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Standing Committee on Economics - 29/08/2014 - Foreign investment in residential real estate

HILL, Mr John, Manager, Foreign Investment and Trade Policy Division, The Treasury

GOLDSWORTHY, Mr Brenton, Principal Adviser, Macroeconomic Conditions Division, The Treasury

ROLLINGS, Mr Jonathan, General Manager, Foreign Investment and Trade Policy Division, The Treasury

WILSON, Mr Brian, Chairman, Foreign Investment Review Board

[11.59]

CHAIR: I welcome officers of the Treasury and the Chairman of the Foreign Investment Review Board to this hearing. I remind you that, although the committee does not require you to give evidence under oath, these hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Would you like to make an opening statement before we proceed to questions?

Mr Wilson : No, thank you. We are happy to answer questions.

CHAIR: We received an additional submission based on you appearing before the committee earlier in the year and we thank you for taking the time to appear before the committee again. We asked a number of questions at that point in time regarding enforcement activities. From the information that has been provided to us, it appears that the enforcement activity took place before 2007. That relates to legal proceedings where people were taken to court or where there were prosecutions. Is that right?

Mr Rollings : That is correct, yes.

CHAIR: Since the advent of the new criminal penalty provisions, there have been no further enforcement activities?

Mr Rollings : The advent of those was a bit prior to my time, but certainly in recent times there has not. What I would say is that the challenge for us is actually identifying the cases to mount those proceedings.

Mr Wilson : However, I think it is worth being a little more granular about what 'enforcement' means. It can range from criminal prosecution at one end through to working with the applicants to regularise breaches, to having an applicant voluntarily dispose of a property improperly retained, to having an applicant put in a retrospective application. So to say there has been no enforcement activity is correct in terms of the prosecution component of enforcement, but there has certainly been a lot more enforcement activity, in fact, in regularising issues to bring about compliance.

CHAIR: Based on that example you have provided, how many people have voluntarily disposed of their property?

Mr Rollings : We might have to take that on notice and come back to you. We can do that.

CHAIR: Yes. In terms of regularising a breach of the Foreign Investment Review Board rules, how many of those people would be people that the FIRB have come across on more than one occasion? Are there regular offenders?

Mr Hill : My recollection is that it is not common for that to be the case. We will keep a record and follow up where we understand there is a repeated retrospective applicant and we will deal with that. My recollection is that there is not a high volume. I do not have the exact number, but there is not a high volume of repeated activity in that area.

CHAIR: In relation to this process of working through with people who have breached the rules, I understand from previous evidence you have provided that it is done on a case-by-case basis. But at what point do you make the judgement, 'We're no longer going to work with you; we're going to take stronger action'?

Mr Rollings : I think it is worth making a distinction between the different types of compliance issues. The ones we are most regularly dealing with are people who have come to us to seek an approval and then have certain conditions imposed on the approval. The main ones are around not offering the property for rent or ensuring that the property is disposed of at the expiry of a visa—those sorts of conditions. I think the point I made to the committee previously was that the fact that those people have come to us for approval indicates that they are seeking to be compliant. When they may drift outside one of those conditions, we have found it productive and effective to talk to people to bring them back within those conditions. It is a separate issue if someone has bought a property who has not actually sought approval at all. We would take a different approach to someone in that category, but they are the cases that are the most difficult to identify.

CHAIR: I want to ask you about the sharing of information with the immigration department. They appeared before the committee this morning. They obviously have a lot of data about people who leave the country on the expiry of their visa who would fall within the remit of the Foreign Investment Review Board because they have purchased an existing dwelling and need to comply with the framework and sell that dwelling, predominantly within the three-month period that is provided for after leaving the country. What is your current relationship with the immigration department in being able to access that information?

Mr Rollings : Mr Hill might elaborate on this, but we certainly have access to the department of immigration's VEVO database, which allows us to check individuals' visa status. Most routinely, we do that with applications for buying an established house, which requires someone to have the appropriate visa; and we do routinely check, at that pre-screening phase, that the person has the appropriate visa status. In that sense, we have full access to that information. Obviously, that can allow us to do checks ex post, to also check if people continue to retain the relevant visa status down the track and do follow-on inquiries from that point.

Mr Hill : I would just add that the VEVO system is a very valuable resource for us, particularly for compliance. It is a manual system. We have login access to it. It is ad hoc in the sense that we go on a case-by-case basis. The system itself will tell us about an applicant's identity. It will tell us what visa they hold and when that visa expires, and it will tell us whether they are currently onshore or offshore. I guess, if we were to look to improve that, there would be bulk arrangements where we could upload lots of data and get lots of responses. But at the moment we use it on a case-by-case basis in the ordinary course of our screening of established property.

CHAIR: So you look at this database in response to an application? You do not, for instance, search the database for people whose visas have expired to see how that correlates with people who have purchased an existing dwelling, and then proactively check that that dwelling is in the process of being sold?

Mr Hill : As I understand the question, we do not use it for that purpose, although we do have ad hoc use of it where we are investigating a particular case. That might well be where we have received information from a legal adviser or real estate agent, enough that we can make sense of the VEVO system using that information. So we can actually access it on an ad hoc basis, in the way that I think you are suggesting, but not in bulk data analysis ways.

CHAIR: Just so I understand, it sounds to me like you have access but it is not always totally useful. Can you, for instance, search the database for people whose visas have expired, on the one hand, and look in your own FIRB database at people who have purchased existing dwellings who are foreign investors with visas of 12 months or more that have expired, on the other hand; and match that data to then proactively go and check that those people are complying with the framework?

