This article analyses the current position under Australian law and general policy and the Commonwealth Government's specific policy on foreign investment in Australian agriculture.
There has recently been considerable debate and concern expressed in the Australian press and Australian public life regarding whether the regulation of acquisitions by foreign persons of Australian rural land is sufficient. Some of that concern arose from matters of food security and the potential for acquisition of Australian rural land and business by foreign governments and foreign state-owned entities.
Commonwealth Government report and response
As a result, an Australian Commonwealth Government report (the Report) was commissioned and recently delivered by the Rural Industries Research and Development Corporation and the Australia Bureau of Agricultural and Resource Economics and Sciences, to which the Government has formally responded.
The Report included a detailed description of the history and extent of foreign ownership of Australian agricultural land, water rights and associated businesses, including by geographic region as well as by industry. Most interestingly, it was found that as at 31 December 2010:
- 11.3% of Australia's agricultural land was wholly or partly owned by foreigners
- 91% of water entitlements were fully Australian owned
- 23% of the Northern Territory's agricultural land was wholly or partly under foreign ownership
- Victoria had the lowest percentage of whole or part foreign ownership of agricultural land, at 0.8%, and
- by industry, the highest level of foreign ownership was in the sheep, beef, cattle and grains industries, with the lowest in nursery and floriculture.
What the Report did however recognise was that information on foreign investment in agriculture and agribusiness is limited. Particularly, there is inAustralia no systematic source of data on foreign ownership of agribusiness companies, nor is there regular information on the nationality of foreign investors or the type of entity involved. The extent of investment by foreign government entities is also not known. Nor too, presumably, is the extent of indirect foreign ownership through Australian and overseas listed and unlisted entities, themselves incorporated in Australia, where a foreign person owns less than 15% of the issued share capital or foreign persons together owned less than 40% of the issued share capital.
The general tenor of both the Report and the Government response was positive for foreigners wishing to acquire Australian rural land and agricultural businesses. The Government response expressly recognised the importance to Australia of foreign ownership of Australian rural land and businesses, and the capital inflows and development opportunities foreign ownership affords. The Government's response noted food security for Australians as being enhanced, not lessened, by greater foreign ownership.
As a result, the Commonwealth Government confirmed its long-term policy stance that foreign investment in Australian agriculture should be regulated in the same way as the general regulation of other Australian businesses.
Position under Australian law and general foreign investment policy
Acquisitions by foreign persons of interests in Australian businesses and Australian real estate are regulated by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act), the regulations made under the Act (principally, the Foreign Acquisitions and Takeovers Regulations 1989 (Cth)) (the Regulations) and the Australian (Commonwealth) Government's published foreign investment policy (the Policy). The Act, Regulations and Policy apply, whether or not the seller is an Australian or itself a foreign person.
The Act, the Regulations and the Policy provide for a regime for the notification to the Foreign Investment Review Board (FIRB), and its examination of proposed acquisitions of interests in Australian businesses, certain types of Australian land, and corporations and trusts that own Australian businesses or land. Under the Act and the Regulations, different monetary thresholds apply, as follows in ascending order:
- Australian developed commercial real estate (heritage listed) - $5 million
- Australian developed commercial real estate (non heritage listed) or companies or trusts whose assets are by value comprised of 50% or more of such land - $53 million, and
- interests in Australian businesses, including of Australian rural land - $244 million.
For US investors, the monetary threshold is in all cases $1,062 million. There is a proposal, to be effective on conclusion of comprehensive bi-lateral arrangements following the signing of a Protocol in February 2011, for investors from New Zealand to be treated in the same way as US investors.
Except in respect of heritage listed land, the above thresholds are increased annually with reference to the Consumer Price Index (CPI). Values for these purposes are to be determined with reference to latest available accounts – audited, where available. Unlike for stamp duty and Capital Gains Tax calculations, transaction specific values and valuations are not required.
The Australian Commonwealth Government, including FIRB, takes a different approach to acquisitions by foreign governments and foreign state-owned entities when compared to acquisitions by other foreign persons. All acquisitions by such governments and entities require FIRB notification, regardless of value.
Analysis of Australian law and general foreign investment policy
Sensitive industry sectors
The above monetary thresholds do not apply where the proposed investment is in a prescribed sensitive sector. Sectors presently prescribed for FIRB purposes comprise: media, telecommunications, transport, military and defence, encryption and security and the extraction of uranium and plutonium and the operation of nuclear facilities. Other legislation regulates investment in airports, Qantas, Telstra, banks and shipping.
Neither the Government nor the Report characterised, nor discussed whether it was appropriate to prescribe, agriculture or other agribusiness as a sensitive industry.
Lesser importance given to Australian rural land than commercial and heritage listed real estate
Under the Act, the Regulations and the Policy, rural land is land that is used wholly and exclusively for carrying on a substantial business of primary production. The definition of primary production is taken from the Income Tax Assessment Act 1997 (Cth) and refers to production resulting directly from the cultivation of land; animal husbandry or farming; horticulture; fishing; forestry; viticulture or dairy farming. Primary production for the purpose of the rural land definition does not include vacant land (even if zoned rural), hobby farms, rural residential blocks or land used for stock agistment or mining.
