responsibility for managing compliance with foreign investment obligations for residential property, only criminal penalties applied under the foreign investment framework. The Treasury had not proceeded with any court prosecutions under the Foreign Acquisitions and Takeovers Act 1975 since 2006. In the Foreign Investment Review Board Annual Report 2014–15 the Treasury reported one forced disposal and no penalty information.

Disposal orders

4.33 Disposal orders require the foreign investor to divest themselves of interest(s) in residential property. As at January 2018, 231 foreign-owned properties valued at $284.9 million had been subject to disposal. Of these, 156 properties had been self-divested, 49 properties were a concessional disposal⁷⁷ and 26 properties were subject to disposal orders issued by the ATO. Of these properties, 39 per cent were identified through data matching, 30 per cent as a result of self-disclosure and 31 per cent through other sources.

4.34 The ATO’s guidance is that if a foreign investor is issued a disposal order they should also be charged a fee equivalent to the cost of an application fee for the same property. As at 22 February 2018, the ATO advised that $407 300 in disposal fees had been issued. The ATO’s guidance instructs compliance officers to record disposal fees as Tier 2 infringements and advised the ANAO that this is because the relevant information technology system cannot separately record disposal fees. The ATO further advised that the system would be enhanced in 2018–19 to capture disposal fees and the guidance would be subsequently revised.

Civil and criminal penalties

4.35 Civil penalties were introduced in 1 December 2015 as part of the reforms to the foreign investment framework.⁷⁸ Existing criminal penalties were also increased as part of the reforms.⁷⁹

4.36 To date, the ATO has not applied any criminal or civil penalties. The guidance to staff indicates that for a criminal prosecution, the ATO must be able to establish that the foreign investor was aware of the laws and chose not to comply with them. However, the guidance does not indicate the type of evidence required to demonstrate that a foreign investor, intermediary or developer knowingly failed to comply with their foreign investment obligations or the method(s) for collecting that evidence. Further, the guidance does not indicate when a civil penalty would apply. The ATO could consider expanding guidance to provide its staff with more information on the application of civil and criminal penalties.

Payment and withdrawal of penalties

4.37 People who receive infringement notices can request an extension of time to pay the notice or request that the notice be withdrawn. Technical leaders are responsible for considering these requests and according to the ATO’s guidance are instructed to review the reasons provided by the person applying for the extension or withdrawal and to consider gathering further information where relevant.

4.38 The guidance for Issuing infringement notices encourages compliance officers to contact foreign investors who have been issued with infringements and who have not paid them within seven to 14 days to prompt payment. For unpaid infringements, compliance officers are instructed to send two reminder letters.

4.39 The ATO advised that it has not reported on the payment of penalties since August 2016 as tracking the timing was a manual and time consuming process, however the ATO advised that the majority of penalties issued have been paid as at January 2018.

4.40 Table 4.8 shows that $4.5 million (82.4 per cent) had been paid of $5.5 million in penalties issued.

Table 4.8: Payment and withdrawal of penalties at 31 January 2018

Source: ATO information.

Investigation timeliness and support

Timeliness of investigations

4.41 The average time taken to complete an investigation is increasing, as shown in Table 4.9.⁸⁰

Table 4.9: Case management timeliness

Note a: Cases were allocated to compliance officers from 29 July 2015.

Note b: Year to date was to 2 October 2017.

Note c: Seventy-two investigations were allocated and completed on the same day.

Note d: One hundred and thirty-two investigations were allocated and completed on the same day.

Note e: Two investigations were allocated and completed on the same day.

Source: ANAO analysis of ATO information.

4.42 The ATO advised that the change in case mix over time has contributed to longer average completion times. In particular, a greater share of earlier cases involved self-reporting of breaches, with relatively short completion times, while a higher share of late cases were from third-party referrals or data matching exercises, which required the collection and assessment of greater amounts of information.⁸¹ Notwithstanding these explanations, the ATO has not systematically reviewed the timeliness of cases with a view to measuring and encouraging efficiency. The ATO could also examine the causes of the longer investigations and possible remedies, and the accuracy of the reported shorter investigations, as outlined in Table 4.9.

Guidance for responding to non-compliance

4.43 When responsibility for investigating non-compliance with foreign investment obligations for residential real estate was transferred to the ATO in May 2015, there was limited guidance to assist compliance officers. Consequently, the ATO was required to develop a suite of guidance and templates to assist compliance officers to conduct investigations, including to correspond with people subject to investigations.