Mr Hill : As I understand it, no, we do not. We put data into it that it will recognise and it will respond to us with certain metrics about that piece of data that we entered in—which will be a passport number, typically.

CHAIR: Not to be too pedantic, but is it no, you do not because you cannot, or no, you do not because you choose not to?

Mr Hill : We do not have that sort of access to that database.

CHAIR: Right. Okay. So improved access is potentially something that could impact—

Mr Hill : Potentially, yes.

CHAIR: What impact would that have on the resources of FIRB, just so I am clear?

Mr Hill : It would certainly have an impact on our compliance capability. I am not sure exactly of the impact on our resources. As I said, we could be uploading certain metrics from the FIRB system into the VEVO system and getting some sort of output that gives us some compliance information, which could be potentially quite valuable. In terms of what impact it would have on our resources, I would regard it as a tool for our activities rather than a heavy resource drain. It is a good resource and I think what you are suggesting is a way to build the use of that resource.

Mr Wilson : As I understand it, what you are driving at is a system where, if there is an application approved on the basis of, let's say, a 457 visa, we then check whether that applicant has acquired a property. When the visa expires there is effectively an automatic flag that says that visa has expired, and that then gives rise to a check to determine whether the property has been disposed of.

CHAIR: That is exactly the thrust of my question.

Mr Wilson : As I understand it, we do not currently have that capability. However, on an item-by-item, applicant-by-applicant, random check basis, some of that activity has been undertaken, particularly with 457 visas. That is the case, is it not, John?

Mr Hill : Yes.

Mr Wilson : It is a fairly intensive process because it does not have that automatic back and forward. So it involves interrogation, rechecking, crosschecking, reinterrogation and so on. But, as I understand it, the activity that has been done on a random compliance checking basis on 457 visas has not disclosed any material retention of properties by expiring visa holders. Is that right, John?

Mr Hill : That is correct.

CHAIR: So people are complying?

Mr Hill : That has been our experience, based on sample work. If I could paint the picture, earlier this year we looked at a sample of established residential real estate approvals that had been provided in the past where the individuals' 457 visas were expected to have expired late last year or early this year. So these could be applicants who were given an approval up to four years ago, given that that visa runs for four years. It is interesting that that particular visa, which is the category of visa holders who make up close to half of all our established residential real estate approvals, does not automatically convert to another visa either. That made it a potentially useful exercise to check whether people were still living in Australia and owning property after their visa had expired. They might have gone overseas and kept the property. So that was the nature of our survey.

We understood that some might not have purchased the residence in the first place, if they got an approval but did not buy. Some might have left Australia, some might have sold the property, some might have transferred from a 457 to another visa and some might have even become permanent residents or Australian citizens. So we looked at that and I think our survey found that all the people we looked at who retained the property were unanimously compliant. That was the finding. It was a sample. We used the VEVO system to assist us in that by checking where they were in terms of their status as a resident.

CHAIR: In your survey, how big was that sample as a percentage of the group of people you are looking at?

Mr Hill : Sample size is 24.

CHAIR: As a percentage?

Mr Hill : I do not have the details of what percentage that was.

Mr HUSIC: In relation to your supplementary submission, focusing on paragraphs 1 to 7, is it fair for me to interpret the way it is explained this way? There were some prosecutions pre-2007, there was a Federal Court case that brought down a decision in 2007 and post that you detected, as evidenced by your commentary in paragraph 6, that people were working more with either Treasury or FIRB on their applications to ensure compliance. Is that a fair summary or assessment by me, based on what you have written there? You had problems pre-2007, there was a court case and since then people have been working to make sure they are more compliant when they are making foreign investment applications?

Mr Rollings : Yes, that is broadly correct. Again, I would make the distinction between people who have sought an approval and had various conditions applied, in which case we work with them to ensure they remain compliant with those conditions, and any cases that we may become aware of where someone potentially has quite wilfully tried to operate outside the approval arrangements. They are the ones that are the most challenging to identify.

Having said that, in our first submission we said we adopt various other approaches to try and get some sense of what might be happening in that area. We have a dob-in hotline where people who have concerns about transactions can report those concerns to us, and we follow up all of those cases. We will also track significant transactions in the media and get to the bottom of those to determine whether they were compliant. In that area, to the extent we undertake those investigations, again we see compliance. So, to the extent we are able to be active in that area, we are seeing compliance. What might be happening beyond that is difficult to determine.

Mr HUSIC: So there is proactive behaviour exhibited by applicants which you have detected and which you have reflected upon in your submission.

Mr Rollings : Yes.

Mr HUSIC: But you also take both a proactive and reactive stance. In terms of proactive behaviour, you are keeping tabs on the investment activity you are seeing in the general public and following that up, and then there is reactive behaviour based on any advice that you receive.

Mr Rollings : That is right.

Mr HUSIC: Can I turn to something quite separate to this, focusing on Treasury. The group that appeared to do a bit of work in this area, creating projections relating to the amount of investment that was believed to be in the pipeline in residential property, particularly from the Chinese market, was Credit Suisse. Earlier this year they suggested that there was potentially $44 billion likely to be invested in residential property over the next few years.

