14 August, 2016
FIRB’s 2014-2015 Annual Report, covering the year ending 30 June 2015, was released in April this year. We discuss trends in foreign investment in Australia as set out in the Report.
Background
FIRB’s 2014-2015 Annual Report (Report), covering the year ending 30 June 2015, was released in April this year.
The Report provides a summary of the foreign investment proposals that were submitted to FIRB during the year, including aggregate figures on the number and value of proposals, nature of proposals and country of origin of investors.
Snapshot
In summary, the Report shows:
A total of 37,953 proposals received approval in 2014-15, compared with 24,102 in 2013-14. The vast majority of approvals (37,347) were related to the real estate sector and this was a significant increase on the previous year. The number of approvals in other sectors (ie. business proposals) was 592 in 2014-15, a very similar level to 2013-14.
Approvals were granted for a total of A$194.6 billion of proposed foreign investment, a 16.3% increase over 2013-14 levels. This increase was largely due to continued growth in residential real estate applications.
Approximately half of the total approved investment by value related to residential and commercial real estate proposals (A$96.9 billion), followed by proposals relating to Services (A$38.77 billion), Mineral Exploration & Development (A$26.65 billion) and Manufacturing (A$19.53 billion).
China was again the largest investor in Australia in 2014-15 in terms of the value of approvals (A$47 billion approved, representing 33% of total approved value). China was followed by the United States (A$25 billion at 18%), Singapore (A$9 billion at 7%), Japan (A$8 billion at 6%) and Canada (A$7 billion at 5%).1
No proposals were rejected in 2014-15 (compared with three in 2013-14) but conditions were applied to approximately 40% of all approvals granted.
The Report also provides data and commentary that illustrates sectoral trends and developments in the Government’s approach to reviewing foreign investment proposals.
Agriculture increases and volatility in Energy & Resources
There was a 54% increase in approvals in the Agriculture sector in 2014-15 period, to A$5.29 billion. Approvals for investment in the Agricultural sector over the last 5 years have averaged A$3.3 billion, so the increase is material, although the number is still relatively modest in the context of overall investment, accounting for 2.7% of total approvals by value.2
In the Agriculture sector, the two largest investor countries were China (A$2.5 billion) and the United States (A$1 billion).3
We would expect FIRB’s next annual report will show a continued increase in Agriculture sector proposals given the number of publicly reported proposals and the recently reduced thresholds for review of proposals involving agricultural land or agribusinesses.
Energy & Resources proposals increased 19% by value, up to A$26.65 billion. Oil and gas proposals accounted for nearly half of the value of all Energy & Resources applications (nearly doubling to A$12.5 billion), compensating for a 75% decrease in the value of iron ore proposals. Interestingly, the increase in value in oil and gas proposals coincided with a significant reduction in the oil price which occurred through the latter half of 2014.
General approach to approvals
Reflecting the general presumption that foreign investment is beneficial given the important role it plays in Australia’s economy, no proposals were rejected in 2014-15.4
However, conditions were applied to approximately 40% of all approvals granted. A majority of these proposals were in the real-estate sector, where it is common to impose conditions relating to the period in which development must commence.
Conditions were only imposed on 12 approvals (of a total of 592) for proposals that were not real estate related. These were where specific national interest concerns were required to be managed or mitigated, for instance, national security or Australian representation on the board of the target company.
One divestment order was made by the Treasurer in FY2015, relating to the A$39 million purchase of a Sydney property which had been purchased illegally by a foreign-owned company. This was the first such order made in 10 years.
Heightened focus on real estate and increased collaboration between FIRB andATO
Given that in 2014-15, 98% of all foreign investment approvals by number were related to real estate, it is no surprise that the Government has strengthened its oversight and compliance capability in the sector.
The Report notes that from 1 December 2015 (the date on which the recent reforms to Australia’s foreign investment framework took effect) the ATO has been responsible for the administration of all aspects of foreign investment into residential real estate, and has created a dedicated unit of 50 officers to review cases to ensure compliance.
