In brief: The Australian Government has announced that, from 1 March 2015, acquisitions of agricultural land worth more than A$15 million and any additional acquisitions over and above that amount will require government approval. It will also establish a foreign ownership register of agricultural land. Nevertheless, we expect that Australia will continue to welcome foreign investment in the agricultural sector. Partners Marcus Clark (view CV), Jeremy Low (view CV) and Wendy Rae (view CV), and Managing Associate Andrew Wong(view CV) report.
- What are the changes?
- What form will the changes take?
- Impact of an A$15 million threshold
- Impact of a foreign ownership register
- Is foreign investment in Australian agriculture still welcome?
- Allens: experience you can count on
HOW DOES IT AFFECT YOU?
- For most foreign investors in Australian agricultural land, the threshold for foreign investment approval is expected to drop from A$252 million to A$15 million, and be applied against accumulated holdings.
- For Chilean, New Zealand and United States investors, Australia's free trade treaty obligations mean that their investment proposals will remain subject to an A$1,094 million threshold. However, the new A$15 million threshold will apply to Chinese, Japanese and South Korean investors because the free trade agreements Australia has recently concluded, or is about to conclude, with those nations specifically contemplated its introduction.
- For foreign government investors, no changes are proposed to Australia's policy of requiring approval for all direct investments and for all acquisitions of interests in land. The lower threshold that will now apply to private foreign investors will largely remove a competitive advantage that they held in pursuing investment opportunities in Australian agricultural land.
- For Australian expats, it is unclear whether the exemption that allows the purchase of residential real estate will be extended to cover purchases of agricultural land. We await further details.
- For all foreign investors, information about investments may be recorded in a public register and subject to oversight by the Australian Taxation Office.
- For all foreign investors, delays are expected in foreign investment approvals as the Foreign Investment Review Board (FIRB) tries to accommodate the additional workloads that are likely to be generated.
These rule changes have been a long time coming. In August 2012, the Coalition (then in Opposition, now the Australian Government) released a discussion paper1 on foreign investment in Australian agricultural land and agribusiness. It opened with the statement that 'The Coalition unambiguously welcomes and supports foreign investment' but highlighted 'growing community and industry concern' and said that a strengthening of regulations may be advantageous. Specific concerns included a lack of reliable data on the extent of foreign ownership, a perception that the foreign investment thresholds are too high for the agricultural sector and the practical effectiveness of FIRB.
In our Focus: The Issue of Foreign Investment in Australian Agriculture from January 2012, we told foreign investors in Australian agriculture to prepare for policy changes. In particular, we highlighted a possible lowering of the monetary thresholds at which investments in Australian agriculture require foreign investment approval, establishment of a public register that records foreign ownership of Australian rural land and pressure on the Government to take a more transparent approach to determining, and then applying, the national interest test to foreign investment proposals. Also see our post-election analysis Focus: Changes are expected to the rules governing foreign investment in Australian agriculture from September 2013.
WHAT ARE THE CHANGES?
This is what the Australian Government announced by press release on 11 February 2015:
- 'To improve the scrutiny of foreign purchases of agricultural land the Government will reduce the screening threshold from $252 million to $15 million from 1 March 2015.'
- 'The new $15 million screening threshold will apply to the cumulative value of agricultural land owned by the foreign investor, including the purposed purchase.'
- 'The Government will also establish a foreign ownership register of agricultural land to strengthen reporting requirements and provide a clear picture of foreign investment in Australia’s agricultural sector.'
- 'From 1 July 2015 the Australian Tax[ation] Office (ATO) will start collecting information on all new foreign investment in agricultural land regardless of value.'2
Interestingly, the press release does not mention the proposal to introduce an A$53 million threshold for investments in Australian agribusinesses. We have previously highlighted a number of problems with that proposal, including issues around how to define 'agribusiness' and the impact the lower threshold would have on passive investing in large listed agribusinesses, such as GrainCorp. Perhaps the Government recognises the difficulties, and is satisfied that the proposed rules for agricultural land are sufficient to deal with the policy concerns.
