Australia: Foreign investment update – Modernisation options

Introduction

On 25 February 2015, the Australian government released an Options Paper seeking feedback on proposed changes to Australia's foreign investment regime, primarily in relation to residential real estate and agriculture.

Following this, on 2 May 2015 the Australian government announced a series of changes to the foreign investment regime. These included further details on the lower threshold for agriculture-related acquisitions, new application fees and a stricter enforcement regime for real estate acquisitions. Further details of these changes are available in our most recent Foreign Investment Update.

Further changes to modernise the foreign investment regime are proposed. Having considered the initial feedback provided following the February Options Paper, on 18 May 2015 the government released a Modernisation Options Paper.

Norton Rose Fulbright Australia made a submission to the Foreign Investment Review Board (FIRB) in response to some of the proposals in the Modernisation Options Paper. Our responses are included in this update, together with a summary of some of the key modernisation options proposed by the government.

Timing of legislative change

The government released on 6 July 2015 three bills to effect the changes to the foreign investment regime announced on 2 May 2015, being the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (Cth), the Register of Foreign Ownership of Agricultural Land Bill 2015 (Cth) and the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015 (Cth).

The government also released draft regulations which will outline how the new legislative regime will operate.

The government is currently seeking feedback on the two substantive bills (the Foreign Acquisitions and Takeovers Fees Imposition Bill is a standard tax imposition bill so the government is not seeking feedback on this)."

Summary of modernisation proposals

The Modernisation Options Paper outlines the following key proposals:

Incorporating prior notification and approval requirements into legislation

Currently, Australia's foreign investment regime includes numerous prior notification and approval requirements that are not contained in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and have no statutory backing. Rather, these requirements, which relate to foreign government investors, the media sector and heritage listed developed commercial property, are contained in Australia's Foreign Investment Policy (Policy).

To increase transparency and provide greater certainty for investors, the government proposes to:

  • incorporate the foreign government investor rules into the current legislation. Our submissions support this proposal as it will ensure that these requirements are subject to proper legislative review and provide greater clarity to foreign government investors;
  • legislate the media specific requirements and increase the percentage threshold from 5% to align with direct investment (10%) or substantial interest (15%) under the current legislation; and
  • abolish the special screening requirements for heritage listed commercial developed property.

The Policy will still provide guidance on operational matters. The government also proposes to retain some flexibility to make changes through the regulations.

Updating legislation to reflect administrative practices, regulatory concepts and modern business and corporate finance practices, and alignment with other federal legislation

The current legislation is not in line with current administrative and regulatory practices.

To reduce regulatory costs and promote compliance, the government's proposals include legislating to allow:

  • applicants to voluntarily agree to extend the screening period. Our submissions support this proposal. The current foreign investment regime requires the applicant to withdraw and resubmit the application in order to extend the screening period of 30 days (so as to avoid the use of an interim order that is publicly gazetted). The current practice of withdrawal and resubmission creates an unnecessary administrative burden on applicants. The government's proposal will allow applicants to voluntarily agree to extend the screening period on a confidential basis; and
  • the Treasurer to vary enforceable conditions (subject to a no detriment test) and impose conditions if applicants fail to notify. Our submissions support this proposal as it will streamline the process for the removal of conditions imposed in connection with a transaction that subsequently become redundant.

A number of proposals will align Australia's foreign investment regime with other federal legislation, including:

  • increasing the 15% substantial interest threshold for a single foreign person in the FATA to 20% (which is the current substantial interest threshold in the takeovers rules in the Corporations Act 2001 (Cth) (Corporations Act)). Our submissions support this proposal as, in our view, an investor with an interest of 19.9% in an Australian entity has a comparable level of control to an investor with an interest of 14.9%. Both investors have a blocking stake with respect to potential takeovers. Accordingly, we believe that the increased threshold will not materially diminish the government's ability to screen transactions that are likely to have a control effect on Australian businesses;
  • considering options to refine the 'associate' and 'foreign person' definitions to better align with modern practice. Our submissions support this proposal as removal of the 40% aggregate ownership threshold may provide much needed certainty for widely-held entities or funds. Currently, there is no equivalent aggregate ownership threshold under the Corporations Act, and both the FATA and Corporations Act already include very broad definitions of 'associate' which would capture an arrangement between different foreign shareholders. The legislative purpose for requiring a diverse group of foreign shareholders to notify under the FATA remains unclear when, individually considered, they would not have control over the operation of the relevant Australian business;
  • considering options to reduce the regulatory burden for substantially Australian entities;
  • better aligning the money lending exemption with current lending practices. Our submissions support this proposal. Currently, the money lending exemption in the Policy only applies to a foreign government investor that is an authorised deposit-taking institution (ADI). The exemption is silent on the application of the exemption to foreign banks which are not ADIs. In our view, this part of the Policy should be clarified so that it is consistent with the money lending exemption as it applies under Australian takeovers law, which does not discriminate between ADI and non-ADI banks; and
  • importing selected exceptions from Australia's takeover rules in Chapter 6 of the Corporations Act (subject to any necessary modifications). These are proposed to be an exemption for acquisitions in the ordinary course of underwriting and an exemption from compulsory notification acquisitions where a majority owner is increasing its direct interest. Our submissions support these proposals as we believe that an exception for creeping acquisitions similar to item 9 of section 611 of the Corporations Act (ie 3% creep in 6 months) should be allowed as creeping acquisitions do not have any significant control effect and this exemption would assist FIRB to better target applications.

