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14 March, 2017
The most significant reform of the Australian foreign investment legislative framework commenced on 1 December 2015 (the Framework).
The Framework introduced:
- new thresholds for notifiable actions based on both the type of acquisition and the nature of the foreign person seeking to invest; and
- record-keeping and reporting obligations, application fees and penalties for non-compliance.
The structure of the Foreign Investment Review Board (FIRB) also changed. The Australian Taxation Office (ATO) is now responsible for the administration of the agricultural land register and applications made in relation to residential land.
Applications for foreign investment in commercial land, agricultural land and Australian business are made to the FIRB.
Who does the Framework apply to?
The Framework applies to foreign persons seeking to invest in Australian land or entities. Individuals and entities defined as foreign persons include:
- an individual not ordinarily resident in Australia (this includes Australian citizens living abroad);
- a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;
- a corporation in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
- the trustee of a trust, where an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest in the trust;
- the trustee of a trust, where two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest in the trust;
- a foreign government;
- a foreign government investor;
- a person who is a general partner of a limited partnership in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; and
- a person who is a general partner of a limited partnership in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest.
What is a “substantial interest” for the purposes of a foreign person?
The changes saw an increase in the “substantial interest” threshold. A person is now taken to hold a substantial interest in a trust or entity if they control 20 per cent or more of voting power or shares in a company (up from 15 per cent).
A person will also have an “aggregate substantial interest” in an entity if two or more persons (with any one or more associates) hold an aggregate of at least 40 per cent of the entity. For a trust, two or more persons will hold an aggregate substantial interest if the persons hold (with any one or more of its associates) a beneficial interest of at least 40 per cent of the income or property of the trust.
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When does a foreign person have to notify FIRB of an investment?
The Framework introduced the concept of classifying certain actions as either significant actions or notifiable actions. Actions that are notifiable must be notified and significant actions may be, but are not required to be, notified to FIRB. Significant actions and notifiable actions include acquisitions of the types of interests, where the relevant threshold test is met.
A foreign person may (but is not required to) give notice of a significant action to the Treasurer unless it is also a notifiable action (in which case notice must be given). Foreign persons should be aware that although notice is not required for a significant action, the Treasurer may make an order prohibiting the significant action or requiring that the significant action be undone if the significant action is or would be contrary to the national interest. The Treasurer may also make an interim order pending making a decision as to whether or not to make an order prohibiting significant action. A no objection notification, which may impose conditions, may also be given by the Treasurer in respect of significant action.
Foreign persons must provide information to notify the Treasurer of all notifiable actions in relation to acquisitions in Australian land and entities, unless an exemption applies. (Tracing rules apply in most circumstances where a corporation or trust in which a foreign person holds a substantial interest or aggregate substantial interest proposes to take certain actions.) Exemptions to significant actions and notifiable actions are provided in the form of no objection notifications or exemption certificates (which are discussed in greater detail below).
Once an application is submitted, the Treasurer has 30 days to make an order or decision and a further ten days to give notice of the decision to the applicant or publish an order but the Treasurer may seek the applicant’s agreement to extend this period.
Thresholds
In order for an action to be a significant or notifiable action, it must meet the relevant threshold test.
The thresholds for significant and notifiable actions vary according to both the type of interest and the nature of the foreign person. If the interest is greater than the thresholds and a notifiable action, the action must be notified. FIRB thresholds are available here.
Thresholds are indexed annually on 1 January.
Fees
Fees are now imposed on all applications for approval of acquisitions made to the Treasurer. As with the thresholds for significant and notifiable actions, the application fees vary according to the type of interest being acquired. The current fees are available here.
Fees will also be payable where:
a foreign person has voluntarily given the Treasurer notice of a significant action which is not notifiable; or
the Treasurer gives a foreign person one of the following:
–– an order prohibiting proposed significant actions;
–– an interim order;
–– a disposal order; or
–– a no objection notification,
and the foreign person had not sought approval from the Treasurer in respect of the action specified in the order or notification.
An application for approval is not considered to have been submitted until the fee is paid. FIRB will send applicants an e-mail notifying them of the estimated fee payable to the ATO.
What types of interests does the Framework cover?
While the Framework covers various types of investments, we focus here on investments in land that may require notification to FIRB.
Thresholds for notifiable actions (and the fees) vary depending on the classification of the type of land. The Framework refers to Australian land which is defined as commercial land, residential land or agricultural land. Australian land also includes mining or production tenements.