4.44 In a relatively short timeframe, the ATO developed internal guidance and templates to support most aspects of investigating non-compliance. The ANAO identified some areas for improving the guidance, as shown in Table 4.10.

Table 4.10: Potential improvements to the ATO’s guidance for investigating non-compliance with foreign investment obligations for residential real estate

Source: ANAO analysis of the ATO’s guidance documentation.

Information gathering notices

4.45 Compliance officers can seek information from other government departments and private sector institutions such as banks, utility providers and real estate agents. In its guidance on issuing information gathering notices, the ATO indicates that it prefers to use an informal approach in the first instance and apply the Commissioner of Taxation’s formal information gathering powers when required.⁸²

4.46 From June 2016 through September 2017, the ATO issued 251 information gathering notices in relation to compliance with foreign investment obligations for residential real estate. Most notices were fully or partially complied with but a small percentage (nine per cent) were not responded to, as indicated in Table 4.11.

Table 4.11: Outcomes of information gathering notices in relation to compliance with foreign investment obligations for residential real estate

Note a: Year to date was to 30 September 2017.

Note b: These notices were due between 28 August 2017 and 18 September 2017.

Source: ANAO analysis of ATO information.

4.47 The ATO can prosecute people who do not respond to information gathering notices. While it is not likely to be appropriate to prosecute individuals or entities that fail to respond to a single information gathering notice, the ATO could give greater consideration to identifying and prosecuting individuals or entities who repeatedly fail to respond to notices.

Quality control

4.48 Team leaders and the technical leader provide a quality control mechanism in relation to the consistency of decision making and compliance approaches among compliance teams by approving the issuance of disposal orders, as well as the escalation of cases for criminal and civil penalties.⁸³

4.49 Team leaders are also responsible for approving the issuing of infringement notices, the escalation of cases for breach monitoring, approving cases that result in no compliance outcomes, and issuing information gathering notices, among other decision making responsibilities. There are two team leaders and their decisions are not reviewed, with the exception of when a process requires escalation to the technical leader. Without some review of team leaders’ decisions, there is a risk of inconsistent decision making between the two teams. The ATO could consider a mechanism where a sample of cases are reviewed from each team at defined intervals to confirm consistency.

Do the ATO and Treasury measure the effectiveness of compliance activities?

Compliance objectives

5.1 As discussed in Chapters 3 and 4, the ATO manages elements of compliance with foreign investment obligations for residential real estate. The ATO’s foreign investment in residential real estate risk treatment plan describes the overall strategy as ‘aiming at increasing the transparency and visibility of our compliance activities to mitigate associated foreign investment risk … and implementing treatment approaches to deal with identified risk.’ The foreign investment risk is that ‘failure of foreign persons to comply with residential real estate foreign investment rules will undermine the integrity of the foreign investment framework and community confidence.’

5.2 The ATO identified five desired outcomes in the risk treatment plan with 10 sources of data to inform indicators that will be used to evaluate if risk treatments have successfully achieved desired outcomes, as shown in Table 5.1.

Table 5.1: Risk treatment outcomes and evaluation data sources

Source: ANAO analysis of ATO Risk Treatment Plan – Foreign investment in residential real estate.

5.3 The indicators and associated data sources provide a framework for the ATO to monitor and report on the effectiveness of its activities to treat compliance risks for foreign investment in residential real estate.

5.4 One opportunity for improvement in the indicators is to establish more targets and measures against baselines. Approximately half of the success indicators (10 of 22) were described as counts of data for a point in time, which did not have associated targets or baselines. For example, the volume of self-reporting breaches could be improved if the indicator showed whether the volume was declining, or if the volume was a proportion of total breaches or defined by a threshold.

5.5 The indicators in the evaluation template are collated and reported disparately through internal communications and compliance processes.⁸⁴ As at April 2018, the ATO had not established baselines or consolidated the risk evaluation information collected to enable a broad view on the effectiveness of compliance activities. As such, the ATO had not clearly assessed the extent to which the foreign investment risk (noted in paragraph 5.1) was being managed. The ATO advised in April 2018 that the lack of historical information had limited its assessment of effectiveness, but going forward will consider establishing baselines to allow trends to be measured and measure effectiveness more broadly when there is a stable data set to draw from.

Policy intent

5.6 As discussed in Chapter 1, the stated intent of the foreign investment policy for residential real estate is to encourage foreign investment in new dwellings, thus increasing housing stock and supporting domestic job growth.

