Foreign investors who fail to report their investments in Australian assets have been put on notice by the Australian Taxation Office and face significant cash fines after a landmark legal win in which the judge said his intention was to “wipe out” the profits of a serial property buyer.
Between July 2016 and April 2018, Vijay Balasubramaniyan spent more than $1.4 million on three residential properties and a block of residential land in Melbourne’s west.
Justice Barry Beach agreed with the ATO that Mr Balasubramaniyan, who had a temporary visa, breached foreign investor rules six times – four times for the purchases, which occurred without permission, and also for owning two established properties’
Justice Beach, following the first prosecution of such a case, ordered penalties of $250,000, broken down into four $30,000 penalties and two $65,000 penalties. The amount was well above the $162,839 that Mr Balasubramaniyan argued was his net gain.
“The judgment provides a strong base from which we will progress our penalty litigation work as part of the ATO’s overall compliance approach,” ATO assistant commissioner Keir Cornish told The Australian Financial Review.
The judgment sets a precedent for how the law treats foreign investors in Australia who do not alert authorities to their acquisition. It is the first such ruling since the Foreign Investment Review Board Act was rewritten in 2015 to introduce civil penalties.
Previously, penalties for international residents acquiring Australian assets without alerting authorities were largely a slap on the wrist. They were forced to divest but could keep any profits gained.
In the three years to June 30, 2020, there were more than 1100 penalty notices for contraventions of the FIRB Act in residential property alone.
“This serves as a clear deterrent to other foreign investors who believe they can operate outside of the law,” Mr Cornish said.
“The ATO promotes voluntary compliance of the rules by foreign persons, but where foreign investors resist compliance action, stronger enforcement action is taken.”
In his judgment, Justice Beach said Mr Balasubramaniyan had made gross capital gains of $710,300.
“This is a significant fact for penalty purposes. General deterrence will only be achieved by a penalty that puts a price on any contravention sufficient to deter others who might be tempted to contravene the Act,” he said.
The ATO argued the net gain was $425,000. Justice Beach accepted some of the ATO’s calculations, but cut the number further.
“I do not propose to linger on the arithmetic, save to say that I am satisfied that a figure of around $250,000 represents no less than the respondent’s net gain,” Justice Beach said in his judgment.
“I propose to wipe this out by the total penalty that I will impose . . . Indeed, the sum of $250,000 is considerably more than the respondent’s own calculation of the net gain.”
Lachlan Molesworth, a barrister and specialist in taxation and foreign investment, who represented Mr Balasubramaniyan, said he expected it to become routine for the Commonwealth to seek penalties for people who breach the act.
“There is no doubt this will very much embolden the regulator, and I think it will send a clear message that if you hold assets in Australia without relevant federal clearances, those assets are very much at risk,” Mr Molesworth said.
“The Commonwealth were probably waiting for a clear-cut case. The next frontier may well be into other assets classes, commercial investments where there have not been contraventions, and there will be a new level of confidence, we know what considerations will apply.”