Interests in Australian land may be significant or notifiable. An interest in Australian land includes:
- a legal or equitable interest in Australian land;
- an interest in a security in an entity that owns Australian land, being a security that entitles the holder to a right to occupy a flat or home unit situated on the land;
- an interest as lessee or licensee in a lease or licence giving rights to occupy Australian land if the term (including extension or renewal) is reasonably likely to
- exceed five years;
- an interest in an agreement involving the sharing of profits or income from the use of, or dealings in, Australian land if the term of the agreement (including
- extension or renewal) is reasonably likely to exceed five years;
- an interest in a share in an Australian land corporation or agricultural land corporation;
- an interest in a unit in an Australian land trust or agricultural land trust; and
- if the trustee of an Australian land trust or agricultural land trust is a corporation, an interest in a share in that corporation.
We will now explore what each of the three categories of Australian land includes.
Commercial land
Commercial land is defined as land in Australia:
- which is not used wholly and exclusively for a primary production business;
- on which ten or fewer dwellings could not reasonably be built; or
- which does not have one or more dwellings (except “commercial residential premises”).
Commercial residential premises
Land can still be classified as commercial land even if it has one or more dwellings if those dwellings are considered to be “commercial residential premises” as this term is defined in A New Tax System (Goods and Services Tax) Act 1999 (Cth). Commercial residential premises include:
- a hotel, motel, inn, hostel or boarding house;
- premises providing accommodation in connection with a school;
- marine berths occupied by ships used as residences; caravan parks or camping grounds; or
- other premises similar to those outlined in A New Tax System (Goods and Services Tax) Act 1999 (Cth), other than those providing accommodation to students in connection with an educational institution which is not a school.
Commercial residential premises are commercial land for the purposes of the Framework.
Types of commercial land
Under the Framework, there are two types of commercial land:
- commercial land that is vacant, being land which has no substantive permanent building which can be lawfully occupied by persons, goods or livestock; or
- commercial land that is not vacant, being land which has a substantive permanent building which can be lawfully occupied by persons, goods or livestock.
Commercial vacant land will have a lower notifiable threshold than commercial land that is not vacant.
Foreign investors should also be aware that lower thresholds apply for acquisitions of developed commercial land which is sensitive in nature. Developed commercial land will be considered sensitive if, among other things:
- critical state-owned infrastructure assets relevant to national security are located on the land;
- failure of a telecommunications unit on the land would result in telephone or internet services not being provided on other land; or
- public infrastructure is located on the land.
Under the Framework, there is no different treatment of land that has heritage-listed property.
Residential land
Residential land is defined as land in Australia on which:
- there is at least one dwelling; and
- the number of dwellings which could be reasonably built is less than ten.
However, it does not include land which is wholly and exclusively used for a primary production business or on which the only dwellings are commercial residential premises.
Foreign persons must apply for approval before purchasing new dwellings or vacant land. Generally approval for the purchase of a new dwelling will be unconditional. Acquisitions of vacant land for residential development purposes if approved are usually subject to a requirement that construction commences within a specified time frame and/or a requirement that the land cannot be transferred without construction having commenced.
Approval to purchase established dwellings will generally not be given to non-resident foreign persons. If approval is given to temporary residents, approval will generally be subject to the condition that the land be sold when the foreign person leaves Australia.
Other types of interests in residential land
An interest in residential land is not limited to what one might ordinarily consider a residential land contract (i.e. the purchase of dwellings or vacant land). It can also include:
- a contract to purchase a share of a dwelling;
- security interests in a real property mortgage;
- an option to purchase the property at an agreed price at
- some future time (e.g. a put and call option);
- a leasehold interest of five years or more;
- an increased share ownership in a dwelling in which the foreign person already has an interest;
- acquisition of shares or units in an entity in which more than 50 per cent of its assets are interest in residential real estate; and
- other acquisitions of Australian land.
Exempt persons – not everyone needs to notify
Acquisitions of certain residential real estate are exempt from the requirement to apply for and receive foreign investment approval. These include acquisitions by:
- non-resident Australian citizens;
- holders of Australian permanent visas;
- New Zealand citizens;
- a foreign person purchasing real estate as a joint tenant (but not as tenant in common) with their Australian or New Zealand citizen spouse, or Australian permanent resident spouse;
- an Australian corporation which would not be considered a foreign person if interests held in it by New Zealand citizens and non-resident Australian citizens were disregarded;
- the trustee of a trust which would not be considered a foreign person if interests held in it by New Zealand citizens and non-resident Australian citizens were
- disregarded; and
- charities operating in Australia for the primary benefit of persons ordinarily resident in Australia.
