Regulation of foreign investment in the Australian agricultural sector has become increasingly contentious. While some of the heat around the debate was driven by the recent Federal election in Australia, the companies we speak to about investing in the Australian agricultural sector are expressing increasing disquiet about the tone of the debate and the resulting increased uncertainty relating to agribusiness transactions. Some reform to Australia's foreign investment regime also appears inevitable, given that both major political parties have proposed change to foreign investment regulation. In light of this, we thought it would be worthwhile to set out the current framework governing foreign investment in the Australian agricultural sector and to map out likely or possible developments in the area.
The principal sources for regulation of foreign investment in Australia are the Foreign Acquisitions & Takeovers Act 1975 (Cth) (FATA) and Australia's Foreign Investment Policy Framework (Policy). The Policy provides a guide to investors as to the stance of the Australian Government on regulation of foreign investment, and an indication of how the Australian Government will apply the FATA.
If a foreign investment proposal falls within the scope of the FATA the investor is required to notify the Foreign Investment Review Board (FIRB) which then undertakes an assessment on a case-by-case basis as to whether the investment is contrary to Australia's national interest.
If the foreign investment proposal falls within the scope of the Policy only, but not within the scope of the FATA (for example, where the investment is being made by a foreign government or associated entity), foreign investors generally seek approval from the Australian Treasurer, through FIRB, for the investment even though they are not legally required to do so. It is important to realise that in both cases, the Australian Treasurer is the ultimate decision maker and FIRB has an advisory role only, although an important one.
The FATA differentiates between "Australian urban land" and "Australian rural land". Australian rural land is defined as land situated in Australia that is used wholly and exclusively for carrying on a business of primary production, being a business that is substantial, with a commercial purpose or character. The Tax Assessment Act 1997 (Cth) provides that carrying on a business of primary production includes carrying on a business of (a) cultivating or propagating plants, fungi or their products or parts (including seeds, spores, bulbs and similar things), in any physical environment; (b) maintaining animals for the purpose of selling them or their bodily produce; and (c) manufacturing dairy produce from raw material produced.
Unlike acquisitions of Australian urban land (i.e. any land in Australia that is not Australian rural land), there is no statutory requirement to notify acquisitions of Australian rural land under the FATA unless the business conducted in connection with that land would trigger the relevant threshold. Under the FATA, the Treasurer has power to block the acquisition of a business, or order divestment if the acquisition proceeds without approval, if the business in question has total assets valued in excess of the following thresholds (which are inflation indexed):
- for private foreign investors, AU$248 million (or AU$1,078 million for US investors), and
- for foreign government investors, any business regardless of the value of its assets.
Accordingly, an investment in the Australian agricultural sector only requires approval from the Treasurer if it exceeds these thresholds and not otherwise. It should be noted that the requirement for foreign government investors to notify all acquisitions is set out in the Policy only and therefore the Treasurer does not have the legal power to block such an acquisition (unless it is also valued at above the relevant thresholds for private foreign investors) or to order a divestment – however the Treasurer expects foreign government investors will respect the Australian Government's Policy and our clients have always sought to do so.
Relevantly for investments in Australian agriculture, since January 2012, the Policy has incorporated an annexure entitled "Policy Statement: Foreign Investment in Agriculture", which outlines the considerations the Government will typically take into account when assessing foreign agricultural investment applications. These considerations are:
- the quality and availability of Australia's agricultural resources, including water
- land access and use
- agricultural production and productivity
- Australia's capacity to remain a reliable supplier of agricultural production, both to the Australian community and our trading partners
- biodiversity, and
- employment and prosperity in Australia's local and regional communities.
In addition to these factors (and general national interest considerations), FIRB has been requesting more detailed information in relation to issues such as:
- whether the land is highly productive
- whether the land is subject to water shortages or regular drought, and whether water rights are also being acquired
- to whom the produce will be sold (including whether it will be sold to related parties offshore), and
- whether the proposed purchaser has purchased other agricultural holdings in Australia and/or intends to make further acquisitions.
These factors are considered as part of an assessment on a case-by-case basis as to whether a particular investment is contrary to Australia's national interest.
Current concerns being debated
It is generally accepted that foreign investment in Australian agriculture supports production, job creation and contributes to the prosperity of rural communities and the broader Australian economy. However, several high-profile foreign investments in Australian agriculture (such as the 2012 acquisition of Cubbie Station by Shandong RuYi and Lempriere Pty Ltd and various farm purchases by foreign investors) have raised questions as to the appropriateness of Australia's current foreign investment regime as it applies to agricultural investments. Some of the key issues raised by commentators have been:
Achieving global food security through agricultural acquisitions
Spikes in international food prices in recent years and the social disruption and political consequences that result from these large price changes, particularly in developing countries, has increased the focus of governments of food-poor countries on the issue of food security. A concern that arises from this is that foreign (particularly state-owned) investors can distort local markets and deprive them of supply by being motivated not by profit, but by channelling production of food to customers in their home countries.
The General Manager of FIRB's policy division told a Senate Committee in 2011 that FIRB "considers whether an investment is commercial in nature or whether the investor may be pursuing broader political or strategic objectives that may be contrary to Australia's national interest"1; however this heightened scrutiny is only applied to foreign government-related entities. Although food security is a substantial global issue, the concerns appear overstated given that the purchase of foreign farmland would seem an uncertain and inefficient device for foreign nations to improve food security.
The applicability of monetary thresholds to agricultural land and businesses
The Treasurer has power under the FATA to block the acquisition of 15% or more of an agribusiness if it is valued in excess of AU$248 million for private foreign investors (or AU$1,078 million for NZ and US investors). Arguably, these monetary thresholds are far too high for the agricultural sector given the fragmented nature of the sector and do not reflect the average value of agricultural assets or land holdings.
