The regulatory framework that governs foreign investment in Australia, known as the 'FIRB regime', is complex and often requires expert assistance to navigate. This article provides an overview of the policy, key legislation and regulatory instruments that govern foreign ownership of Australian businesses, the decision-making roles and powers of the federal Treasurer and the Foreign Investment Review Board (Board), and the potential impacts the FIRB regime has on the planning and execution of foreign investments in Australia.
Australia's Foreign Investment Policy
Governmental regulation of foreign investment in Australia aims to strike a balance between ensuring that Australia remains an attractive destination for foreign investment, by maintaining an accessible and transparently administered political, legal and economic environment, and retaining the Australian Government's ability to protect the national interest as it judges necessary and appropriate.
The principles underpinning the FIRB regime are set out in Australia's Foreign Investment Policy (Policy), published by the Board on behalf of the federal department of Treasury. The Policy provides an overview of the regime and the stated aims of the legislation and can aid in interpreting the law and providing certainty around policy intentions.
The legislative framework of the FIRB regime
The FIRB regime is made up of the following main legislative instruments:
- the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA)
- the Foreign Acquisitions and Takeovers Regulations 2015 (Cth) (FATR)
- the Foreign Acquisitions and Takeovers Amendment (Exemptions and Other Measures) Regulations 2017 (Cth), which amended FATR
- the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth) and regulations.
Foreign investment decisions under the FIRB regime are made by the Treasurer, who is advised by the Board. The Board is an administrative advisory body, which examines foreign investment proposals and advises the Treasurer on the national interest implications. Such analysis and advice are not binding on the Treasurer, who retains the ultimate decision-making power; although, in practice, the Board's recommendations will always be received and considered.
The FIRB regime legislation is supported by the Policy and Guidance Notes on the specific application of the law. While neither have the force of law, they provide a helpful aid to interpreting and understanding the FIRB regime and are updated by the Treasury from time to time to take account of changes in the Government's policy position and the relevant legislation.
Who is a foreign person?
The FIRB regime applies to 'foreign persons' seeking to invest in Australian land or entities. The FATA and FATR provide that a foreign person is:
- an individual not ordinarily resident in Australia
- a foreign government or foreign government investor
- a corporation, trustee of a trust or general partner of a limited partnership in which:
- an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds an interest of 20% or more
- two or more persons, each of whom is either an individual not ordinarily resident in Australia, a foreign corporation, or a foreign government, hold an aggregate interest of 40% or more.
The FIRB regime also incorporates 'tracing rules' that operate so that any foreign person that holds a 20% or more interest in a higher entity is taken to hold the same interest in any second entity that the higher entity holds. For example, if a foreign person holds 30% in Company 1 and Company 1 holds 100% in Company 2, the foreign person is taken to hold 100% of Company 2.
Which entities are foreign government investors?
Any of the following entities will be classified as a foreign government investor under the FIRB regime:
- a foreign government
- a separate government entity1
- a corporation, trustee of a trust or general partner of a limited partnership in which:
- a foreign government, separate government entity or foreign government investor from one country holds an interest of 20% or more
- foreign governments, separate government entities or foreign government investors from more than one country hold an interest of 40% or more.
What transactions are covered by the FIRB regime?
There are two categories of transactions that are covered by the FIRB regime:
- significant actions that are also notifiable actions
- other significant actions.
A notifiable action must be notified under the FIRB regime by the foreign person proposing to take that action. Failing to notify is an offence that can attract civil and criminal penalties. With respect to significant actions, the Treasurer has broad powers to make orders if he or she is satisfied that a transaction would be contrary to the national interest. Orders can include blocking the transaction, requiring disposal of the interest acquired or imposing binding conditions on the transaction.
If a significant action is also a notifiable action, it is an offence to proceed with the transaction until a statement of no objection is received or the Treasurer's power to make a decision in relation to the transaction expires. Significant actions that are not also notifiable actions do not need to be notified under the FIRB regime. However, it is prudent practice for an investor to notify such actions in advance to manage the risk that the Treasurer may block or unwind the transaction at a later date.
Significant actions that are also notifiable actions
Unless subject to a valid exemption, the following actions will be notifiable:
- a foreign person acquiring an interest of 20% or more of shares or units of an Australian company or trust valued above the FATR monetary thresholds
- a foreign person acquiring an interest in Australian land valued above the FATR monetary thresholds2
- a foreign person acquiring a direct interest in an Australian company, unit trust or agribusiness valued above the FATR monetary thresholds3
- a foreign person acquiring an interest of 5% or more in a company, unit trust, or business that wholly or partly carries on an Australian media business
- a foreign government or foreign government investor acquiring a direct interest in any Australian company, unit trust or business
- the starting of an Australian business by a foreign government or foreign government investor
- a foreign government or a foreign government investor acquiring an interest in an exploration tenement or a mining or production tenement, or an interest in at least 10% in securities in a mining, production or exploration entity.
Other significant actions
In addition to transactions that are both significant and notifiable actions, other significant actions include:
- an acquisition of securities in an entity carrying on an Australian business or entry into or termination of a significant agreement with an Australian business, valued above the FATR monetary thresholds, that results in a change of control in that entity4
- the entry into an agreement relating to the affairs of an entity, under which one or more officers of the entity will be obliged to act in accordance with the directions of a foreign person who holds a 20% or more interest in the entity, that results in a change of control in that entity
- the alteration of the constituent documents of an entity, such that one or more officers of that entity will be obliged to act in accordance with the directions of a foreign person who holds a 20% or more interest in the entity, that results in a change of control in that entity.
