The Government will implement the Coalition's election commitment to tighten Foreign Investment Review Board scrutiny of purchases of agricultural land with effect from 1 March 2015.
During its electoral campaign the Coalition promised to reduce the threshold for Foreign Investment Review Board (FIRB) review of purchases of agricultural land from $252 million to $15 million. On 11 February 2015 the Australian Treasurer announced that its promise will be implemented from 1 March 2015. After 1 March 2015 purchases of agricultural land by non-government owned foreign persons which result in the cumulative value of agricultural land held by that buyer exceeding $15 million will require the approval of the Federal Treasurer (as advised by FIRB).
Until 1 March 2015, the $252 million general business threshold for FIRB assessment was applied to purchases of agricultural land – there is currently no specific threshold for agribusiness or agricultural land. This has meant that there has never been any FIRB review of purchases of agricultural land per se.
Also, under the existing regime, the threshold applies to individual acquisitions only. As such, currently there is the potential for foreign entities to amass agricultural land holdings worth in excess of the general threshold via creeping cumulative acquisitions.
There is some concern that the lack of scrutiny in relation to foreign purchases of agricultural land may undermine the national interest in various ways. Underlying the general public concern of "selling the farm" are, among other things, concerns about food security, competition and protecting Australia's revenue base. The potential impact of transfer pricing, particularly with large vertically integrated multinationals, is also a particular concern. Some of these issues came to the fore in the Treasurer's decision to reject Archer Daniels Midland's proposed takeover of Graincorp in late 2013.
However, there is no getting around the fact that the agricultural sector requires capital to grow and increase productivity over the next 15-20 years (and longer) in order to serve Australia well and increase lucrative overseas opportunities. The source of such capital will inevitably involve foreign entities and foreign sources.
The imposition of the $15 million cumulative threshold for FIRB examination should help to allay concerns over selling the farm. The lower threshold will mean an increased number of FIRB assessments as to whether particular land acquisitions are in the national interest. The application of the new threshold to cumulative agricultural landholdings also goes a long way towards addressing concerns over creeping acquisitions. Hopefully the new threshold does not deter foreign capital coming to Australia.
The FIRB review process
From 1 March 2015 a proposal by a non-government foreign entity to purchase agricultural land which:
- takes the value of the cumulative agricultural land holding of the buyer over $15 million; or
- increases the value of the cumulative agricultural land holding of the buyer where the buyer already owns agricultural land with a value in excess of $15 million,
will need to be notified to FIRB.
The formal notification activates a time clock so that if the Treasurer does not take action against the proposal within 30 days, the Treasurer loses the ability to block or impose conditions on the transaction under the Foreign Acquisitions & Takeovers Act (FATA). The 30-day period can be extended in particular cases (for example, if more information is required to assess the notification). In most cases, a decision is made within 30 days of lodgement of a notification and a decision to not object to the transaction is normally granted unless the proposal is judged to be contrary to the national interest.
Specific considerations which FIRB will consider in assessing whether a foreign investment in agriculture is consistent with Australia's national interest are set out in Annexure 2 to Australia's Foreign Investment Policy. These include the impact of the proposed investment on:
- 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 some cases, approval of the transaction may be made subject to certain conditions and, in these cases, compliance with the conditions imposed is compulsory.
Does the nationality of the investor matter?
The announcement of the change in policy is currently short on detail. In particular there is no mention of whether the new screening threshold applies across the board, regardless of the nationality of the buyer. We will need to review the amendments to the FATA Regulations in order to determine this point.
The current screening threshold for the purchase of an Australian business by investors from the US, Chile, NZ and, following recent Free Trade Agreements, Japan, South Korea and China is much higher ($1.094 billion) than the generally applicable $252 million threshold. Last week's announcement of the new agricultural land threshold referred to a change from the $252 million general threshold only.
However the terms of the recent Free Trade Agreements with Japan, South Korea and China refer to the $15 million threshold for investments in agricultural land. Notably, the US, NZ and Chile Free Trade Agreements are silent on such lower threshold, being earlier agreements. This raises questions as to whether the new threshold will apply regardless of the nationality of the buyer.
One circumstance that has not changed is that all acquisitions of agricultural land by entities which are owned or controlled by foreign governments will continue to be screened. There is a zero threshold for acquisitions by such foreign government entities.
What about Australia being open for business?
The new threshold for screening foreign investment risks is much lower than the current threshold and may deter the foreign investment which Australia needs to boost agricultural infrastructure and productivity in the sector. Also, the imposition of the new threshold will increase the red tape for foreign investors in agricultural land (and with the current influx of foreign investment in Australian agricultural land, substantially increase FIRB's workload).
However the new threshold has been expected and there are good policy reasons behind it. Notably, the $15 million threshold is not completely new to many foreign entities. The Free Trade Agreements with Japan, South Korea and China all contemplate the $15 million threshold for investments in agricultural land.
From a practical perspective, the vast majority of acquisition proposals notified to FIRB under the new threshold are likely to be approved. Overall, the Government is keen to emphasise that it continues to welcome foreign investment, provided the investment is for Australia's benefit. The recent free trade agreements with Australia's largest trading partners are evidence of this commitment, Australia remains open for business.
And a new foreign ownership register
At the same time as announcing the imposition of the new screening threshold for agricultural land, the Treasurer announced that a register of foreign ownership of agricultural land will be established by the Australian Taxation Office (ATO). From 1 July 2015 the ATO will start collecting information on all new foreign investment in agricultural land, regardless of value. The ATO will also begin a stocktake of existing foreign ownership of agricultural land.
A register of foreign ownership of agricultural land has long been slated by both major political parties.
Details of the operation and accessibility of the new register have not yet been released.
Firstly, the detail of how the new threshold for agricultural land is to apply is yet to be released and this detail will need to be examined to check its application to particular circumstances.
Secondly, a foreign entity contemplating an offer to purchase Australian agricultural land which causes the cumulative value of the entity's Australian agricultural land to be in excess of $15 million should include a condition precedent in the sale conditions regarding FIRB approval or obtain FIRB approval prior to signing any agreement.
Thirdly, the terms of the Free Trade Agreements with Japan, South Korea and China also contemplate a new (much reduced) screening threshold of $53 million for foreign investment in agricultural businesses. Therefore, there is an expectation for the Government to introduce a new threshold for agricultural businesses under the FATA.
Fourthly, the Government has also flagged that it will introduce new threshold and reform foreign investment in the residential real estate sector. The detail of these reforms are expected by the end of February 2015.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.