Foreign investors who have been forced to sell properties because they did not adhere to tougher laws aimed at foreign investment into residential real estate, may have pocketed capital gains, according to evidence given to a parliamentary hearing.

The hearing was told not a single prosecution had been brought against foreigners who did not comply with tougher laws — including the need to apply to the Foreign Investment Review Board (FIRB) and get approval when overseas investors want to buy into, or take a stake in, Australian real estate.

Wednesday's hearing into Managing Compliance with Foreign Investment Obligations for Residential Real Estate was also told Australian citizens who are elderly relatives of people overseas, may be used as fake "front men" to make purchases, but it was, at times, too hard to prosecute.

Australian Taxation Office (ATO) deputy commissioner Mark Konza said often the fake 'front man' being used to illegally acquire local real estate was an elderly relative with limited English language skills, and so litigating in these circumstances would be too hard.

Financial penalties total $5.5 million

Since May 2015, when the Federal Government announced a package of budget measures aimed at making it harder for people offshore to invest in Australia, there had been forced disposal of 316 properties worth about $300 million.

Mr Konza said this was a "significant amount of action".

But Julian Hill, deputy chair of the Joint Committee of Public Accounts and Audit, said: "I'm not getting that sense of confidence that you interrogate this data in a proactive way," adding that the agency needed to go after intermediaries, such as property developers, who are facilitating illegal purchases.

"Why out of all those breaches have you not prosecuted anyone?" Mr Hill asked.

The ATO, in a written submission to the committee, said that since May 2015, it had completed 3,940 investigations that identified 1,158 breaches and resulted in 1,067 financial penalties totalling some $5.5 million.

Mr Hill noted, "The average $5,000 penalty is not much of a deterrent".

He also asked whether so far, in the cases of the 316 forced disposals, the investors were able to keep the capital gain. Mr Konza responded, yes if there was a capital gain, but said he would take the question on notice to be sure.

Community concerns about fake 'front men'

Most foreign investments in residential real estate have been in Victoria.

Mr Hill asked about what happened in a hypothetical example of a fake front person: "If Mrs Bloggs goes and buys a house in Glen Waverley [Melbourne] say, which is in the top 10 postcodes [where foreigners are buying], she's an Australian citizen, she's bought the house — does she need to make a declaration on the way through that this is not in trust for a foreigner?"

Mr Konza said the ATO did, in some cases, require the person to show sources of funds, particularly for larger purchases.

And if community concerns were raised that the person buying was not the real identity profiting, the ATO would investigate, he said.

"That has worked on a small number of occasions where we have investigated because it appeared that an elderly relative or someone magically was buying a significant property, so we we've tried to trace the funds," Mr Konza said.

But it was not always the case they could take action.

"We did look at one particular case where someone, we believed was a front person, and we looked at prosecuting that person," Mr Konza said.

"But the person turned out to be someone of limited education, limited language skills, advanced age and other sympathetic factors that meant that, in the end, we decided upon advice, that the prospects of litigation were poor."

Mr Hill asked: "Mrs Bloggs archetypal is a grandma?" Mr Konza responded: "Yeah, that can be a problem for us as well."

Chasing down shonky real estate agents

Mr Konza told the hearing he hoped to get a better picture of non-compliance over time.

Conveyancers and real estate agents may fail to tell someone they need to register and encourage them not to, and in that case, it is an offence, he said, although, he added the ATO would need to prove the intermediary knew what they were doing and had been 'reckless'.

Mr Konza said foreign investment applications for residential real estate had been steadily falling since the new laws came into place.

ATO data given to the committee shows there were 40,149 applications by foreigners wanting to invest locally in 2015-16, totalling $72.4 billion worth of proposed investments.

ATO responses to questions on notice state foreigners are more likely to invest in Victoria.

Victoria had 877 breaches since December 1, 2015, which is 55 per cent of total breaches reported. But when looking at total FIRB applications, it is 42 per cent of the total applications over that time.