I note that just over the last hour the head of the financial systems inquiry, Chairman David Murray, has indicated that our nation's major financial risks appear to rest largely in real estate. He has indicated—and this is based on an interview he conducted last night—that Australian banks are still very reliant on foreign money to fund home and business lending. We have previously discussed in this committee the source of financing and whether or not there was stability in that source of finance, given the amount of investment that is likely to occur in the property market, particularly with the emergence or the growth of shadow banking within China, which has been reflected upon as an issue that requires further work by Chinese regulators. Also, the IMF is keeping a close watch on this.

What work is being done by Treasury, in conjunction with RBA and others, to assess the level of risk to Australia that exists based on what has been expressed by Mr Murray and what we are seeing elsewhere in the international community? What level of risk are we being exposed to by the level of investment that is occurring? What work is being done? Do you believe it is a risk? Is this something that you need to take on notice and respond to down the track?

Mr Goldsworthy : Unfortunately it is probably something we need to take on notice because the relevant area of Treasury is not represented at this hearing. I can make a couple of general observations, though.

Mr HUSIC: Sure.

Mr Goldsworthy : One is that our understanding of the source of financing is that a lot of it does come from offshore, but even then our understanding is that a lot of the investors—certainly, the individual foreign investors purchasing a property—are quite wealthy and they tend not to be all that highly leveraged, so that provides us with some level of comfort. We certainly understand that the level of onshore borrowing from foreign investors is minimal; and, to the extent that it exists, it would be secured by collateral. They are just a couple of observations to put some of those figures in context, but for a more detailed response we would have to revert to our colleagues.

Mr HUSIC: I think it is also important in the context of this discussion to be able to distinguish between investment undertaken by individuals that manifests itself in the acquisition of an individual property and investment undertaken by a developer, where they are accessing finance through a number of vehicles. Just to let you know, Mr Goldsworthy, we have continually confronted in these hearings a disconnect between the sources of financing for purchase. We have banks that say they do not provide the financing and we have people in the property market who say they believe that the banks are providing the financing. It is very difficult to understand where the financing flows are actually originating from.

I am also mindful, Mr Wilson, that you expressed a degree of confidence in our banking system when I posed this question to your good self a few months ago—that you believed the risk management approach was quite robust and we would in effect be shielded from those types of risks. Based on the discussion we have had so far, and the views of Mr Murray, do you still maintain that position? Has there been anything that would make you re-evaluate your position? And I ask you that question as someone who I know has been involved in the sector for an extensive period of time.

Mr Wilson : I do maintain the position. I think what David Murray was largely talking about in terms of the risks to the Australian financial system was the manner in which our banks fund themselves, because one of the key recommendations of the financial system inquiry so far—which has been resisted to an extent by the Australian banks—is the need for additional capital; and, obviously, in times of global financial difficulties, short-term foreign funding of our banks is less stable, less certain, than domestic funding that is capital based. So there is always a tension between cost of funding sources and certainty of funding sources. I think he was focused more on that.

In terms of the risk to our financial system of foreign investment in housing, obviously, the more of our housing market is investor owned by, particularly, foreigners from some other jurisdiction, to the extent we become covariate with a housing bubble that may occur in that foreign jurisdiction and to the extent that our housing market becomes covariate with someone else's economy, the risk always is that a collapse in that economy will result in a rapid withdrawal of those investors from the Australian housing market, resulting in a fall in our housing prices, resulting in a financial problem.

Mr HUSIC: Or impacting on economic activity here.

Mr Wilson : Correct. As I think I said to you last time, a housing fall on its own does not cause an immediate financial problem. A housing fall generally gives rise to a financial problem through the debt markets. So, to the extent we get a housing bubble and lenders are lending at bubble levels, once we get to negative equity, that places pressure on those lending institutions, which in turn places pressure on our whole financial system.

I think what I said to you last time was that I was unconcerned about the Chinese shadow banking market or whatever. If that loses money, it is not going to affect our economy. Indeed, we have had the benefit of the construction activity and the economic activity from construction—and additional housing stock—without any of the disbenefit of our financial institutions losing money. To the extent that our financial institutions are lending at high loan-to-asset ratios on overhyped prices, that is where we would have an immediate concern.

As I understand it, and as you have said, there is a disconnect between what our lending institutions are saying and what others are saying about what they are doing. But I do know that APRA, which is the body most responsible for the financial security of our banks, does have a pretty draconian set of rules around lending and pretty robust stress-testing around housing, which is the biggest sector, I think; APRA assumes a 30 per cent immediate drop in housing prices and all of the things that would flow from that in its stress tests.

So, no, I am not concerned. I think that, almost always, when there has been a financial collapse around the world, real estate has been either a contributor to it or a resultant difficult area. But I think we are reasonably well insulated at this point.

Mr HUSIC: I will end on this point. Just for clarification—and this is for Treasury to respond to in due course, either now or on notice—my concern is that, if the quality of the loans that have been extended for the purposes of development or investment is not sure enough or concrete enough and they collapse down the track, particularly if we have domestic economic activity that is underpinned by that within this section of residential development, my concern is what happens there. We have already witnessed—and you reflected on this, Mr Wilson—in some cases, the impact of financing of residential acquisition or development in one part of the world on another, leading to a series of economic problems. The question is: does that have the potential for the same impact now? I want to get a sense from Treasury of what risk assessments are being done on that. If those loans that are extended through that system fall and we have economic activity underpinned by it, what are the risks here?

Mr Goldsworthy : These are loans extended through the China shadow banking system?

