20 January, 2016
On 1 December 2015, a package of new foreign investment legislation commenced operation, representing the most significant reform of the Australian foreign investment legislative framework since it was introduced. We discuss the key changes.
Summary
On 1 December 2015, the package of new legislation bringing in significant changes to Australia’s foreign investment framework commenced.1
The substantive operative provisions of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) were replaced2 and a new set of regulations made.3 To complement these changes, new legislation was also introduced to establish a register of foreign ownership of agricultural land operated by the Commissioner of Taxation4 and to impose fees on foreign investment applications.5
The changes represent the most significant reform of the foreign investment legislative framework since it was introduced. The stated purpose of the changes is to strengthen the integrity of Australia’s foreign investment framework, ensuring Australia maintains a welcoming environment for foreign investment that is not contrary to Australia’s national interest. The changes will likely result in increased administrative and transaction costs for foreign investors, due to a number of factors, including the introduction of application fees and the agricultural land (and potentially a water) register.
Increase of the substantial interest threshold
Foreign persons must generally get approval before acquiring a ‘substantial interest’ in an Australian entity that is valued above $252 million.6
The substantial interest threshold for a single foreign person has been increased from 15% to 20%. This amendment aligns the substantial interest threshold with the takeovers regime under the Corporations Act 2001 (Cth). The aggregate substantial interest threshold of 40% has been retained.
Regulation of foreign government investors
Investments by foreign government investors, which were previously only regulated under Australia’s Foreign Investment Policy (Policy) (without a clear statutory basis), are now regulated by the FATA and the regulations.7
Investments in the agricultural sector
The changes increase the scrutiny around private foreign investment proposals in the agricultural sector, not only under the changes to the FATA, but also through the introduction of the agricultural land (and potentially a water) register.8
Fees
The new package of legislation provides for fees to be levied on foreign investment applications. The Treasurer is not required to take any action in relation to certain foreign investment applications before the applicable fee is paid. The Treasurer also has the power to waive the whole or part of a fee if satisfied that it is not contrary to the national interest.
The fees are indexed and are generally as follows: 9
- $5,000 for acquisition of an interest in residential land or agricultural land where the consideration is $1 million or less (and if the consideration exceeds $1 million, $10,000 for each $1 million, up to $100,000);
- $10,000 for acquisition of an interest in vacant commercial land, internal reorganisations and for a foreign government investor to start an Australian business, acquire an interest in a tenement or a 10% interest in a mining, production or exploration entity;
- $25,000 for acquisitions of interests in (i) non-vacant commercial land, (ii) mining or production tenements or (iii) an Australian entity (including an agribusiness) where the consideration is $1 billion or less;
- $100,000 for acquisitions of interests in an Australian entity/business (including an agribusiness) where the consideration is more than $1 billion.
Penalties
Previously, only divestment orders and criminal penalties applied in relation to breaches of the FATA. Enforcing breaches under the criminal penalty framework was difficult as a result of the high burden of proof required. The amendments to the FATA introduced civil penalties and increased the applicable criminal penalties.
Generally, the maximum criminal penalty is 750 penalty units for an individual (currently $135,000) and the maximum civil penalty (other than for residential land) is 250 penalty units (currently $45,000). In both cases, the amount is multiplied 5 times for a corporation.
Different civil penalties apply in relation to residential land, some of which may be calculated by reference to the market value of, or consideration for, the acquisition of the interest in residential land or the capital gain from disposing of the interest. In addition, infringement notices may be given with respect to civil penalty provisions that relate to residential land permitting action to be taken more efficiently and effectively.
The criminal penalties and civil penalties generally extend to any person who incites, procures or aids another person to commit an offence or contravene a civil penalty provision. The penalties also extend to officers of a corporation who authorise or permit the corporation to commit an offence or contravene a civil penalty provision.
Residential
In addition to the new fees and penalties noted above which apply in relation to residential real estate, the Treasurer has delegated his powers and functions relating to residential real estate to the Commissioner of Taxation, as is permitted by the FATA. These measures are designed to enable stronger enforcement and better compliance with the rules in relation to residential real estate.
30 day decision period
The ‘30 day’ decision period remains the same under the amended FATA as it was previously, save that, an applicant may request that the Treasurer extend the period. In addition, the decision period will be extended by the amount of time it takes for an applicant to provide further information requested by the Treasurer.
Previously, if the Foreign Investment Review Board (FIRB) was unable to make a decision within the 30 day statutory time, it generally requested that applicants withdraw and resubmit their application. Under the FATA, the onus will continue to remain on the applicant to request that the Treasurer extend the period for consideration of the application (rather than the onus being on FIRB to seek such an extension if it requires more time to consider the application).
Conclusion
The recent amendments do not fundamentally change the manner in which foreign investment into Australia is regulated, although the changes in relation to agriculture are potentially significant. However, the changes generally provide further certainty and clarity around the operation of the foreign investment framework, including by eliminating regulation (particularly of
foreign government investors) solely through the Policy.
The new penalties imposed may also promote greater compliance with the framework, particularly in the residential sector.
FOOTNOTES
1. The full suite of amending legislation and regulations comprises: Foreign Acquisitions and Takeovers Legislation Amendment Act 2015 amending the Foreign Acquisitions and Takeovers Act 1975 (the Act / FATA), Foreign Acquisitions and Takeovers Imposition Fees Act 2015, Register of Foreign Ownership of Agricultural Land Act 2015, Foreign Acquisitions and Takeovers Legislation Amendment Regulation 2015, Foreign Acquisitions and Takeovers Regulation 2015 (the Regulations 2015), Foreign Acquisitions and Takeovers Fees Imposition Regulation 2015, Treasury Legislation Amendment (China Australia Free Trade Agreement) Regulation 2015, Register of Foreign Ownership of Agricultural Land Rule 2015.
2. Effective from 1 December 2015, the Foreign Acquisitions and Takeovers Legislation Amendment Act 2015 (Cth) repealed and replaced the operative provisions of the Foreign Acquisitions and Takeovers Act 1975 (Cth).
3. The Regulations 2015 commenced on 1 December 2015. The former principal regulation, the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) was repealed by the Foreign Acquisitions and Takeovers Legislation Amendment Regulations 2015 (Cth).
4. See the Register of Foreign Ownership of Agricultural Land Act 2015 (Cth).
5. See the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth) and the Foreign Acquisitions and Takeovers Fees Imposition Regulation 2015 (Cth).
6. Different thresholds apply in relation to certain types of entities, for example, an entity which is an agribusiness. In addition, consistent with Australia’s free trade agreement commitments, a $1,094 million threshold currently generally applies to investors from Chile, Japan, Korea, New Zealand and the United States (save in respect of sensitive businesses).
7. For a detailed discussion of the new rules applying to foreign government investors, please refer to the article by Robert Nicholson and Annabel Sampson entitled ‘FIRB changes: impact on foreign government investors’ on page 7 of this edition of the Australian Foreign Investment Review.
8. For a detailed discussion of the changes on foreign investment into agribusiness in Australia, please refer to the article by Matthew FitzGerald and Mary Boittier entitled 'FIRB changes: impact on Australian agribusiness’ on page 4 of this edition of the Australian Foreign Investment Review.
9. The fees are subject to the de minimis rule that, generally, where the fee would be more than 25% of the consideration for the proposed acquisition, the fee is $1000.
For further information, please contact:
Tony Damian, Partner, Herbert Smith Freehills
tony.damian@hsf.com