To constitute a business of primary production, it must be substantial and have a commercial purpose or character and not merely be carried on as a hobby or for recreation purposes. A number of factors are considered in determining a business' commercial purpose or character, including:
- operating as a significant commercial activity, and not a recreation or hobby
- the intention of the business is to make a profit from the activity
- repetition and regularity of activity
- activity organised and carried on in a businesslike manner with associated business records and reports
- reasonably large scale operation, and
- commercial scale of sales of product.
A primary production business should also meet the following criteria:
- the value of the business' Australian urban land should be less than 50 per cent of its total assets; and
- the land on which the business is being conducted should be zoned rural and not residential.
By way of contrast, land on which a developed mine is operating is, commercial real estate, to which in 2012 a $53 million monetary threshold applies.
An argument exists that the regulation of foreign investment in Australian agriculture ought to proceed on the same basis as for the mining industry. This argument was neither raised nor discussed in either the Report or the Government response.
In the agribusiness sector, narrow distinctions continue to be drawn between land on which intensive processing or packaging of agricultural produce is conducted, which would, like an operational mine, be characterised as commercial real estate, as opposed to rural land on which primary production is undertaken. Again, the appropriateness of such a distinction was neither raised nor discussed in either the Report or the Government response.
Acquisitions of water rights
As noted in the Report, changes have occurred since the enactment in 1975 of the Act to the system of ownership and tradability of water rights in the various States and Territories of Australia. Particularly following the National Water Initiative, the ownership and trading of water rights has been decoupled from the ownership of the land to which such rights previously attached.
As a result, what now constitutes land is narrower than was previously the case. A further result is that land specific monetary thresholds are now, in real terms and without reference to the value of attendant water rights, in effect higher than they were, leaving a lesser number of water rights and land package acquisitions by foreign persons subject to the FIRB regime. This effect is not just of passing interest, as it can often be the case that the value attributed to water rights in an agricultural business acquisition can exceed the value of the land itself.
Acquisitions by alternate entities and in alternate structures
Steps were taken by the introduction of Foreign Acquisitions and Takeovers Amendment Act 2010 (Cth) (the 2010 Amendment Act) to tighten the regulation of indirect acquisitions of interests in regulated Australian corporations, land and businesses. The 2010 Amendment Act introduced a concept of potential voting power, in addition to the pre-existing concept of voting power, in relation to corporations, including to cover option and other arrangements.
Interestingly, what remain unregulated are investments through the following entities and structures:
- non-trust managed investment schemes, whether registrable or not, and
- profit or produce sharing joint ventures or other arrangements, where there is no direct interest in the land owned by the joint venture.
There is in our view no reason why such structures and arrangements should not be regulated under the Act.
Aggregation of where business or land owned by commonly controlled entities
Australian agricultural enterprises are not uncommonly structured so that different entities separately hold the land; own the equipment; process, package and market the produce; and employ staff working on the land.
The Act, including as amended by the 2010 Amendment Act, would seem to allow such arrangements to circumvent the monetary thresholds which would otherwise be applicable if these enterprises were conducted through the one entity.
Comparison with other major OECD countries
The Report surveyed the regulatory regimes of certain other major OECD countries for foreign investment in agriculture. When compared to Australia, New Zealand's regulatory regime is tighter, in part informed by its tighter regulation of land acquisitions, generally. At the federal level, both Canada and the United States do not regulate foreign investment in agricultural land, but it was reported that a significant number of their provinces and states did so. Systems of notification and regulation were noted in the Report as in place or proposed in Braziland Argentina.
Analysis of Report and response
That these concerns have recently been aired, considered, reported on and responded to is positive for potential foreign acquirers and indicates continuing stability in the policy framework adopted in this area by successive Australian Commonwealth Governments, led by both the major Australian political parties. This in our assessment is likely to continue for the foreseeable future.
Given the paucity of information, an outstanding issue yet to be resolved by the Australian Commonwealth is whether a register of foreign ownership of Australian rural land and businesses should be maintained. Such a register is maintained for land generally, in Queensland. Western Australia goes further in relation to pastoral leases, where a transfer of a pastoral lease will not be approved to an entity with more than 50% foreign ownership unless it can be shown that no Australian interest could be obtained.
What the Report and the response do not address is the introduction of an asset or industry specific threshold or test for foreign investment in the Australian agricultural sector generally. The most important distinction now operative, outside the currently prescribed sensitive areas and outside whether or not the foreign person is a US investor, a foreign government or a foreign government controlled entity, is the nature and proportion of the land that is involved in the proposed acquisition.
Given that distinction a parting thought: is our rural heritage – our rural land and access to water - of such lesser importance that the threshold before FIRB will examine acquisition proposals is now more than 40 times higher than if the land and buildings involved were heritage listed? On current policy settings, this would seem to be the accepted position.
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.