5.7 Treasury is responsible for implementing the policy on the foreign investment framework, however its responsibilities are broader than residential real estate, as indicated in Table 5.2.

Table 5.2: Treasury 2016–17 foreign investment related performance criteria and target

Source: Treasury, 2016–17 Annual Report [Internet], Treasury, 2017, available from: <https://static.treasury.gov.au/ uploads/sites/1/2017/10/Treasury-Annual-Report-2016-17.pdf> [accessed 8 March 2018].

5.8 Treasury has not evaluated or reported the extent to which the stated policy intent has been met. The ANAO suggests that Treasury assesses and reports the extent to which the revised foreign investment policy objectives for residential real estate have been met, particularly with regard to the increase in new housing stock.

Do the ATO and Treasury effectively report on compliance activities?

Internal and inter-entity reporting

5.9 The ATO prepares various internal reports that contain information about its compliance activities for foreign investment in residential real estate, some of which are provided to Treasury, as outlined in Table 5.3.

Table 5.3: ATO internal and inter-entity reporting that covers compliance activities for foreign investment in residential real estate

Note a: From April to August 2016, these reports included the value of penalties paid. However, the ATO advised that this reporting was discontinued as it was not required and the information was manually intensive and time consuming to gather.

Note b: The ATO prepared a high-level compliance report in May 2015, however, regular reporting commenced from August 2015.

Note c: Information about the ATO’s foreign investment operations was first included in the Public Groups and International site and function July to September 2016 report.

Source: ANAO analysis of ATO information.

5.10 In addition to monthly compliance reports that the ATO provides to Treasury, it reports internally on foreign investment in residential real estate applications and collections on a monthly basis.

5.11 The ATO’s reporting could be improved by including the value of disposal fees issued as well as the value of penalties paid, although its systems do not currently support the reporting of this information (refer Chapter 4). As discussed in the previous section, internal reporting could also be improved through the ATO establishing baselines and performance information to provide a broad view on the effectiveness of compliance activities.

External reporting

5.12 As shown in Table 5.4, the ATO and Treasury report limited information regarding foreign investment in residential real estate in their annual reports. However, the Foreign Investment Review Board’s annual report includes information about the number of compliance activities, their source and outcomes.

Table 5.4: External reporting of compliance with foreign investment obligations for residential real estate

Source: ANAO analysis of Treasury information.

5.13 Prior to 2013–14, the Foreign Investment Review Board annual reports did not include information on the outcomes of compliance activities, and this was acknowledged in the 2014 House of Representatives Report on Foreign Investment in Residential Real Estate.⁸⁵ Reporting was subsequently expanded in 2014–15 and 2015–16 as indicated in Table 5.4.

5.14 The release of public reporting on foreign investment has been slow and this was noted by stakeholders, including in relation to the Foreign Investment Review Board annual report for 2014–15 that was released 10 months later in April 2016. One stakeholder suggested that releasing quarterly datasets could allow timely analysis of key trends.⁸⁶ The 2015–16 annual report was released in late March 2017 and as noted in Table 5.4, the Foreign Investment Review Board annual report for 2016–17 was yet to be released in early May 2018.

5.15 The ATO annual reports have not included specific information on compliance with foreign investment obligations in residential real estate⁸⁷, although the amount of revenue collected in foreign investment application fees was reported for both years.⁸⁸ As stated in Chapter 2, the ATO aims to populate the register of foreign investment in residential real estate by December 2018 and prepare yearly reporting on the register once the states’ and territories’ information is standardised from 2019 onwards.

Regulator Performance Framework

5.16 The Regulator Performance Framework reporting requirements commenced on 1 July 2015⁸⁹ and two subsequent reports from the Foreign Investment Review Board have included information on foreign investment compliance activities. The ATO provides data for the Treasury to include in its reporting. Table 5.5 outlines the compliance activity information included in the Regulator Performance Framework reports.

Table 5.5: Compliance activities reported in Treasury Regulator Performance Framework reports

Source: Foreign Investment Review Board, Regulator Performance Framework report.

5.17 Treasury’s Regulator Performance Framework reporting does not distinguish between agricultural land or residential real estate compliance activities. The reports include data for the single year reported and do not include previous years information.

5.18 The ANAO suggests that future reports could delineate between compliance activities conducted on agricultural investments and those activities conducted for residential real estate. Defining targets could assist the ATO and the public to understand if compliance strategies were effective, and including the information from past years would also provide visibility of trends over time.

Appendix 1 Entity responses