Cashed-up foreigners, many from China, have been blamed for driving up prices in Australian property markets, particularly Sydney and Melbourne, and placing home ownership out of reach of many locals.
"Part of the Australian dream is owning your own home and we certainly want the dream to continue," Abbott told a press conference in Sydney.
He said the current rules, under which foreigners are only allowed to buy new dwellings and are barred from purchasing existing residential property, had not been enforced in recent years.
"So what we're on about is ensuring that the long-standing rules are enforced.
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"Yes, foreign investment has been very, very good for Australia but it's got to be the right foreign investment... and it can't disadvantage Australian home buyers," he added.
The government is proposing charging an application fee on all foreign investments, similar to a scheme already operating in New Zealand. The charges are likely to be more modest than those in places such as Hong Kong and Singapore, Abbott said.
This would rise by Aus Dollars 10,000 for every extra million dollars in the purchase price.
If an investor broke the law by purchasing existing property, Treasurer Joe Hockey said they could then be fined up to 25 per cent of the value of the property and be forced to sell it.
"These integrity measures are absolutely essential for reassuring Australians that when they go to an auction they are on a level playing field, that they are not being taken advantage of," Hockey said.