WHAT FORM WILL THE CHANGES TAKE?
In relation to the new A$15 million threshold, FIRB has confirmed that the changes will be implemented via revisions to Australia's Foreign Investment Policy. The Policy supplements the Foreign Acquisitions and Takeovers Act 1975 (Cth) but does not itself have the force of law.
It is unclear whether the Australian Government intends for the Policy update to be a temporary measure that gives it time to formulate changes to the Act or a permanent measure. For many years, the Policy has been used to regulate foreign government investors and investors in the media sector, with no move to incorporate those regulations into the Act.
One difficulty this creates is a lack of certainty. The Policy is written as policy, not as legislation. Policy statements often lack the precision of legislation and that makes it difficult for us and other lawyers to give our clients clear answers about how the changes work.
Certainly, the Government's announcement raises a lot of questions that we hope it will be able to clarify when it releases the revised Policy.
- Do the changes apply to farms currently under contract or will those transactions be grandfathered? A failure to grandfather may place foreign investors in the invidious position of having to choose between breaching a binding sale contract and breaching Australian Government policy.
- Australian expats are defined as 'foreign persons' under the Act because they are not 'ordinarily resident in Australia'. However, when it comes to purchasing residential properties, they enjoy an exemption from having to obtain foreign investment clearance. Will Australian expats enjoy a similar exemption when purchasing agricultural properties?
- Similar uncertainties exist for foreign-owned custodians, responsible entities and secured lenders – will the exemptions available to them under the Act be applied by the revised Policy to the acquisition of interests in agricultural land?
- Will the new threshold be indexed annually as is the case with all current monetary thresholds under the Act?
- What valuation principles will apply when the new threshold is tested against cumulative purchases? Should previous purchases be valued based on their original purchase price, a recent balance sheet value or will new valuations be required? This is new territory for the Government because it has not previously applied a cumulative test against any foreign investment proposals.
- Will proposals to lease or licence land require clearance? We expect they will but that raises additional questions. Will the new threshold be applied against the value of the lease or the value of the land? If the value of the land is relevant, how will a foreign tenant necessarily know what the value of the land is in the absence of a sale? If the value of the lease is relevant, how will options for further terms be treated? Will there be exemptions for short-term leases or stock agistment arrangements?
- Just what is agricultural land? The Act defines 'Australian rural land' as land 'used wholly and exclusively for carrying on a business of primary production'. Currently, this means that vacant land and mixed use land – irrespective of their location – are oddly classified as 'Australian urban land' and subject to a zero dollar threshold (in the case of vacant land) or a A$54 million threshold (in the case of non-residential mixed-use land).
- What about acquisitions of interests in land-owning companies and trusts? Particularly companies and trusts that own a mix of assets, not just agricultural land. Will the revised Policy apply to every acquisition of an interest in any company or trust that holds an interest in agricultural land, or will the Government apply sensible thresholds which excludes minor interests (eg below 15 per cent) and companies and trusts whose interests in agricultural land comprises 50 per cent or less of their total asset values?
IMPACT OF AN A$15 MILLION THRESHOLD
Aside from the initial uncertainty that will exist until the revised Policy is released, the obvious impact is that many more foreign investment proposals will now require foreign investment clearance.
Like most government agencies, FIRB and the Foreign Investment and Trade Policy Division of The Treasury that supports its functions are on a tight budget and that places strains on the resourcing of its clearance function.
Being subject to foreign investment clearance creates a significant timing issue for foreign investors. In our experience with foreign government investors in agricultural land (who are currently subject to a zero dollar threshold), FIRB strives to process these applications within 30 days, but longer clearance times are not uncommon. While the reasons for this delay may be varied and case-specific, the likely increase in applications can only exacerbate the issue unless resourcing issues are addressed.