Exempting certain proposals that are unlikely to affect national interest

This proposal aims to increase the consistency of the exemptions available across the different acquisition types.

The key proposals are to:

  • allow annual program arrangements to cover indirect acquisitions of interests in urban land (currently, these programs only apply to acquisitions of direct interests in urban land), and to extend such programs to foreign government investors;
  • fix and update the exemption for passive investments in urban land trusts, which is no longer operational as a result of obsolete references in the regulations;
  • broaden the scope of exemptions for Australian land corporations and trusts by extending the current exemptions to interests acquired indirectly through urban land corporations and trusts;
  • raise the developed commercial real estate screening threshold for non-sensitive commercial real estate from A$55 million to A$252 million (indexed);
  • adjust the definition of 'foreign government investor' to reflect the proposed new single foreign person control threshold of 20% (discussed above); and
  • extend existing exemptions for non-governmental investors to foreign government investors. Our submissions support this proposal as we believe that a pragmatic approach should be taken to investments by foreign investors and we support an extension of exemptions to these investors, including in respect of pro-rata capital raisings.

Amending legislation so that it applies irrespective of transaction structuring

The current foreign investment regime produces inconsistent outcomes between some direct and indirect acquisitions due to its focus on shares, rather than other securities such as units.

The government proposes to amend the legislation to simplify the regime through greater consistency, and to ensure that the exemptions apply equally irrespective of the transaction structuring.

General tidy-up of legislation and Policy

The government also proposes to undertake a general tidy-up of the Policy and FATA to remove obsolete provisions and provide more clarity.

The government released a revised Policy on 29 June 2015 which included the following changes:

  • the registration by foreign persons and foreign government investors of their interests in agricultural land from 1 July 2015 (regardless of the value of that land);
  • confirmation that non-resident foreign persons cannot buy established dwellings as investment properties or homes, regardless of the vehicle used to purchase the dwelling (subject to some exceptions); and
  • a limit of $3 million for foreign persons purchasing interests in new dwellings in developments where the developer has provided a pre-approval certificate. Foreign persons will need to apply separately if they wish to acquire interests in new dwellings in the same development above this limit.

Further clarification changes are also proposed. For example, the government has proposed to clarify the differences between Australian urban and rural land in the FATA. The government is considering:

  • replacing the existing definition of 'Australian rural land' with an alternative broader definition of 'agricultural land'; and
  • splitting the existing definition of 'Australian urban land' into 'residential land', as it is commonly understood, and a new category of 'other land', which will cover industrial and commercial land such as mining tenements.

In light of these new definitions, our submissions proposed that the government should also consider the circumstances in which an application is required in respect of dealings in mining tenements, particularly mining tenements that only authorise prospecting or exploration activities.

In particular, we submitted that, to the extent an application regarding a transaction involving a prospecting licence or exploration licence is made and no objections are raised, a further application should not be required for the conversion of that prospecting or exploration licence to a mining lease.

Further submissions

In our view, the government should also consider updating the application of the foreign investment regime to downstream acquisitions of Australian subsidiaries owned by a foreign holding company.

Currently the application of the 'prescribed corporation' rule captures acquisitions of small foreign companies that:

  • are well below the acquisition threshold that applies to normal business acquisitions; and
  • would have been exempt from the application of the Australian foreign investment rules if the foreign investor had acquired the Australian subsidiary directly.

Our submissions proposed that the current legislation should be updated so that acquisitions of foreign holding companies are only caught if the value of the Australian subsidiaries or assets is more than half of the value of the global assets of the target company, and the total value of the Australian subsidiaries or assets is above the relevant monetary threshold that applies to acquisitions of Australian companies or businesses.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Liz Allnutt
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.