6 December, 2015
The Foreign Acquisition and Takeovers (Legislative Amendments) Act 2015 (Cth) came into effect on 1 December 2015, substantially amending the provisions of the Foreign Acquisitions and Takeovers Act 1975 (Cth). The Australian Government is promoting the new legislative framework as a simplification to the foreign investment framework, in reducing red tape and providing greater certainty for investors, and proof that Australia is open for business. The main policy areas addressed by the reforms are the notification of foreign investment, treatment of foreign government investors and changes to investment in the residential real estate and agriculture sectors.
Codification of foreign investment regime
Australia’s foreign investment legislative framework has remained largely unchanged since 1975. However, since that time various policy announcements have been made that have affected the foreign investment regime. One of the important features of the legislative changes is that the foreign investment framework currently set out in the foreign investment policy has been codified into legislation.
The new regime empowers the Treasurer to make orders and decisions in relation to significant actions and foreign persons must notify the Treasurer prior to taking notifiable actions.
A significant action includes an action by a foreign person to acquire interests in securities, assets, land, or entities and businesses with a connection to Australia above certain financial thresholds. Higher financial thresholds apply in respect of investors from certain countries with whom Australia has made investment commitments under a free trade agreement (including the United States, New Zealand, Japan, Korea and Chile). A significant action must result in a change in control involving a foreign person or be taken by a foreign person.
The foreign investment regime authorises the Treasurer to impose conditions, or object and make an order prohibiting a significant action where the action would be contrary to the national interest. Where a significant action has already taken place, the Treasurer can impose disposal orders to unwind a transaction.
Notifiable actions include a proposed acquisition by a foreign person of a substantial interest in an Australian business entity, a direct interest in an agribusiness or an interest in Australian land where the value of the relevant entity, business or land is over a relevant monetary threshold.
There have been significant reductions in the notification thresholds for investment in agricultural land and agribusiness, from $252 million to $15 million and $55 million respectively. Investors from the US, NZ and Chile or enterprises or nationals from Singapore or Thailand will have the benefit of a higher threshold for agricultural land as a result of free trade agreement commitments.
Foreign persons can nominate to notify the Treasurer and seek a no objection notification, which can prevent the Treasurer making a disposal order in relation to a significant action.
New level of substantial interest
Under the legislative reforms, the definition of substantial interest will change from a 15% interest to a 20% interest. Where multiple foreign persons are involved in a transaction, the current 40% interest will remain in place. This change brings the foreign investment regime in line with Australia’s takeover legislation.
Changes for foreign government investors
Foreign government investors will now be included in the definition of foreign person. Prior approval will continue to be required for a foreign government investor to invest in any new business venture or acquire an interest in land or a direct interest in an Australian business by a foreign government investor (no matter the value of the investment).
In line with the changes to the substantial interest definition, the threshold for identifying when a foreign government investor holds a substantial interest has been increased to a 20% interest for a single foreign government, or a 40% aggregate interest where multiple foreign government investors hold an interest.
Associate provisions have been modified so that all foreign government investors from a single country are now deemed to be associates. The practical effect of this change is to trigger the requirement to notify the Australian Government of an investment in a broader range of circumstances. This may create uncertainty for some foreign investors, especially where the target may already include foreign government investment from another level of government from the same country.
Application Fees and Penalties
Application fees will now be payable on all foreign investment applications. There are a range of different fees but the fee for an application for a business acquisition will be $25,000 (or $100,000 where the value of the transaction will be greater than $1 billion).
Foreign investors need to be aware of new and stricter penalties, central to the amendments. The penalties apply where a person fails to give a notice to the Treasurer before taking a notifiable action, gives notice but takes action before the Treasurer reaches a decision or contravenes orders made, or conditions imposed by the Treasurer. The new penalties include:
- increased fines up to $135,000 or 3 years imprisonment for an individual and $675,000 for a company;
- divestment orders;
- civil pecuniary penalties;
- infringement notices for less serious offences; and
- the introduction of penalties to capture third parties who knowingly assist foreign investors to break the rules.
These penalties are supported by increased monitoring capabilities for the Australian Tax Office (the ATO) in the context of residential real estate. Backed by funding of $47.5 million over four years, the ATO will employ data matching programs, utilising banking data and state and territory land title data, as well as information sharing with the Foreign Investment Review Board to monitor investment in this sector. The ATO will also develop a national register of agricultural land.
Neither tried nor tested
It remains to be seen whether the codification of the current legislative and policy framework will actually result in any greater certainty and transparency for foreign investors.
Given the commitments the Australian Government has now made in various free trade agreements, the legislation sets out a variety of financial thresholds which are dependent on the nationality of the foreign person.
We anticipate that the application of associate provisions to foreign government investors may in fact result in greater complexity for investors with foreign government shareholders.
While increased notification thresholds will potentially stimulate foreign investment, the effects of increased protection for sensitive sectors, especially in the area of foreign government investment, agriculture and real estate do raise questions as to how “open” the new regime really is.
For further information, please contact:
Dean Carrigan, Partner, Clyde & Co