20 January, 2016
The new changes to Australian foreign investment rules have a particular focus on Australian agribusiness.
Summary
The significant changes made to Australia’s foreign investment rules which are relevant to the agricultural sector are unlikely to limit the amount of foreign investment into that sector.1
These changes are unlikely to increase the number of agricultural investment proposals which the Treasurer does not approve as there is a need for foreign investment in Australian agribusiness as this sector becomes more corporatized. This is consistent with the Government’s strong message that Australia welcomes foreign investment unless a specific proposal causes concerns about Australia’s national interest.2
There has been some discontent voiced that the different thresholds applicable to some countries are discriminatory. The Government has made it clear that differential thresholds reflect free trade agreements (FTA) with particular countries such as the United States, New Zealand and Chile. Where a particular country can negotiate a favourable FTA in relation to inbound Australian agricultural investment in the future, the relevant thresholds are likely to be adjusted consistently with the FTA.
Overview of the new rules for the agricultural sector 3
What is an ‘agribusiness’?
An ‘agribusiness’ includes a primary production business as defined in a current Australian and New Zealand standard industrial classification codes published in Australia by the Australian Bureau of Statistics. These refer to agriculture, forestry and fishery businesses and certain first stage downstream manufacturing businesses (including meat, poultry, seafood, dairy, fruit and vegetable processing and sugar, grain and oil and fat manufacturing).
An Australian business or entity will be considered an ‘agribusiness’ where the value of the assets of the business used in carrying on the agribusiness, or the earnings before interest and tax of the entity derived from agribusiness, exceed 25% of the total business assets or total earnings of the entity.4
What is ‘agricultural land’?
Agricultural land is land in Australia that is used, or could reasonably be used, for a primary production business, or land where only
part of the land could reasonably be used for a primary production business.5
A primary production business is determined under the same rules that apply for Australian tax purposes.6 The term generally includes the businesses of animal and fish farming, cultivating and propagating plants and forestry, but does not include hobby farming or a recreation or sporting activity.7
Prior notification required and the Treasurer may block or impose conditions
A proposed :
- direct interest8 in an Australian entity or an Australian business that is an Australian agribusiness by a foreign person who is not a foreign government investor; or
- Australian agricultural land by a foreign person, whether direct or through an Australian agricultural land corporation9 or Australian agricultural land trust may,10 may:
require prior notification to the Treasurer and be regarded as a ‘significant action’ and subject to a blocking order, conditions or other action by the Treasurer,11 depending on the nationality of the foreign person and if applicable thresholds are met or whether the foreign person is a foreign government investor.
Applicable thresholds
The general threshold for the acquisition of an interest in an Australian agribusiness is $55 million (indexed annually). This amount takes into account the total consideration for the acquisition and the value of all other interests held at any time by the investor and associates in the entity or business (regardless of the value of the agribusiness).
This threshold will apply to all non-government investors except for those from the United States, New Zealand and Chile. Consistent with FTA arrangements, these investors are subject to the rules for general business acquisitions, for which the current threshold is $1,094 million.12
The general threshold for an investment in ‘agricultural land’ was lowered in March 2015 to $15 million. This threshold was not adjusted by the 1 December 2015 changes detailed in this article. The threshold is based on the total consideration for the acquisition and the total value of all interests in agricultural land in Australia held by the investor.
This threshold applies to all non-government investors except the following, where the thresholds are aligned with relevant FTA commitments:
- the United States, New Zealand and Chile, which are subject to a threshold of $1,094 million; and Singapore and Thailand, where a $50 million threshold applies only where the land is used wholly and exclusively for a primary production business.13
- Any proposed direct investment by a foreign government investor in an agribusiness or agricultural land, regardless of value, must be notified to the Treasurer and is potentially subject to a blocking order or other action by the Treasurer.
Policy considerations
To coincide with the changes to the foreign investment rules, the Policy has been updated and confirms Australia’s approach which welcomes foreign investment with any such investment proposals being assessed on a case-by-case basis to consider national interest concerns.
National interest concerns may be applied to agricultural proposals
Two high profile agricultural sector investment proposals have recently been blocked by the Treasurer based on the following national interest concerns that apply for any sector:14
Kidman: In November 2015, the Treasurer cited the location of part of a S. Kidman and Co. (Kidman) property in the Woomera Prohibited Area, a weapons testing range in South Australia, as a basis for blocking the proposed sale of the entire Kidman property portfolio. The Kidman proposal was also refused reportedly due to the size and significance of the property portfolio.15
GrainCorp: In blocking the proposed acquisition of GrainCorp by Archer Daniels Midland Company (ADM) in 2013, the Treasurer determined that it a 100% foreign acquisition of this key Australian business was contrary to the national interest.16 The acquisition was also blocked because of the potential undermining of public support for the Government’s foreign investment policy. 17
Lessons for vendors and foreign investors
Vendors – consider if sale structure may cause national interest concerns
Vendors of significant Australian agricultural assets are well advised to attempt to seek FIRB’s likely position on the proposal prior to finalising their acquisition structure taking into account the likely field of interested buyers. This is a lesson from the Kidman proposal where the Treasurer indicated that a sale of a landholding that covered 2.5% of Australia’s agricultural land to a foreign person would not be appropriate (which could mean that if the structure excluded certain parcels or also include investment from domestic parties, the result may have been different). 18
Foreign investors – engage with FIRB early and often
Foreign investors should also consider taking up the Government’s invitation in the Policy to engage with FIRB prior to lodging proposals for significant investments in the agricultural sector. These discussions may help foreign investors understand national interest concerns the Government may hold about a particular proposal and the conditions the Treasurer may be considering imposing on the proposal should it be approved.
