Substantial changes to Australia's foreign investment regime are one step closer with today's introduction into Federal Parliament of the:
- Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 (FATA);
- Register of Foreign Ownership of Agricultural Land Bill 2015; and
- Foreign Acquisitions and Takeovers Fees Imposition Bill 2015.
TheTax and Superannuation Laws Amendment (2015 Measures No. 5) Bill 2015: Foreign resident capital gains withholding payments, forms part of the package but is yet to be introduced into Federal Parliament. The Foreign Acquisitions and Takeovers Regulation 2015 (Regulation) will be made after the FATA is passed. The proposed changes will introduce new concepts, thresholds, fees and penalties, and changes to taxation from 1 December 2015. The aim is to strengthen the enforcement of our foreign investment rules and increase the transparency of foreign ownership.
The new regime
The Treasurer can make a range of orders in relation to significant actions and notifiable actions.
Potentially both civil and criminal offences are committed in a wide range of circumstances.
A significant action includes:
- acquiring an interest in securities, assets or land above the monetary thresholds set by the Regulations;
- engaging in actions that change the control of corporations, unit trusts and businesses above the monetary thresholds set by the Regulations; or
- an action prescribed by the Regulations including a foreign government investor acquiring a direct interest in an Australian entity or business or an interest in land or foreign government investor starting an Australian business.
An acquisition includes entering into an agreement or option (or materially altering it)including where it is dependent on the fulfilment of a condition.
Notifiable actions include:
- an acquisition of a direct interest in an agribusiness over the relevant monetary threshold;
- an acquisition of a 20% interest in an Australian entity;
- an acquisition of an interest in Australian land; or
- an action prescribed by the Regulations including a foreign government investor acquiring a direct interest in an Australian entity or business or an interest in land.
Notification requirements will apply to all Australian land, including agricultural land, commercial land, residential land or a mining or production tenement unless an exemption applies.
An interest in land does not include an interest under a lease or licence for less than 5 years.
Thresholds for entities and businesses
The monetary thresholds that must be reached for an action to be classified as a significant action in relation to entities and businesses that are not agribusinesses are:
- $1,094 million for investors from USA , New Zealand, Chile, Japan and Korea (barring sensitive businesses); and
- $252 million for other foreign investors.
It is likely that China will be added to the $1,094 million category in amendments to the Bill due to the signing of the China-Australia Free Trade Agreement on 17 July 2015.
These thresholds do not apply if the significant or notifiable action has been prescribed by the Regulations, for example an action by a foreign government investor.
Thresholds for land
The monetary thresholds for land (for both significant actions and notifiable actions) are:
- no threshold for residential land, vacant commercial land, mining or production tenement land or any land being acquired by a foreign government investor;
- $15 million for investors acquiring agricultural land (other than for investors from USA, NZ, Chile or for an enterprise or national of Singapore or Thailand);
- for all "other" land (for instance developed commercial land)
- $1,094 million for investors from USA, NZ, Chile, Japan and Korea (and likely China to be added);
- $50 million for land being acquired by an enterprise or national of Singapore or Thailand used wholly or exclusively for a primary production business; and
- $55 million for all other foreign investments.
Investors from USA, NZ, Chile or an enterprise or national of Singapore or Thailand are not required to apply for approval to acquire agricultural land.
Like the thresholds for entities and businesses, these thresholds do not apply if the Regulations exclude their application, for example for some acquisitions of land from the Commonwealth.
If a party notifies the Treasurer of a significant action, the Treasurer has 30 days to issue a "no objection" notice, impose conditions on the proposed action, or block it altogether.
If a party does not inform the Treasurer of a significant action, the Treasurer may make a disposal order blocking or unwinding the significant action if the Treasurer determines that the significant action is contrary to the national interest.
Notification must be given to the Treasurer of notifiable actions. The acquisition cannot proceed unless the Treasurer gives his approval, and then only subject to the conditions of that approval.
Disposal orders can be made by the Treasurer if notifiable actions proceed without the Treasurer's approval.
Exemptions and exclusions
The Bill provides for exemptions and exclusions that a foreign person may be able to take advantage of in a given set of circumstances.