Mr HUSIC: Yes, especially if we have up to $44 billion invested, as has been predicted. That is a fairly significant investment. We have not had the opportunity to test that with Credit Suisse because, as the chair has advised, they did not accept our invitation to appear so we could actually pressure-tests some of that. Thanks, Chair.

CHAIR: Mr Coleman.

Mr COLEMAN: Thanks, gentlemen, for coming along today. I want to focus on compliance and enforcement activities. If I read your summary here correctly, you seem to be saying that there were some prosecutions around 2006-07. You also seem to be saying that there are 33 cases currently being looked at or investigated as at 2014. My question is: what happened between 2007 and 2014?

Mr Rollings : Some would have been before my time, Mr Coleman. I certainly do not want to leave the committee with the impression that, if faced with an example of someone who has wilfully undertaken a transaction and not sought the requisite FIRB approval, we would in some way take a soft approach and try to talk them around to a compliance situation. We would take the identification of any such examples very seriously. I am not sure what has happened before 2013 or so. Mr Hill may have some more details. But I expect a key part of the problem is just uncovering cases where someone has tried to operate outside the system.

Mr COLEMAN: If I am to read your submission logically, I presume you would have provided other examples if they existed. So it would seem to suggest that between 2007 and 2014 there were not any prosecutions or breaches found by your department in relation to this area of investment in real estate. Would that be correct?

Mr Rollings : It is certainly correct that there were not any prosecutions, yes.

Mr Hill : I would agree with that. I am not aware that there were any prosecution actions after those few that we mentioned in the follow-up submission. We probably took other strategies beyond that period. I personally was not involved in this line of work either, but there would have been strategies to bring investors who might have breached the rules into a compliant position through means other than the pointy end enforcement mechanisms.

Mr COLEMAN: Would there be examples of people who were found by your department to have breached the rules between 2007 and 2014 and some other sanction was imposed?

Mr Hill : There might have been.

Mr Wilson : As I recall, the submission said the last prosecution was in 2007 and there are currently 33 investigations going on. But in the years between 2007 and 2014 there would have been a similar number of investigations going on in each of those years—2008, 2009, 2010, 2011, et cetera—sometimes giving rise to regularisation of the position to the extent that breaches were found. That is correct, isn't it?

Mr Hill : Yes, it is correct.

Mr Wilson : It is not the case that nothing happened.

Mr Hill : Let's not assume that nothing happened.

Mr COLEMAN: Just to be clear, though, you say you had 340 applications that were withdrawn when they came to you. You had discussions and realised that it was inappropriate to lodge the applications and they withdrew. I think that is a different category—

Mr Hill : Correct.

Mr COLEMAN: to where you have, whether through your own investigation or through other means, determined that a breach has occurred. Obviously under the act there are penalties that should apply in that circumstance. So really my question is: was any sanction applied to anyone between 2007 and 2014 by your department?

Mr Rollings : I think the answer is not to our knowledge, or we would have put it in the submission.

Mr COLEMAN: You would understand, wouldn't you, why that might be of concern to the committee? It does not accord with intuition that breaches would not have occurred in that time, so it would seem like a strange outcome that over what is quite a lengthy period commencing in 2007 you did not identify any breaches.

Mr Rollings : In relation to some of the considerations in that area, there may have been increased compliance. A series of high-profile prosecutions may have led to a response in compliance. It could be that any cases that were identified were considered in terms of their likelihood of success through the courts, and in those cases you would be looking at the intent of the relevant person and whether there were any extenuating circumstances. I am sort of hypothesising here, as I was not around for the particular cases. That is probably all I can offer.

CHAIR: Mr Coleman, I will not interrupt your train of questioning other than to put something that I think is directly relevant to your line of questioning here. If I look at the FIRB's original submission, attachment A, you go through in quite some detail the policy changes that took place in relation to the foreign investment framework. 'In 2008,' to quote from it, 'the requirement for temporary residents to obtain foreign investment approval for real estate purchases was removed. The 50 per cent rule for the advanced off-the-plan category was removed and replaced with a new requirement that the developer must market the development domestically and the minimum number of dwellings required in a development was increased to 100.' So there was a policy change whereby nobody would have been in breach from that period of time because of the decision made by the government of the day. Is that correct?

Mr Hill : Yes, I think that is probably reasonable.

Mr Wilson : I think people would certainly have been in breach if they had not applied. They were still required to make an application, so an undetected acquisition or an acquisition without an application would theoretically have been a breach.

CHAIR: But it was changed back in 2010, according to your list here. 'The requirement that temporary residents need approval for real estate purchases was reinstated.' So that applied from 2010 right through until today. I think Mr Coleman's point is actually a very good one. It does seem unusual that everybody would somehow be more compliant. Could it be that, because of that policy change, there was a lot of confusion out there and that there would be some people who perhaps did not realise the policy had changed and then changed back?

Mr Rollings : It was sort of hypothesising, but it is probably reasonable to expect that the FIRB at the time would have taken that into account in the administration of the rules. With those changes in policy, there would have been some allowances made for people who thought that the previous policy was still in place and had not complied due to that. That is a reasonable proposition, I think.

CHAIR: That it was still a bit of a free-for-all?

Mr Rollings : No, not so much, but there was a reasonable transition allowed for people to readjust to the new framework.

Mr Wilson : The other thing that occurred was that there were new and streamlined application arrangements which resulted in much higher initial compliance.

