The Australian government has proposed new “application fees” to apply to foreign purchasers of real estate in Australia. In the case of residential assets, a fee of AUD 5,000 will be levied on the purchase of a dwelling valued below AUD 1 million. A fee of AUD 10,000 per additional AUD 1 million will apply above that level. Also, stiffer penalties for breaches of the regulations are proposed.

Will these fees – in effect a tax – discourage offshore investors? That depends on who will pay and the impact of the proposals on dwelling prices.

Investment in Australia’s residential market takes a number of forms. Offshore residents can acquire new, but not established, dwellings. By contrast, temporary residents can purchase an existing dwelling providing that it’s their primary residence in Australia. Increasingly foreign developers, particularly from China, are entering the Australian market by purchasing development land or commercial assets for subsequent redevelopment or conversion to residential use. So, foreign investors are active both on the demand and on the supply side of the housing market.

In general, tax burdens are determined by the relative elasticity of demand and supply – the party with the lower elasticity of demand or supply carries a larger share of the burden.

The burden of the proposed fees will be split three ways – between the final offshore buyer, the developer and the vendor of the development site, who is probably Australian. How the burden is spread will likely vary through the market cycle.

In the current buoyant market the burden will probably devolve heavily on developers (who may be local or foreign) and foreign purchasers. But caution is required. No offshore investor is compelled to select Australia – the US, Singapore and the UK spring to mind as alternative destinations. And with double digit vacancy prevailing in most of Australia’s CBD markets, vendors of assets suitable for conversion may have limited options. Australians, one way or another, will likely be wearing a fair proportion of the fees intended for foreigners.

And there is another twist. The median price paid by apartment investors in Australia in 2014 was around AUD 750,000. So the proposed tax is a modest 0.7%. But Sydney apartments are in general more expensive than apartments in other capital cities. So for apartments below AUD one million the rate of the tax will be lowest in Sydney. One of the unintended impacts of the proposal may be to increase the proportion of offshore investors heading for the Sydney market.

In allocating tax burdens, legislators are able to determine who is liable to pay the tax. But the ultimate burden of the tax is determined by market forces over which policy-makers have little control or visibility. The hand that signs the cheque may be a poor guide to who actually pays the tax.

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