In July 2011 the Senate Rural and Regional Affairs and Transport References Committee (Committee) was tasked with preparing a report examining the key "national interest test" which applies to foreign investment in Australia (Report). The publication of the Report has now been delayed until 15 May 2013. Though delayed, the Report is still keenly anticipated.
The Report is likely to provide a platform for important changes to Australia's foreign investment requirements – in particular, foreign investment in agricultural land which has not been far from the spotlight in recent times (e.g. the January sale of Cubbie Station to a majority foreign owned consortium). It will also focus on Australia's future food security, and may recommend a review of tax laws. Given the range of issues being examined by the Committee it is not surprising that there has been a further delay.
In this brief note we refresh what is happening and what the implications could be for stakeholders. We also discuss some of the key changes to foreign investment policy under a recently revised policy released by the Foreign Investment Review Board (FIRB).
Currently, 'rural land' (i.e. agricultural land) is distinguished from 'urban land' in the Foreign Acquisitions and Takeovers Act (FATA). FIRB approval is generally not required to acquire agricultural land (unless it is acquired by a foreign government investor or the acquisition of an interest in a primary production business exceeding certain thresholds). In contrast, approval is required to directly acquire urban land (which, despite its title, includes mining interests).
Therefore, there is a difference in treatment between rural land and urban land. The difference most likely arises, according to FIRB's Chairman, Mr John Phillips, because in 1975 (when FATA was originally enacted) foreign investment in the housing market was topical, but rural (i.e. agricultural) land did not attract great concern. In New Zealand, in contrast, acquisitions of agricultural land greater than 5 hectares in size require approval. In 2010 Senator Xenophon proposed that a 5 hectare threshold be introduced in Australia and introduced a private member's Bill to this effect. The Bill has not been enacted, but there remains ongoing speculation about a potential tightening of Australia's foreign investment regime in relation to agricultural land.
The Committee's recommendations on the treatment of agricultural land are keenly anticipated and, as noted above, are scheduled to be delivered in May this year. The recommendations may take a number of forms, including for example:
- imposing a monetary threshold on the acquisition of agricultural land - to do this there will need to be amendments to the terms used in the FATA to clearly define what agricultural land is (which will be welcomed in what is acknowledged to be an out-dated legislative framework);
- adjusting (e.g. lowering) the threshold for the acquisition of an agricultural business; or
- making agriculture a 'sensitive sector' (although, by itself, this is unlikely to be very effective).
The final Report will provide a useful basis for considering what the future may hold for foreign investments in Australian agriculture (noting that once the Report is delivered the legislative process will then need to commence). Only time will tell.
Foreign investors should also be aware that the Committee made several taxation recommendations in its interim report which was released in November 2012. These include:
- That the government undertakes an "extensive review" of the tax arrangements applying to foreign investments and acquisitions in the agriculture sector "in order to prevent tax revenue leakage and market distortions". In the Committee's view there are a number of ways that the current taxation arrangements are vulnerable to loopholes, particularly in the areas of transfer pricing, capital gains tax and passive income.
- That the review should, in particular, consider ways of developing more rigorous tax liability arrangements to limit the scope for foreign investors to use business structures not available to domestic competitors to reduce their tax burden.
- That the review should extend to tax exemptions available for not-for-profit activities of foreign entities. The purpose should be to prevent tax revenue leakage when a foreign government entity undertakes agricultural production in Australia for humanitarian purposes or for food security. The Committee stated that, as a general principle, foreign government entities should invest in Australian agricultural land and businesses on a commercial basis and not for food security purposes.
At this stage these are still recommendations in an interim report, but these could have significant consequences for foreign investors in this area.
So, what does all this mean for foreign investors?
Given that the goal posts for an acquisition in agricultural land or an agricultural business might change, foreign investors considering investments in Australian agricultural land or businesses should watch this space as FIRB approval can create an additional process and reduce deal certainty. There might also be important tax implications down the track.
Other recent foreign investment changes
Importantly, while the above potential changes are still a work-in-progress, some other definitive changes have occurred. Namely, FIRB has recently updated its key policy document "Australia's Foreign Investment Policy" (Policy).
The revised Policy now provides that foreign government investors that are regulated by the Australian Prudential Regulation Authority as Authorised Deposit Taking Institutions do not need to notify the Government when they take security over an asset as part of a lending arrangement. Notification and prior approval is not required if the security is enforced and the asset is sold. But, the investor must notify the Government and get approval if the security is enforced and the investor gains control over the asset and retains it for more than 12 months.
The Policy has also revised the definition of "Foreign Government Investor" and, in doing so, has resolved an outstanding issue as to how aggregation of disparate foreign government interests will work. Now the 15% test (for investment by a foreign government or state owned enterprise) will apply in respect of each foreign country and the aggregation of all foreign countries' interests will apply at 40% (aligning with the comparable aggregation principles under FATA). This will be important for private equity consortiums which may involve various foreign government entities. The new Policy has also removed the requirement that "investments preparatory to a takeover bid" need to be notified irrespective of size – now any foreign government investment of less than 10% will (among others) need to be notified to FIRB if the foreign government investor is "building a strategic stake in the target".
Finally, the Policy recognises that non-government New Zealand investors will now receive the same treatment as United States investors. The key thresholds are now:
- $1,078 million for New Zealand and United States non-government investors in non-sensitive sectors (the threshold for sensitive sectors is $248 million);
- $248 million as a general threshold otherwise; and
- $54 million for real estate.
We will keep you updated about important developments in this area.
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.