CHAIR: Sorry, Mr Coleman. I just wanted to clarify that policy change.

Mr COLEMAN: That is fine. Just to pick up on that point, you are saying that compliance effectively improved because it was easier to comply from 2008.

Mr Wilson : From 2011, I think, when the new arrangements were put in place—online applications and the like.

Mr COLEMAN: So you have these 33 investigations at the moment and you say there have been investigations throughout that whole period. Again, if you were to have 33 investigations at any one time over a seven-year period, that suggests you would have had some hundreds of investigations. But you are telling us that not one of those investigations resulted in a penalty.

Mr Rollings : That is correct.

Mr COLEMAN: Obviously there is this issue in relation to the policy change around the 2008 period. Did that perhaps contribute to the lack of success in identifying any breaches, is it a broader organisational issue that led to that, or is it simply that no breaches occurred?

Mr Rollings : Again in our original submission we made the point that, in the absence of some systemic data or information against which we can check actual transactions versus FIRB approvals, it is quite a tricky area to identify noncompliance. We are left to use these indirect methods to try and promote compliance as best we can. We are also promoting education, including of real estate agents, lawyers et cetera, around the requirements. But short of those methods I mentioned earlier—the compliance hotline or following up things in the media—it remains challenging to identify cases where a transaction has gone ahead that required a FIRB approval and that approval was not sought.

Mr Wilson : As I understand it—John, you have more details that I—there have been 21 very specific, very detailed, deep investigations reasonably recently as a result of dob-ins or high-profile media cases speculating that an illegal acquisition had been made. That is right, is it?

Mr Hill : Yes, that is correct.

Mr Wilson : Those were detailed manual investigations, digging right down into exactly what had happened—the funding, the true ownership and the like—and we discovered that there were zero breaches of the regulations as a result of those. I tried to get the Treasury's statistical team to tell us whether 21 targeted investigations arising from specific allegations of illegality was statistically the same as a thousand random cases. They said they could not; if we had a case of one or two breaches arising from that 21 they could extrapolate statistically to what that might mean in terms of an overall outcome. But apparently, because there were zero, people who know more about statistics than probably anyone of us in this room told me that they cannot extrapolate to what that might mean. The fact is that when we had real reasons to dig deep down in the expectation that we would find something in each case, we have not.

I think it is common ground that the underlying policy that says existing housing should be reserved for citizens, permanent residents and temporary residents for their own use while they are here only and that new housing should be essentially allowed to be acquired by foreigners other than that where there are specific issues surrounding that particular applicant—provided they notify and to get approval—is a policy that is generally supported. Reading the general thrust of the submissions and some of the evidence that has been given to this committee I suppose that the key area of community concern appears to be around existing residential housing being acquired by people who do not fall into the reserved category and who either wilfully do not apply or who use some obfuscatory mechanism not to have to apply—acquiring in nominee names or whatever. That is probably the greatest 'evil' that has been brought up in evidence before this committee.

On the limited, very manual work that has been done we have not seen any evidence of that. But that is not to say that in the 500,000 or 600,000 property transactions that occur each year there is not some of that. We deal with people who make an application—at the very least, they are trying to do the right thing. The ones we really need to be most concerned about are the ones who are actively trying not to do the right thing. But there is no current mechanism other than the sort of very specific 'dob in' line or following up on media reports or whatever even to actually identify those people as a class or individually. I think that is probably a summary of where we see the core issue and probably what seems to be the core noneconomic concern of people in front of this committee.

Mr COLEMAN: Thank you.

CHAIR: Just before I throw to Mr Kelly: I want to follow up on the point you made before, Mr Wilson. Do you think, then, that in order to identify those people we need to enhance how we actually do that? For instance, at the moment everything is on the applicant themselves—the person who is actually wanting to purchase. There are lots of people involved in these sorts of transactions, including conveyancers, real estate agents and others. Do you think that in order to identify those people there ought to be some mechanism—some imposition—on those people involved in a transaction to help to identify those people?

Mr Wilson : I will leave that decision up to the parliament. I think there are all sorts of difficulties in putting obligations on nonprincipals—agents and the like. They could be myriad: lawyers, financiers, buyers agents, real estate agents and vendors agents. Quite how you do it and who you make responsible and what sort of standard you hold them to is quite difficult. I think to the extent it was decided that this was really important and worth some resource, the suggestion made quite widely that tapping into the state transfer mechanisms that by definition do get every single property transaction that actually occurs is by far the most effective way of getting that data. Again I would simply caution that, while we all talk about a simple check-box, it is going to be a lot more complicated than a simple check-box because if someone wilfully wants to avoid the system, they are going to check No, they are going to buy in a nominee name, they are going to have a funny financing arrangement and so on. It is up to parliament to decide whether several hundred pages of association and other rules to determine who is and who is not foreign is appropriate for the 500,000 or 600,000 real estate transactions that occur every year. It is a difficult problem to get it exactly right.

Mr CRAIG KELLY: If I am correct, there were something like 16,000 applications made in the previous financial year. Obviously there is the cost of monitoring those, of receiving them. Do you have any idea of what the total cost of overall monitoring is for the taxpayer? Comparing no regulation at all with what is in place with the application process, what is the current cost of monitoring it, from the taxpayer's perspective?

Mr Rollings : The cost of my division is roughly $4 million a year, but there is a little bit of policy work done within that budget. Probably two-thirds to three-quarters of that $4 million is on the screening of both real estate and broader foreign investment; if I was to narrow it just to real estate maybe it is about a third of that budget.