Foreign investors should not underestimate the time that a FIRB application may take to prepare for a significant proposal and engagement time that may be required to satisfy all queries raised by FIRB. Where there is a competitive bid process for the acquisition, a foreign investor that does not actively engage with FIRB early in the bidding process may be placed at a competitive disadvantage to other bidders who open a dialogue with FIRB early.
Agricultural land register and proposed water register
To increase transparency regarding the level of foreign ownership in Australian agricultural land, the Government established a register of foreign ownership of agricultural land in conjunction with the ATO that started collecting data from 1 July 2015. This register includes a stocktake of existing ownership to provide a clear picture of foreign investment in Australia’s agriculture sector. All foreign individuals, companies and trustees are required to notify the ATO of any existing interests by 29 February 2016.
As part of a deal negotiated with the Greens to ensure the successful introduction of the new rules, the Government has agreed to establish a register of all foreign investment in water by 1 December 2016. The legislation for the land register will cease to have effect if legislation providing for a foreign ownership of water entitlements register has not been enacted by 1 December 2016.19
FOOTNOTES
1 For a summary of the package of the new legislation, including the new application fees, please refer to the article by Tony Damian and Malika Chandrasegaran entitled 'FIRB changes: a snapshot of what you need to know' on page 2 of this edition of the Australian Foreign Investment Review.
2 See page 1, Australia’s Foreign Investment Policy – Released December 2015.
3 The Foreign Investment Review Board has issued guidance notes to assist investors and their advisers to understand the new rules. See Guidance Note 17, Agricultural land investments and Guidance Note 18, Agribusiness investment.
4 If the business or the relevant corporate group has agribusiness and other operations, apportionment rules will apply to determine if the proposed investment in the business or entity is subject to the foreign investment agribusiness rules. See Regulations 2015, s 12(4).
5 See Guidance Note 17 for further detail. Note also an exemption certificate may be available for a program of acquisitions of interests in agricultural land. See Guidance Note 21 for more detail.
6 See subsection 995 -1 of the Income Tax Assessment Act 1997 (Cth) and Tax ruling TR 97/11: Income tax: am I carrying on a business of primary production.
7. See Regulations 2015, s 44 for specific factors and exclusions.
8. See Regulations 2015, s 16. A direct interest means an interest of at least 10% in the entity or business; of at least 5% in the entity or business if the person who acquires the interest has entered a legal arrangement relating to the businesses of the person and the entity or business; or an interest of any percentage if the person who has acquired the interest is in a position to participate or influence the central management and control of the entity or business or to influence, participate or determine the policy of the entity or business.
9. See Regulations 2015, s 13(2).
10. See Regulations 2015, s 13(3).
11. See Foreign Acquisitions and Takeovers Legislation Amendment Act 2015 (Cth), Schedule 1, Division 2.
12. See Regulations 2015, s 40(1). Subject to lower thresholds for sensitive businesses and media.
13. See Regulations 2015, s 52(4).
14. For a reference to the current Senate Enquiry regarding whether there ought to be any legislative or regulatory changes to the foreign investment review framework to ensure Australia’s national interest is being adequately considered, 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.
15. See http://sjm.ministers.treasury.gov.au/ media-release/011-2015/
16. See http://jbh.ministers.treasury.gov.au/ media-release/026-2013/
17. See GrainCorp – Treasurer blocks American suitor, Adam Strauss, 9 December 2013, http:// www.herbertsmithfreehills.com.insights/ legal-briefings/graincorp-treasurer-blocks- american suitor.
18. The full list of factors the Government typically considers in assessing a foreign investment proposal are set out in the Policy. The specific factors are the quality and availability of Australia’s agricultural resources, including water; land access and use; agricultural production and productivity; Australia’s capacity to remain a reliable supplier of agricultural production, both to the Australian community and to its trading partners; biodiversity; and employment and prosperity in Australia’s local and regional communities: see page 9 of the Policy.
19. Foreign Acquisitions and Takeovers Legislation Amendment Act 2015 (Cth), Schedule 5.
For further information, please contact:
Matthew Fitzgerald, Partner, Herbert Smith Freehills
matthew.fitzgerald@hsf.com