For instance, a foreign person will not need to notify the Treasurer of the acquisition:
- of a new dwelling where an exemption certificate (previously referred to as advanced off-the-plan certificate) has been granted in advance to a developer selling the new dwelling; and
- where the acquisition of the interest in land is not a significant action, like an acquisition of agricultural land valued under $15 million.
A broader definition of foreign person
The concept of a foreign person will include:
- an individual not ordinarily resident in Australia (including expatriate Australians);
- a corporation (or a trustee of a trust) in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds a substantial interest;
- a corporation (or a trustee of a trust) in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
- a foreign government; and
- any person prescribed by the Regulation.
Although a "foreign person" includes expatriate Australians, the Regulations exclude the application of the Act for land acquisitions by Australian citizens not ordinarily resident in Australia.
What is a substantial interest?
Holding at least a 20% interest in an entity, which brings the FATA into line with the Australian takeovers regime. Similarly, for trusts, a substantial interest is a beneficial interest in at least 20% of the income or property of the trust.
What is an aggregate substantial interest?
This is where two or more persons hold:
- at least a 40% interest in an entity; or
- beneficial interests in at least 40% of the income or property of the trust.
A wider meaning of agricultural land
Agricultural land means land in Australia that is used, or that could reasonably be used, for a primary production business consistent with the Income Tax Assessment Act, which is broader than the current concept of "rural land" being land in Australia used wholly and exclusively for carrying on a business of primary production.
Register for agricultural land
All foreign persons who hold interests (including a right to occupy under a lease or licence likely to exceed 5 years) in agricultural land as at 1 July 2015 must register those interests by 31 December 2015 with the Australian Taxation Office (ATO) regardless of the value of that land. The ATO will use this information to develop a national register to be made available to the public in 2016.
An expansion of what constitutes agribusiness
Agribusiness will capture primary production businesses plus certain downstream activities with links to primary production. Acquisitions of a direct interest in agribusiness over $55 million (with exceptions for investors from the USA, New Zealand and Chile) will need to be notified to the Treasurer.
Fees for notices
Application fees will be introduced for notifications of acquisitions, applications for exemption certificates and variations to exemption certificates and objection notices.
Notifications for both residential and agricultural land start from $5,000. Exemption certificates (some were previously referred to as advanced off-the-plan certificates) and investments in commercial real estate, business and the agriculture sectors, as well as acquisitions of direct interests in agribusiness and acquisitions of securities or assets in an entity or Australian business, will attract application fees from $25,000.
Exemption certificates for the sale of off-the-plan new dwellings will also attract a further fee payable every six months based on the number of foreign sales achieved in that six month period.
Penalties for offences
The Bill sets out tough criminal and civil penalties. These include maximum criminal penalties of $127,500 for individuals and $637,500 for companies, up to three years' imprisonment and divestment orders, including for developers with exemption certificates who fail to advertise their new dwellings in Australia in accordance with the conditions of their exemption certificate.
The additional civil penalties in relation to the acquisition of residential land are extensive. For example, the penalty applicable to a foreign person (who is not a temporary resident) for not notifying the acquisition of an existing dwelling or not complying with a condition of acquisition is the greater of:
- the amount of capital gain;
- 25% of the consideration of the acquisition; and
- 25% of the market value.
It is likely that any penalty paid equivalent to the amount of capital gain will not be deductible for the purposes of calculating tax payable to the ATO.
Infringement notices will be introduced for individuals and companies.
These penalties potentially extend to third parties such as company officers, lawyers, accountants and real estate agents.
Unpaid penalties for failure to notify, for entry into agreements in contravention of the law, for contravening an order or for contravening a condition will result in a charge against the land. This will need to be cleared before transfer of the land much like the charge for unpaid land tax or council rates.
Changes to withholding tax
From 1 July 2016, purchasers of certain types of Australian property will be required to pay 10% of the purchased price to the ATO as a non-final withholding tax if they know, or have reason to believe, the vendor is a foreign resident, and the property is:
- taxable Australian real property; or
- an indirect Australian real property interest; or
- an option or right to acquire this property or interest.
There are exceptions, such as transactions on the stock exchange, or residential property under $2.5 million (excluding vacant land).
What should you do?
If you are a foreign person or are proposing to enter into a transaction with a foreign person, be aware of the new regime and seek assistance to ensure that you are fully aware of your rights and obligations before entering into any agreements.
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.