Mr CRAIG KELLY: So that is about?

Mr Rollings : Say $1 million to $1½ million—something like that.

Mr CRAIG KELLY: What does it roughly work out at per application?

Mr Rollings : Back of the envelope, $50 to $100.

Dr HENDY: In answering Mr Coleman you were talking about the 21 investigations—

Mr Wilson : There are 33 currently going on; there have been 21 completed recently.

Dr HENDY: What would be the team investigating something like that? Would it be one person?

Mr Hill : On each investigation it would be just one individual.

Dr HENDY: And then they could be doing three or four, maybe?

Mr Hill : They could be, yes.

Dr HENDY: Without going into the boring detail, what was the evidence-collecting approach? Were interviews done with people? It was obviously more than just a desktop analysis. You said, Mr Wilson, that it was in depth and I am trying to get a concrete sense of what 'in depth' is.

Mr Hill : I guess a typical instance would be where there is a prestige property in the press and a foreign individual might be named or there might be a suggestion that a foreign individual has been the mystery buyer, perhaps.

We would pretty much go through a process of primarily looking at who that particular individual was and whether they were eligible to buy the property. That is our regulatory responsibility. It can be quite a lengthy process because that information is not obvious in any form.

We would often go to the real estate agent, who would be more visible than anyone else in the transaction. We would have a conversation with them about what had happened and who this individual was. Half of those individuals might say, 'We are not providing you with any information.' We would then get to talk about our powers to demand information. Basically, we move very quickly to a law firm that is representing the buyer, and that party might better understand our powers and our interests. Typically, they will come back to us with details of the individual, and in most cases they would tell us that the individual was a permanent resident in fact—not a foreign person or non-resident person—contrary to media reports. And then we would go through a process of establishing the credentials and that would take us into the VEVO immigration system.

Dr HENDY: All right, so you go that far. So that is quite a comprehensive analysis, if that is the sort of thing you are doing. I only have one more related question to that line of questioning, which is—and to some degree, Chair, you have already asked this—I know a number of your answers have been, 'That is up to the parliament or the government to decide.' But actually you are the regulator of this piece of legislation. Even if you, as individuals, do not have a comment to make here, I would have thought the board itself would have a view that they would express publicly about doing their job in ensuring the most robust regulation and administration of the regulations. I have not actually seen that per se. Maybe I am just making a comment.

If we are having a hearing with the Reserve Bank, which is a regulator, or with the Australian Prudential Regulatory Authority, or whoever, they are quite willing to put their views about how to better regulate their legislation. So I am just going to ask—but I think I know what the answer is going to be: are there any other powers that FIRB would be asking for with respect to the administration to ensure that we are adequately ensuring that the rules are met?

Mr Wilson : I do not think it is a matter of additional powers. I outlined before what I thought was the legislative and regulatory intent behind the rules, the differentiation between existing property and new property and, given that other than in very specific instances, new property is intended to be waved through. As it stands at the moment, there is no particular intention to restrict foreign acquisition of new development. So the key focus on restriction is around existing property.

I do not think there is a difficulty with our enforcement powers. I think, as I noted, the difficulty is one of data capture, because as Mr Hill has said, when it comes down to actually investigating something that may be an irregularity, it is a very detailed process. It is not a desk job. We have to get down to interviews, right down through the nominal ownership to the actual ownership, to whether there are any financing arrangements that are disguising the actual ownership. It is a very intense thing. We can do that on a targeted number of cases where perhaps our attention is drawn to something, but to have a perfect outcome we would have to do that on every single property transaction that occurs in the country—600,000. It is a matter of resourcing, not a matter of powers. It is a case of just how much resource is appropriate to put into overcoming what seems to be the main concern, which is about people acting outside the system, or deliberately obfuscating their identity or involvement. If I could think of a simple, automatic data matching arrangement that would do that, I would tell you about it.

Dr HENDY: I appreciate that. But one way you could put this is that we have uncovered a law that nobody ever breaches, and I am amazed that that is the case. The other way to look at it is that it is not being administered to the degree that should be happening. It is one of the two.

Mr Wilson : I think there is probably a third explanation, and that is that we have a law, the detection of a breach of which is extraordinarily difficult. Where we have done the work we have not found breaches. Where we have found a breach, we have acted. Mr Coleman, I appreciate that that action has not been prosecution, but it has been an attempt to regularise the position. I cannot think of a simple cost-effective solution to do it, but the key difficulty is detecting the breach. Tax evasion still occurs—there are 20,000 people in the compliance division of the ATO. In order to detect wilful breaches of the law, that is someone who buys an established property who does not fall into one of the permitted categories, and who does not apply or who uses mechanisms to disguise their identity and therefore the fact that they should apply, is not an automatic 'tick the box' data matching sort of problem. It involves manual, intense, deep analysis of every single transaction. So it is not a matter of power, it is a matter of resource. Ultimately, whether the resource to do the job that was necessary is worthwhile is a matter for parliament to determine.

Mr COLEMAN: I do not want to misquote you, but I think you said there have been occasions where you have picked up problems and sought to regularise the position. As I understand from the submission, that is in the context of someone, generally voluntarily, coming forward to you during the application process?