There have been numerous proposals for decreased monetary thresholds. In 2011, a Senate Committee suggested a threshold of $5 million for purchases of rural land and in 2012, a Coalition working group and most recently, the Senate's Rural and Regional Affairs Transport References Committee recommended a threshold of $15 million2. There have also been calls for the introduction of a spatial threshold for agricultural land (in 2011, a Senate Committee suggested the same 5 hectare threshold that applies in New Zealand). Opponents to these proposals argue that lower thresholds may allay some concerns, but could also risk deterring desirable, productivity enhancing foreign investment, which may contribute to financing difficulties for Australian agricultural producers.
The data vacuum
Australian Bureau of Statistics (ABS) research3 published in 2012 showed minimal change in the foreign ownership of Australian agricultural land between 1984 and 2010. The ABS data showed that 89% of Australian agricultural land was 100% Australian-owned and 99% of Australian agricultural businesses were 100% Australian-owned. The ABS data has been widely criticised as being inaccurate and a product of poor sampling, and it is generally accepted that the true levels of foreign agricultural ownership are still unknown. In response, the Government announced in 2012 it had funded the ABS to undertake further surveys on ownership of agricultural land and water4, which ABS commenced on 30 June 2013.
Defining 'rural land' for the purposes of foreign investment legislation
Agricultural assets are not defined in the FATA. The only guidance in the FATA for the agricultural industry is in the definition of "rural land", as land situated in Australia that is used wholly and exclusively for carrying on a business of primary production, being a business that is substantial, with a commercial purpose or character. This has caused inconsistencies in the ability of FIRB to properly consider acquisitions involving land.
In 2012, FIRB officials told a Senate Committee that the definitions of land in the FATA can cause "funny situations" to arise, such as the classification of "a mine in the middle of the Kimberleys as urban land but not the pastoral property next door".5 It has been argued that agricultural land should be defined to allow FIRB to properly assess and categorise land which is the subject of foreign investment.
Fear of creeping acquisitions
There is currently no formula which triggers FIRB's consideration of cumulative land acquisitions by a single entity where successive acquisitions are below the threshold, because each acquisition is regarded separately. Because there is no statutory requirement for private investors to notify acquisitions of Australian rural land, it is possible for a foreign entity to acquire large swathes of aggregated land holdings without ever being subject to FIRB scrutiny.
Possible reforms by the new Government
The extent to which the Government will reform the foreign investment regime is unclear, as a policy divide is evident within the Coalition. Members of the National Party appear intent on increasing regulation to protect Australian farm land and national sovereignty, whereas broader Coalition policy is geared towards free-market principles and encouraging investment for development of the sector.
Nevertheless, foreign investors should prepare for future changes to the Government's foreign investment policy, and increased scrutiny on agricultural investments. Reforms such as the following may be introduced by the Government in the near future.
- The Coalition has previously stated that they will establish a database capable of tracking acquisitions of land across Australia to inform public debate and policy6.We think that some form of register is inevitable.
- At present, the sale of agricultural land and agribusiness is not treated as a sector-specific purchase (such as media and aviation). To enable FIRB to apply heightened scrutiny to investment in the agricultural sector, the sale of agricultural land and agribusiness may be treated as a sector specific purchase by FIRB, with its own statutory considerations and monetary thresholds. We think that it is likely that there will be reform in this area, including a lower threshold for acquisitions of rural land.
- Foreign investors may be subject to heightened disclosure for investments in the agricultural sector, such as a requirement that any foreign investor discloses any direct or indirect ownership or source of influence by a foreign government. We think that there may be some reform in this area but it is difficult to tell what form it might take.
- There may be a move to codify the national interest test, including a requirement to provide precise and unambiguous instructions to prospective foreign investors about their obligations to FIRB and the Treasurer and how the national interest test is conducted. We think that this is the least likely reform given the difficulty in defining the national interest and the political imperative to retain a flexible test to deal with changing circumstances and attitudes.
That said, we do not believe that the Australian Government will impose substantive new restrictions on foreign investment in the Australian agricultural sector beyond the additional scrutiny involved in the measures identified above. Nor do we believe that the Government is likely to change the way it exercises its powers under the FATA to block or impose conditions on a greater number of acquisitions in the sector. Election politics aside, both of the major Australian political parties appear to appreciate that Australia lacks the investment capital required to develop the Australian agricultural sector (and other sectors) and that foreign investment is therefore essential to our economic well-being and must be encouraged. Certainly, a balance needs to be reached between satisfying legitimate national concerns, and ensuring the health and growth of the Australian agriculture sector but we do not see this balance leading to substantially increased hurdles to agricultural investment.
1Mr F Di Giorgio appeared before the Rural and Regional Affairs and Transport References Committee on 16 November 2011, and his comments were quoted on page 48 of the Senate Committee's Report.
2This suggestions appears on page 12 of the Coalition's Discussion Paper on Foreign Investment in Australia and is a recommendation of the final report issued by the Senate Standing Committee on Rural and Regional Affairs and Transport entitled "Foreign Investment and the National Interest".
3The ABS data was published in the Department of Agriculture, Fisheries and Forestry's report entitled "Foreign Investment and Australian Agriculture" released in November 2011.
4The announcement was published in the 2012 National Food Plan green paper.
5The former chair of the FIRB and other FIRB officials appeared before the Rural and Regional Affairs and Transport References Committee on 9 February 2012, and their comments were quoted in page 77 of the Senate Committee's Report, which was released in June 2013.
6This promise was made on page 10 of the Coalition's Discussion Paper on Foreign Investment in Australia.
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