It has been a big few weeks in the foreign investment space, particularly in light of the drastic changes to the Foreign Investment Review Board (FIRB) regime announced by the Treasurer on 29 March 2020. As set out in our previous alerts on this issue (which you can find here and here), the changes imposed a $0 monetary screening threshold on all inbound foreign investment. On 24 April, FIRB released Guidance Note 53 to provide some much needed clarity on the review process in these uncertain times. We have summarised some of the key elements of the guidance below.
As announced by the Treasurer on 29 March 2020, the standard processing time for applications will be increased from 30 days to six months. FIRB will use its current powers to extend the assessment timetable rather than amending the Foreign Acquisitions and Takeovers Regulations 2015 (Cth)(FATR). In the new guidance note, FIRB has provided reassurance that it will prioritise urgent applications for investments that protect and support Australian businesses and jobs. Specifically, the Treasury and the ATO will employ additional staff to triage cases using a 'risk-based approach'.
FIRB has again stressed the importance of early applications - the earlier an application is submitted (and the correct fee paid), the earlier the screening process will commence and the earlier the applicant may receive a no-objection notification.
Fees are payable for all investment applications that are required to be screened by FIRB, except where the fee payable is prescribed as nil. However, the Treasurer has confirmed that it may be open to considering a refund of fees where the impact of the pandemic has resulted in delays to, or deferrals of, investment decisions that are currently the subject of a FIRB application where the applicant wishes to withdraw the application.
FIRB has also advised that a fee concession may be granted to non-government foreign investors in respect of the acquisition of certain developed commercial land. Generally, the FIRB application fee is $26,200 for a non-government foreign investor who proposes to acquire an interest in commercial land for consideration between $10 million and $1 billion. Prior to the recent COVID-19 changes, this fee only applied to acquisitions of non-sensitive developed commercial land in excess of $275 million because acquisitions below this threshold did not require FIRB approval. Foreign government investors (FGIs) have always required FIRB approval for all land acquisitions, regardless of value, but there is a specific fee concession for FGI's for acquisitions of developed commercial land below $55 million. As this fee concession does not technically apply to non-government foreign investors (who now also require FIRB approval regardless of value) there is a disparity in the fees payable, with FGIs getting favourable treatment.
To rectify this disparity in fees, FIRB has stated it will consider and process fee waivers on a per-application basis with a view to putting private foreign investors in line with the fee concessions afforded to FGIs.
Importantly, in all other cases, fee concessions will not generally be granted.
When foreign investment applications are assessed against the national interest test, conditions on the investment may be imposed to address any risks raised by the Treasurer. In Guidance Note 53, FIRB confirmed that any conditions imposed on investments that are now required to be screened under the temporary changes to the rules will remain for as long as the Treasurer considers necessary to protect Australia's national interest. In other words, conditions imposed on an investment during these uncertain times could potentially remain in place even after the expiry of the temporary changes to the FATR.
Agreements and options existing prior to announcement
We noted in our previous alert (which you can find here) that the changes to the monetary screening threshold would not apply to actions taken under agreements that were entered into before 29 March 2020.
FIRB has now clarified that it considers an agreement to have been entered into before the announcement date if negotiations in relation to the agreement were completed and the parties reached a mutual understanding of all essential elements of their bargain. Importantly, this means that an 'agreement' does not include preliminary negotiations falling short of such a mutual understanding.
In regards to the exercise of options that exist within agreements entered into prior to the announcement date, FIRB has confirmed that such an action would not itself give rise to a new significant and/or notifiable action. Importantly, and as is usually the case, the FATA considers the granting of an option itself the acquisition of an interest in land, not just the exercise of that option.
Notifications and exemptions existing prior to announcement
Pre-existing no-objection notifications
If a foreign investor was granted a no-objection notification from the Treasurer prior to the announcement date, they do not need to apply to FIRB again before taking the proposed action (or executing the agreement in respect of that action). This is the case so long as the action (or execution) occurs within the timeframe prescribed by the Treasurer in its no-objection notification.
Pre-existing exemption certificates
FIRB has confirmed that the temporary changes do not affect exemption certificates granted prior to the announcement date. These certificates remain valid, provided the conditions (if any) contained in them continue to be met.
Treatment of Leases
Acquisitions of leasehold interests in Australian land by foreign investors require FIRB approval where the term of the lease (including renewals) is reasonably likely to be more than 5 years. Any foreign investor entering into a lease agreement after 29 March 2020 (where the lease term is reasonably likely to be over 5 years) is now subject to a $0 monetary screening threshold.
Accordingly, a large number of routine lease agreements will now require FIRB approval. As noted above, FIRB has confirmed that the Treasury and the ATO will work on triaging and applying its risk-based approach to ensure non-sensitive lease applications can be efficiently renegotiated to enable businesses to remain open.
Lease terms and rent amounts
Where an agreement is subject to FIRB approval, FIRB requires parties to notify it of any material variation to the agreement (which of course comes with a fee). The new guidance note however expressly states that where an adjustment is made to lower, defer, or otherwise delay rental payments under an existing lease, made in relation to the COVID-19 and is temporary in nature, then it would not of itself be considered a 'material' variation and further notification is not required.
This however is not necessarily the case where the lease is extended as part of the lease parties' response to COVID-19 impacts. A change to the term of a lease is a material variation to the lease agreement. If the lease with the amended term exceeds five years, foreign lessees will likely need to seek FIRB approval.
Agreements for lease
In Guidance Note 53, FIRB sets out a view that an agreement for leases (AFL) is different from a lease itself. FIRB considers leases and an AFL as two separate actions under the Foreign Acquisitions and Takeovers Act 1975 (Cth). This is a concerning approach that is inconsistent with agreements to acquire any other interest in land and also inconsistent with FIRB's approach to lease options (which it confirms in Guidance Note 53). We consider that the correct interpretation of the legislation means that a lease entered into pursuant to an AFL that was agreed before the announcement date will not be subject to the new lower thresholds. However, this is contrary to FIRB's published view and until or unless FIRB updates its guidance, specific advice should be taken on this issue.
Establishing new entities
Historically foreign investors have not required FIRB approval for the incorporation of Australian subsidiaries. However with the lowering of the monetary thresholds to nil, there were concerns that the incorporation of a subsidiary may be captured. The new guidance note has confirmed that the incorporation of a new subsidiary company by a foreign investor does not require FIRB approval, however this does not (at the moment at least) to the establishment of new subsidiary trusts.
In respect of starting new Australian businesses, only FGIs are required to obtain FIRB approval. This rule remains unaffected by the new temporary rules.
In light of FIRB's new guidance, there are a few factors that are key for foreign investors to successfully navigate the current foreign investment landscape in light of COVID-19.
Foreign investors should seek to engage with FIRB early - early applications are key in facilitating a potential earlier approval, and ensuring that the correct fee is calculated and paid to facilitate an effective FIRB application.
It is also important to remember that, in some cases, one transaction may yield more than one notifiable action which requires the FIRB application to account for more than one event.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.