Mr Wilson : No, or where it has come to our attention that a temporary resident has rented out a property. There have been cases such as that where, obviously, that creates difficulties. There might be an Australian resident or an Australian citizen who is renting that property, and it would not necessarily be appropriate to turf them out onto the street with 24 hours notice, and prosecute the lessor. So arrangements are made to regularise that position, terminate the lease at an appropriate time and have the property disposed of or re-used by the owner. Where people have left the country and not sold within a particular time, arrangements are made to have them put the property on the market. Prosecution would be an addition to that, but it does not really—

Mr COLEMAN: In that example, an owner who has inappropriately rented out a property would not be fined or suffer any consequence of having done so?

Mr Wilson : That has not been the practice, no.

Mr COLEMAN: Why is that?

Mr Wilson : The penalty regime is a criminal penalty regime. I do not think we would get the DPP to even contemplate going down such a path for what is a relatively minor breach.

Mr COLEMAN: I struggle with the idea that there are no breaches worthy of any penalty. You have done the 22 detailed investigations—

Mr Wilson : I am sorry; I did not say there were no breaches worthy of any penalty.

Mr COLEMAN: Sorry, that you had identified.

Mr Wilson : I do not think there have been breaches identified that would be worthy of the only penalty that is available to us, which is a criminal prosecution.

Mr COLEMAN: I think the situation is that you have not identified anyone in seven years who you think is worthy of any penalty.

Mr Wilson : Of any penalty we are capable of extracting, which is a criminal prosecution.

Mr COLEMAN: So you have done the 21 in-depth investigations recently and you have 33 on foot, I wonder if it is possible to take on notice whether it is the case that that number is representative of the past seven years, or whether it has increased recently? It would be interesting to know for 2008, 2009, 2010, 2011, 2012 et cetera, how many comparable investigations were undertaken.

Mr Rollings : I am happy to see what we can find out and come back to you on that.

Mr COLEMAN: Thank you.

Mr BUCHHOLZ: I want to limit my questioning to issue of the integrity of data, which seems to have been a centralised thread throughout our hearings. I want to firstly ask the Foreign Investment Review Board were you aware of concerns in the marketplace around the integrity of data that you were providing?

Mr Wilson : I think it is important to categorise the concerns around integrity of data into what seem to me to be two buckets. One is the integrity of data as it applies to enforcement action or the specific Foreign Investment Review Board approval processes. The other appears to be more of a general view of lack of general economic knowledge or publicly available information on what is actually happening in the property market generally as applies to foreign trends and the like. The first of those obviously are part and parcel of our general remit; the second has been something that has more come out of recent publicity and this inquiry and the various submissions that have been made.

Mr BUCHHOLZ: In relation to the integrity of data and state gathering methods, there were some comments that Queensland, whatever they did, did well or better than some other states. On the collection of data, is there an appetite from the FIRB to gather more accurate data or is the status quo to remain?

Mr Wilson : For some time Queensland has had a box on its land transfer form around—

Mr BUCHHOLZ: It is a box tick, isn't it?

Mr Wilson : It is a box tick.

Mr BUCHHOLZ: From previous commentary, it seems to be without a doubt the most—

Mr Wilson : It is the only state that has that at all. So the data—in my second bucket of general understanding of what is happening—is better out of Queensland than it is out of anywhere else. I think that, generally, having that throughout the country would be helpful to us. As I said earlier, and various other submitters have noted, by far the most effective way to collect data at that level is using the land transfer office—that does get, in a simplified way, to all 500,000 or 600,000 transactions a year. The point I would make about our enforcement action arising from that sort of box tick, which I was making to Dr Hendy, is it certainly does not really get us where we need to go. Ticking a box that says, 'I'm not foreign,' because I have bought through my lawyer or have some other arrangement, or because I am just saying, 'I'm not foreign,' anyhow, does not help us with our specific enforcement activities around wilful avoiders of the system.

Mr BUCHHOLZ: So we agree that the tick of the box in Queensland is superior to any other—

Mr Wilson : Absolutely.

Mr BUCHHOLZ: My question goes back to the first comment I made. Is there an appetite from the FIRB to encourage a higher standard of collection, whether it be as simple as the tick-a-box approach—which we have just established is superior in Queensland—across the other states? If so, is there any active movement in encouraging that to happen?

Mr Wilson : Certainly, as I think I said at the last hearing, more data is always better than less provided it has a reasonable level of integrity, but it is not costless. The tick the box is probably relatively costless, though it may take a little time to put in place around the various states.

Mr BUCHHOLZ: The cost would probably come from centralising the states' data.

Mr Wilson : Yes, which I think the states are doing for real estate arrangements anyhow. That seems to be a relatively low-cost way of getting better data. It will be useful to the market and for everybody to understand better what is happening in the marketplace. It will be useful to us, at some level, in a macro sense in trying to determine how our applications and changes in the level of our applications—the various categories of properties—actually marry up to what is happening in terms of actual property transfers. So if we find that the number of tick the boxes for 'I am foreign' on actual transfers doubles, but the number of applications to the FIRB has only gone up 10 per cent, that is going to be useful to us in the macro sense to know that something is going wrong. But, as I say, it is not going to be useful to us in the very micro sense of specific enforcement against specific avoiding applicants.

Mr BUCHHOLZ: I am not looking to solve all problems. I am just looking to see what the possibilities are for taking one step closer to that place than where we are today.

Mr Wilson : Correct. I think I have said that that probably generally is the single biggest, relatively cost-effective step that could be taken to shine a light on what is happening here.