Agricultural land
Agricultural land is defined as land in Australia that is used, or could reasonably be used, for a “primary production business” as defined under the Income Tax Assessment Act 1997 (Cth). This definition includes land which is partially used, or where only part of the land could reasonably be used, for a primary production business. However, if the land includes a building or part of a building not directly connected with the land or which is not used and could not reasonably be used for a primary production business, the building or part of the building will not be considered “agricultural land”.
While the definition of agricultural land is broad, there are a number of factors that FIRB will consider in determining whether land could reasonably be used for a primary production business. These include the primary use permitted on the land by its zoning; the land use history; the land characteristics; and the lease or licence conditions.
Whether land could reasonably be used for a primary production business will depend on the facts and circumstances of the particular land. It is unclear whether some of the relevant factors will be given more weight than others. If in doubt as to whether the land is agricultural land, investors should seek foreign investment approval if the value of the acquisition exceeds the threshold in order to avoid the significant penalties for failing to notify.
Excluded land
The Framework expressly excludes from the definition of agricultural land a number of different types of land which may “reasonably be used” for a primary production business.
They are:
- land whose zoning requires government approval for a primary production business;
- land for which rezoning approval has been sought to:
–– prohibit the use of the land for primary production business; or
–– approve the use of the land for a mine, oil or gas well, quarry or similar; or
–– approve the use of the land to locate infrastructure relating to a mining operation; or
–– approve the use of the land for mining waste storage;
- land used wholly and predominately for a mining operation;
- land where a government approval for use of the land for a mining operation is in force;
- land used under a government law or agreement, wholly or predominately for the purpose of environmental conservation;
- land used wholly or predominately as a wildlife sanctuary or for rehabilitation of animals;
- land which is approved as an industrial estate;
- land of one hectare or less; and
- land which has government authority approval to provide facilities to the public for tourism, outdoor education or outdoor recreation.
Mixed use land
Unless the land is being acquired for a continuing purpose, the land may not be neatly classified in just one category under the Framework.
Acquisitions of interests in land are considered on a title-by-title basis. This means that, although a monetary threshold may not be triggered in respect of one parcel of land, the threshold may be triggered by other parcels of land either forming part of the same title or proposed to be acquired under the one contract for sale.
Where an application is made to acquire land that is mixed use, all uses should be notified and the highest application fee will apply.
Australian entities and trusts
In addition to real estate investments, a foreign person looking to invest in an Australian corporation or unit trust or in an Australian business may need to notify FIRB of that investment.
Actions in relation to Australian entities and trusts
It is a significant action if a person takes certain actions in relation to entities and business that have a connection with Australia, such as acquiring or issuing securities (being shares in corporations or units in unit trusts), entering into agreements with Australian businesses, and altering
constituent documents.
For such an action to be significant, the relevant threshold test must be met and the action must result in a change in control of the entity so that a foreign person begins to control the entity or business or there is a change in foreign persons who control the entity or business.
It is a notifiable action to acquire a substantial interest in an Australian entity, where the Australian entity is:
- an Australian corporation that carries on an Australian business, whether alone or together with one or more other persons; or
- an Australian unit trust; or
- an Australian entity that is the holding entity of either of the above
Investors should be aware that different thresholds apply in respect of entities which are considered to be land entities (i.e. corporations or trusts whose interest in agricultural land or Australian land exceeds 50 per cent of its total assets).The thresholds which apply to a land entity will depend on the types of land assets held by the entity (as set out above).
It is important to note that an interest in a security, asset, trust or Australian land includes not only the acquisition or disposal itself, but also entering into an agreement to acquire the interest under an option or otherwise having a right to have the interest transferred to the foreign person or their associate. However, the action to acquire or dispose of the interest will only be taken once the provisions of the agreement become binding (i.e. after satisfaction of any conditions precedent). This means that entry into an agreement for the acquisition of an interest which is a notifiable action will not be contrary to the Framework where FIRB approval is, among other things, a condition precedent to a binding agreement.
Agribusiness
Under the Framework, an agribusiness is one in which the business or entity derives earnings from carrying on a business falling within certain classes of the Australian and New Zealand Standard Industrial Classification Codes.
Foreign investors, other than those from Chile, New Zealand and the USA (which have the benefit of a higher threshold), will be required to apply for foreign investment approval before acquiring a direct interest in agribusiness where that interest exceeds A$55 million.