The monetary thresholds specified by FATR in deciding when a foreign investment becomes a significant or notifiable action are calculated differently for varying kinds of transactions. The thresholds are indexed annually for inflation and should be assessed carefully with each new foreign investment.
Higher monetary thresholds apply for certain kinds of transactions by investors from countries with which Australia has a free trade agreement. The thresholds will not be the same for every country party to a free trade agreement but will depend on what has been negotiated between the nations.
The higher monetary thresholds under free trade agreements will not, however, apply to foreign government investors or to transactions involving certain businesses prescribed under FATA as 'sensitive' to national interest considerations. Such businesses include (section 26 FATA and regulation 22 FATR):
- those carried on wholly or partly in the media, telecommunications or transport sectors
- those that are wholly or partly for:
- the supply of services to, or manufacture of goods for, the Australian Defence Force or other defence forces
- the manufacture or supply of goods able to be used for a military purpose
- the development, manufacture, supply of, or provision of services relating to, encryption and security technologies and communications systems
- the extraction of, or holding rights to extract, uranium or plutonium, or the operation of a nuclear facility.
The current monetary thresholds as at 1 January 2019 are:
What is the national interest test?
When the Treasurer is reviewing a proposed foreign investment transaction, the test to be applied is whether the transaction is contrary to the national interest. The Treasurer is able to take any factors considered appropriate into consideration. Such factors typically include:
- the impact on national security
- the impact on competition
- the impact on the economy and community
- other government policies
- the character of the investor.
There are also specific matters taken into consideration when examining proposals relating to critical infrastructure, agricultural investment, residential real estate investment and those proposals involving a foreign government investor.
Following review of a proposed foreign investment transaction, the Treasurer may issue a statement of no objection, issue a statement of no objection subject to conditions, or reject the transaction.
If a transaction that the Treasurer objects to has already proceeded, the Treasurer has the power to issue a range of orders in relation to the transaction, including ordering disposal of the interest acquired.
What transactions are exempt from the FIRB regime?
The FATR sets out exemptions from the operation of FATA for certain acquisitions, interests, Australian businesses and foreign persons. Many of the exemptions set out in FATR are highly technical and conditional, requiring careful consideration of the transaction in question before being relied upon. Some examples of exemptions from the FIRB regime include:
- interests acquired as security for moneylending arrangements, except foreign governments in certain circumstances (regulation 27)
- interests acquired by Will or devolution with certain exceptions (regulation 29)
- interests held for the purpose of providing custodian services (regulation 30)
- an acquisition of an interest in shares of a financial sector company, except foreign governments (regulation 32)
- an acquisition of an interest in securities under a compulsory acquisition or a compulsory buy out (regulation 33)
- an acquisition of an interest in Australian land by an Australian citizen not ordinary resident in Australia or by their spouse or de facto partner (where the interest is jointly held), and certain Australian corporations, trustees and charities (regulation 35).
The Treasurer is also given power to grant exemption certificates in respect of certain transactions that would otherwise be significant or significant and notifiable actions. The Treasurer must first be satisfied that the transaction would not be contrary to the national interest before granting such a certificate. Exemption certificates can be varied or revoked and may name multiple persons, specify conditions or a period, or deal with more than one interest.
Standing categories of exemption certificate exist under the FATR to simplify the screening process for the FIRB regime. These include:
- exemption certificates where a foreign person proposes to acquire one or more kinds of interests in an Australian business or securities of an entity (regulation 42)
- exemption certificates where a foreign person proposes to acquire one or more kinds of interests in a tenement, or in securities in a mining, production or exploration entity (regulation 43)
- a range of exemption certificates for various types of investment in Australian land.
How do I apply for a decision in relation to a foreign investment transaction?
All foreign investment applications (except applications relating to residential real estate, which will be processed by the Australian Taxation Office) must be made online through FIRB's application portal. A decision under the FIRB regime will typically take up to 40 days. However, this is commonly extended to allow additional time to examine the application.
To avoid delay in processing, applicants should ensure all necessary information in relation to the transaction is included in their application. The relevant fee for lodging an application under the FIRB regime is payable at the time of application, with fees varying according to the type of interest being acquired.
Where approval is required under the FIRB regime, it is important the transaction documents are made conditional on a no objection notice being issued.
If approval is obtained for a transaction, investors should complete the transaction in a timely manner (generally 12 months); otherwise further approval will need to be sought.
Impact on deal planning and execution
The FIRB regime is a complex framework of legislation requiring careful consideration of the classification of interests, categorisation of investor, level of control, monetary thresholds and potential exemptions that relate to a foreign investment proposal.
Getting it wrong can have fundamentally adverse consequences, including prosecution and compulsory divestment risks.
1 Under section 4 of the FATA, a 'separate government entity' is defined as: an individual, corporation or corporate sole that is an agency or instrumentality of a foreign country or a part of a foreign country; and is not part of the body politic of a foreign country or of a part of a foreign country.
2 Under section 4 of the FATA, land is classified as: developed or vacant commercial land; agricultural land; residential land; or mining tenements.
3 Under regulation 16 in the FATR, 'direct interest' means: any investment of 10% of more; investments of 5% or more where coupled with a legal arrangement relating to the business; or any interest where the acquirer is in a position to influence or participate in the central management and control of the business.
4 Under section 54(4) of FATA, a person controls an entity if they are in a position to determine the policy of the entity in relation to any matter or if they hold an interest of 20% or more in the securities of the entity.
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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.