Mr BUCHHOLZ: Thank you. One of our terms of reference, the last dot point, is:

whether the administration of Australia's foreign investment policy relating to residential property can be enhanced.

I wanted to leave here knowing that we were going to be taking a step, or that there were recommendations to be looked at and considered by the committee.

Mr HUSIC: In response to earlier questions you outlined that the FIRB has a budget of $4 million, is that correct?

Mr Wilson : Yes.

Mr HUSIC: What is the current head count for the number of people who have worked in the FIRB to process applications—not just for residential property investment, but across the board?

Mr Rollings : My division is around about 30-odd people and about two-thirds of them are doing the FIRB process, so 20-odd.

Mr HUSIC: Has that changed in any way in the last 12 months? Has the headcount gone up or has it gone down?

Mr Rollings : Broadly over the last 12 months it has been about the same. Just in very recent times there have been a few losses, but we are working to restore that capability pretty quickly.

Mr HUSIC: How many losses have occurred and why have those occurred? You can answer generally. I do not need specifics.

Mr Rollings : Just generally, it is well known that the Treasury department is downsizing. That is across the department.

Mr HUSIC: So there have been redundancies. How many have there been?

Mr Rollings : I do not have those details. I am probably not best placed to answer those.

Mr HUSIC: I am asking not about all of Treasury but about FIRB. Can I get that question answered on notice?

Mr Rollings : Yes.

Mr HUSIC: Thank you.

CHAIR: I just have a final question. It follows up from the conversations we have been having regarding penalties. I want to outline a scenario to you around somebody who might contravene our foreign investment framework in circumstances where an individual, as you describe, Mr Wilson, who is not a permanent resident but rather a temporary resident has left or has moved somewhere else and has rented out their existing dwelling, contrary to the existing framework. When FIRB discovers that, as Mr Coleman pointed out, there is no real sanction that can be applied to that individual at the moment. So, in effect, whatever income they have derived from that rental property is really a windfall gain for them for having done the wrong thing, isn't it?

Mr Wilson : It is.

CHAIR: That is right. So take circumstances where a nonresident foreign investor, contrary to the framework, decides that they will go on a bit of a buying spree of existing properties. At the point at which Treasury discovers this, through FIRB, it can take action in order to sell up that property on that particular individual. In those circumstances, given that that process can take a period of time to work its way through the court system, that property may have increased in value. Again, that individual can keep the benefit of that increase in property, because once it is sold they keep whatever windfall gain is made. They are benefiting from doing the wrong thing.

Mr Wilson : That is correct. The only sanction available is that of criminal penalty and the fines associated with that criminal penalty. There are no economic sanctions whatsoever available to us.

CHAIR: Having outlined those two scenarios, it seems patently obvious that the incentives are all around people who do not do the wrong thing rather than those who do. There is actually a real benefit for somebody who does the wrong thing, even if they are caught, because they get to keep whatever windfall gain they might have made. I see you nodding.

Mr Wilson : That is the case.

CHAIR: Yes. I think it is patently clear that this is something the committee needs to consider more deeply and make recommendations on.

Mr HUSIC: Just following from that, that is one end of the equation—the penalties. At the other end is the actual application. How much does it cost when you apply?

CHAIR: It does not cost anything.

Mr HUSIC: If a recommendation were to be put to the committee about changing that fee structure and placing a fee on applications to acquire property here in Australia, would you see that as a beneficial thing, or do you see that this could have a negative impact on the number of applications received?

Mr Wilson : I am torn on this one. I am sure if the revenue was hypothecated to the Foreign Investment and Trade Policy Division, that would be a very welcome thing.

Mr HUSIC: This is a look of shock on my face.

CHAIR: You can be assured we are on your side on that score.

Mr Wilson : Equally, I think this is an area where, because of the difficulty of determining that people who do not voluntarily come into the system should come into the system—which I think I have outlined in many different ways at many different times—anything that discourages people from voluntarily coming into the system may have an unintended negative effect.

When Mr Hill and I talked about this, he made the point that quite often on a Friday we might get four applications from the same buyer who is going off to four auctions in Melbourne. They are only going to buy one property and they might not buy any of them. If we had a fee, even a reasonably modest but useful fee, we would possibly be deterring them from entering the system in the first place. People who have potentially done the wrong thing, if it becomes a bit more formal and if it costs money to come and regularise it, would potentially be deterred too.

As I say, I am torn. On the one side I am a believer in user pays principles generally, but this is an area where, just by the nature of the proposals, detecting people who do not come into the system voluntarily is very, very hard and very, very expensive.

Mr HUSIC: But there are ways you could deal with that. We have already reflected upon the difference between approvals versus actuals. You could also structure reimbursement along the lines of whether or not the actuals precede the refunding of that application fee. But that is the sort of micro stuff that we do not necessarily need to discuss here.

CHAIR: Are there any final questions?

Mr COLEMAN: I just have another question to place on notice. In relation to the investigations that have arisen where you have in fact identified a breach but have not pursued it because of the complexity of getting a criminal prosecution, it would be interesting to know how often that has occurred. In addition to the number of investigations, I am also interested in the number of investigations that led to the identification of a breach but where no sanction was applied.

CHAIR: If there are no further questions, can I thank you again for appearing before the committee. I know you really look forward to it, so we thank you very much.

Mr Wilson : I would just say they are more fun than Senate committees.

Resolved that these proceedings be published.

Committee adjourned at 13 : 18