Direct interest in an agribusiness
Interests that amount to a direct interest are specified as:
- an interest of at least 10 per cent in the entity or business;
- an interest of at least 5 per cent if the foreign person who acquires the interest has entered a legal arrangement relating to the businesses of the foreign person and the entity or business; or
- an interest in the entity or business of any percentage if the foreign person is in a position to influence or participate in the central management and control of the business or to influence, participate or determine the policy of the entity or business.
Exemption certificates
Under the Framework, if foreign persons are likely to acquire a substantial number of real estate interests during a year, developers or foreign persons (as the case may be) can apply for an exemption certificate.
There are four types of exemption certificates available:
- exemption certificates for one established dwelling;
- exemption certificates for acquisitions of Australian land;
- exemption certificates to sell new dwellings in a development to foreign persons; and
- exemption certificates to acquire securities through
- underwriting.
Developers obtaining exemption certificates to sell new dwellings to foreign persons must pay a fee in respect of each dwelling sold to a foreign person where the dwelling is sold for less than A$3 million.
Investors applying for an exemption certificate may need to provide detailed information regarding the proposed acquisition (e.g. details of the suburbs in which proposed property acquisitions are intended to be made or details of the specific land (if known)).
Agricultural land register (and proposed water register)
Also introduced from 1 December 2015 were reporting obligations for foreign persons who have an interest in agricultural land (as referred to above).
All foreign persons who held an interest in agricultural land as at 1 July 2015 must have given notice of their interest to the Commissioner of Taxation.
Foreign persons acquiring an interest in agricultural land or ceasing to hold an interest in agricultural land must give the ATO notice of the event in the approved form within 30 days of the occurrence of the event.
Failure to comply with reporting obligations may result in an administrative penalty of up to A$4,500.
New legislation introduced late in 2016 seeks to create a register of foreign ownership of water entitlements, which will operate from 1 December 2017. The ATO will maintain the register, which will operate in a similar way to the agricultural land register.
Record-keeping obligations
Under the Framework, there are new record-keeping obligations in relation to:
- any significant or notifiable action taken by a foreign person in response to an order or decision by the Treasurer;
- any action taken by a foreign person that is specified in an exemption certificate;
- whether a foreign person is complying with a condition in the no objection notification or exemption certificate; and
- a disposal of an interest in residential land that was a significant or notifiable action, or would have been a significant or notifiable action if it had not been the subject of an exemption certificate.
It is important to remember that, while significant actions may not be notifiable, information regarding the significant action must be kept. The period of time for which record must be kept varies depending upon the nature of the record required to be kept.
Records must be kept in English, or must be readily convertible into English, in hard copy or electronic format.
Records must also be sufficiently clear so that the act, transaction, event or circumstance they refer to can be easily ascertained. Failure to keep records is an offence and fines may be imposed for non-compliance.
Standard conditions
In February 2016, the Australian Government announced that standard conditions would be imposed on all foreign investment applications. While these standard conditions require investors to comply with Australian taxation laws, including paying taxation debt, in relation to the action and any transaction, operations or assets acquired as a result of the action, they may also impose a higher level of engagement with the ATO by requiring tax rulings before the FIRB application is processed. The standard conditions also require investors to provide documents and information in accordance with Australia’s tax laws and to provide an annual compliance report. A FIRB Guidance Note released in November 2016 provides some guidance on how the tax conditions may be applied to FIRB approvals. The tax conditions are separated into two categories:
Item A conditions: these may be imposed where the Treasurer considers that the investment involves a risk to Australian tax revenues.
Item B conditions: these may be imposed where the Treasurer considers that there is a significant or particular risk to Australian tax revenues.
Penalties for non-compliance
The Framework imposes strict civil and criminal penalties for breach, including fines and imprisonment. They include, for example, criminal penalties including fines of A$135,000 for individuals or A$675,000 for corporations, three years’ imprisonment and civil penalties of up to 10 per cent of the
consideration or market value of residential property and A$45,000 for individuals or A$225,000 for corporations in other circumstances, where a foreign person:
fails to notify of notifiable action:
takes significant action before the earliest of:
–– ten days after the expiration of the decision-making period;
–– before the end of the period specified in an interim order (if made); or
–– before the day a no objection notification is given to the foreign person;
contravenes an order made by the Treasurer; or
contravenes conditions imposed in an exemption certificate or a no objection notification.
Infringement notices may also be issued for less serious breaches of the Framework.
Conclusion
Given the considerable application fees, penalties and the Treasurer’s powers to take action in relation to both significant and notifiable actions, foreign investors should carefully consider, in consultation with their advisers, the notifications to be made under the Framework.
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For further information, please contact:
Pauline Tan, Partner, Ashurst
pauline.tan@ashurst.com
