When the Australian Government overhauled the foreign investment framework in late 2015, it had at least three key objectives in mind: (i) to better regulate foreign investment in agriculture and residential real estate (no doubt to address a prevailing public perception that foreign investment was 'buying up the farm' and driving up the cost of housing in Australia's major cities); (ii) to implement stricter penalties on foreign investors who breach the rules; and (iii) to introduce application fees to ensure that Australian taxpayers no longer fund the cost of administering the foreign investment review system.
At the time of reforms being announced, the Government emphasised how the changes brought about clearer legislation, providing for stronger compliance, greater certainty and better service delivery. Now that it has been more than one year since the reforms came into effect, it is evident that there is still some way to go in achieving the stated objectives.
Despite Australia's published policy of welcoming foreign investment, foreign investors continue to be put off by our foreign investment regulatory framework. Instead of understanding the framework as a regulatory process aimed at safeguarding national interests, many foreign investors fear that our foreign investment regime is an insurmountable hurdle for their investment plans in Australia. In addition, at home the perception remains that not enough is being done to regulate foreign investment in Australia.
Perceptions aside, the reality is that Australia has a very detailed and thorough (if not entirely streamlined and certain) regulatory framework for foreign investment. There have only been five rejections of international purchases here in Australia on national interest grounds in the past 20 years, in contrast to more than 10,000 foreign investment approvals granted. As the former Chairperson of the Foreign Investment Review Board (FIRB), Mr Brian Wilson, recently said, Australia still has "the most welcoming and open foreign investment regime in the world". For example, it has been reported that only two FIRB purchase vetos have concerned agricultural assets, one of them being the Kidman sale to Chinese investors and the other being the $3.4 billion bid by global trading giant Archer Daniels Midland in 2013 for Australian grain company GrainCorp.
The Australian Government's foreign investment policy is implemented through Commonwealth legislation, including the Foreign Acquisitions and Takeovers Act 1975 (Cth), the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth), the Register of Foreign Ownership of Water or Agricultural Land Act 2015 (Cth), as well as other applicable regulations, rules and policies.
The FIRB notification or approval framework is integral to Australia's foreign investment regulatory regime. FIRB itself is a non-statutory body established in 1976 to provide advice to the Treasurer and the Government on foreign investment policy and administration, including foreign investment applications. The Board's functions are advisory only, but foreign investment applications that relate to foreign investment in commercial land, agricultural land or an Australian business are made to and processed by FIRB through the FIRB Secretariat, which is within the Department of Treasury. Applications that relate to residential land are processed by the Australian Tax Office (ATO).
Foreign investment applications consist of notifications or approvals. Mandatory notification or approval (called a 'notifiable action') is required for acquisition of:
- a substantial interest, being an interest of 20% or more, in an Australian corporation with a value of A$252 million or more. For foreign investors from FTA partner countries (China, US, NZ, Japan, South Korea and Chile) investing in 'non-sensitive sectors' a threshold of A$1,094 million applies
- any direct investment by a 'foreign government investor', including establishing a new business (a passive investment interest of less than 10% in an entity, which must be an investment without any control elements, is not considered to be a direct investment requiring FIRB approval)
- a 10% or greater interest in an agribusiness where the total of the consideration for the acquisition and the cumulative interests held by the foreign investor (and their associates) in the business are more than A$55 million. For foreign investors from Chile, NZ and US, a threshold of A$1,094 million applies
- rural land valued greater than A$15 million (on a cumulative basis)
- any residential or vacant Australian land or any land for redevelopment (0% interest and $nil threshold)
- a developed commercial property, which has two categories – (i) sensitive with a A$55 million threshold and (ii) non-sensitive with a A$252 million threshold. For FTA partner countries (China, US, NZ, Japan, South Korea and Chile), a threshold of $1,094 million applies. Land rich entities also have thresholds reflecting their underlying land interests; and
- a media business (greater than 5% or any non-portfolio interest).
Further, the Treasurer has the power to make orders in respect of certain material transactions, which are called 'significant actions. Significant actions include the acquisition of the assets of an Australian business and offshore acquisitions and takeovers, in each case where the Australian component has gross assets of A$252 million or more (or the consideration is based on Australian revenues of A$252 million or more). Significant actions must be notified by foreign government investors, but it is also advisable for foreign investors who are not foreign government investors to voluntarily notify such transactions for approval and thereby remove the risk of the Treasurer exercising the Treasurer's discretion post-completion.
FIRB has currently issued 47 guidance notes to assist with understanding the detailed laws, regulations and rules relating to foreign investment, including two guidance notes on the fees payable for foreign investment applications. Even so, it is still very challenging for foreign investors, their advisors and even the FIRB itself to understand how a particular application should be assessed and what fees are applicable for the application. Foreign investors need to be mindful that FIRB's statutory review timeframe now only commences once the application fees have been paid. Given that the fees are considered to be for handling the application process, it is possible that it will be very difficult for refunds to be paid of the application fees in most circumstances.
Foreign investors should also pay attention to the key issue of whether a foreign investment proposal is 'contrary to Australia's national interest'. There is no definition of 'national interest' - it is a subjective case-by-case application. However foreign investors need to focus on factors such as how the proposal will have a positive effect on employment and prosperity in Australia's local and regional communities, the effect of the proposal on Australia's housing stock, the impact of the proposal on the Australian economy and the broader community, how the proposal is funded, whether the proposal would promote or hinder competition, and the impact of the proposal on the environment and national security.
We assist numerous clients with their foreign investment applications and are available to address any queries that you may have.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.