The ATO is now also responsible for administering the register of foreign ownership of agricultural land (brought in with the recent reforms) as well as the collection of all foreign investment application fees.
In another example of collaboration between FIRB and the ATO, in February 2016, the Government announced a proposed set of standard tax conditions that would be applied to all applications to ensure compliance with Australia’s taxation regime. These conditions were subsequently refined via the release of an announcement around the time of the
Federal budget in May 2016.5
Privatisations of infrastructure
The Report notes that during 2014-15, FIRB commenced a process of engagement with State and Territory governments to ascertain the manner in which sales of key infrastructure assets of national significance could be managed to ensure the correct safeguards are in place (with particular focus on the privatisation of NSW’s electricity assets). Following the period of the Report, FIRB’s practical approach to approvals relating to infrastructure was illustrated in two key instances.
Firstly, in November 2015, the Treasurer approved the 99 year lease of TransGrid to NSW Electricity Networks. In that case, it was publicly stated that FIRB had been in extensive consultation with the NSW Government for over 12 months to ensure national interest considerations were addressed, illustrating FIRB, the vendor and potential buyers proactively engaging on the approval process. The Treasurer imposed a number of safeguards including requiring operation and control within Australia and a 50% cap on the ownership of foreign consortium members.
In March 2016, the Treasurer announced that foreign investors seeking to invest in any level of Australian government-owned infrastructure assets including airports, ports, electricity, gas, water and sewerage systems, roads, railways, inter-modal transfer facilities, telecommunications networks and nuclear facilities would now be subject to FIRB review.6 This expanded the foreign investment review net, as previously only foreign government investors (and not private foreign investors) required approval where an asset was purchased from an Australian government.7
Conclusion
Following the period of coverage of the Report, the Government implemented the most significant foreign investment reforms in Australia in close to 40 years (the reforms were effective on and from 1 December 2015).8 It will be particularly interesting to compare the 2014-15 Report with that for 2015 – 2016 (when it is released next year), to examine how the changes in the framework are affecting the nature and number of proposals submitted to FIRB.
FOOTNOTES
- The Report notes that the United States remains Australia’s dominant inward investor country, accounting for 23.7% of foreign direct investment as at the end of 2014. The Report addresses a subset of total foreign investment in Australia, being investment proposals for which a FIRB approval was sought.
- Reductions to the dollar thresholds for investments involving agricultural land were first introduced effective 1 March 2015 (near the end of the period the Report covers), so this may have contributed to the increase in the Agriculture sector proposals reviewed.
- Under the US-Australia Free Trade Agreement, US investors have the benefit of a higher agricultural land and agribusiness approval threshold (A$1.094 billion) than Chinese investors (A$15m for agricultural land and A$55m for agribusiness). These figures need to 6. be considered in this context.
- More recently (and outside the period of the Report), the Treasurer pre-emptively announced that he would not approve the sale of S. Kidman & Co as it included the Anna Creek 7. pastoral lease which contained land within the Woomera Prohibited Area in South Australia. Then, in April 2016, the Treasurer indicated he would not approve the sale of S. Kidman & Co (ex. Anna Creek) to an 80:20 Chinese and Australian consortium.
- See http://sjm.ministers.treasury.gov.au/ media-release/010-2016/ and https://firb.gov. au/2016/05/taxation-conditions/. Please also see the article by Toby Eggleston entitled ‘FIRB & Tax’ on page 11 of this edition of the Australian Foreign Investment Review.
- The previous regime came under scrutiny following the 99-year lease granted to Landbridge over the Port of Darwin. See http:// sjm.ministers.treasury.gov.au/ media-release/031-2016/
- his change was effected via section 31 of the Foreign Acquisitions and Takeovers Regulation 2015 (Cth).
- For a summary of these reforms see the Herbert Smith Freehills Australian Foreign Investment Review – January 2016, seventh edition.
For further information, please contact:
Paul Branston, Partner, Herbert Smith Freehills
paul.branston@hsf.com