One possible means of addressing resourcing that has been raised is for FIRB to start charging fees on applications. The House of Representatives Standing Committee on Economics has suggested a flat fee of $500 to $1500. That is certainly a lot cheaper than New Zealand's equivalent, the Overseas Investment Office, where some application charges exceed NZ$20,000, but would nevertheless break with a long-standing tradition of no fees being charged. However, it is not clear to us that this approach would address the issue or is consistent with intended policy objectives; firstly, because there is not a formal direct correlation between the fees a government department receives and its funding (as that occurs through appropriations and allocations) – ie there is no guarantee that revenue from fees will go directly to resourcing FIRB; and, secondly, if the rationale is that the number of applications are likely to be 'chilled' as applicants are less likely to submit unless they have transaction certainty, how is this consistent with the objective of transparency and information gathering so as to be able to make better policy decisions?
Over time, one of the most significant drivers of application volumes will be the accumulation test. This is because, once that ownership threshold is reached, any acquisition of agricultural land – whether observable from space or a small paddock – will require clearance.
There are some measures that could reduce this impact on both foreign investors and FIRB.
- Minimum threshold. There must be a point at which a proposed purchase is so small that it could not possibly call into question Australia's national interest. Implementing a minimum threshold would ensure that minor land accumulations did not require foreign investment clearance.
- Accumulation period. Testing accumulation against a reasonable period such as one or two years (with the relevant threshold then refreshed) would be appropriate, rather than applying the same test in perpetuity, more so given how low the threshold is.
- Annual programmes. Ensuring that foreign investors in agricultural land can submit annual programme arrangements for pre-approval similar to the system that currently operates for non-agricultural land (and on a very limited case-by-case basis in respect of rural land). An annual programme arrangement would enable a foreign investor to obtain pre-approval for investments in agricultural land up to a maximum amount over a year. The pre-approval enables the foreign investor to overcome timing issues and costs associated with having to obtain an approval for each individual purchase, and also to remain competitive by being able to respond swiftly to opportunities in the market.
We think Australia's national interest will be best served if FIRB can concentrate its resources on significant investment proposals rather than having to shuffle a large number of inconsequential ones. The above measures would help achieve this.
IMPACT OF A FOREIGN OWNERSHIP REGISTER
According to the press release, from 1 July 2015 the Australian Taxation Office (ATO) will start collecting information on all new foreign investment in agricultural land regardless of value, and will also commence a stocktake of existing agricultural land ownership by foreign interests. The ATO register will also use land title transfer information from State and Territory governments.
The purpose of the proposed foreign ownership register for agricultural land is 'to strengthen reporting requirements and provide a clear picture of foreign investment in Australia’s agricultural sector'. We infer from this that the rationale for the register is that, if information were available about the levels of foreign ownership in agricultural land, community concerns may be mollified (to the extent that the actual level is considered acceptable) or perhaps substantiated (if considered too high) in which case policy action based on hard data can be more meaningfully explored.
Nevertheless, delivery on this rationale will depend on implementation of the register at a practical level. With that in mind, we set out some observations and questions concerning implementation.
- Is the ATO, as the nation's principal tax revenue collector, the appropriate body to be collecting data on landholding interests from State and Territory land titles offices in terms of infrastructure, functionality and personnel? Even if the ATO already has processes in place to monitor land transactions for capital gains tax purposes, clearly the retrospective 'stocktake', maintenance and updating of an agricultural land register of foreign interests is not simply an expansion of the ATO's current functions and operations but a new function which will require expenditure and investment in establishing new systems and processes – even if only to 'bolt-on' to current systems and processes. How does this sit with the announced programme of staff reductions at the ATO?3
- Does the fact that the ATO will be responsible for the foreign interest register mean that there will be greater tax scrutiny over agricultural land transactions? If not, as indicated above, there is not a real 'fit' with the ATO's operations other than the expediency that both the ATO and FIRB report to the Treasurer. So is there any risk that there will be pressures to justify or mitigate these additional operational costs via increased tax scrutiny of agricultural land transactions?
- How will 'foreign person' be defined for these purposes? We assume that despite being managed by the ATO it would be the definition in the Foreign Acquisitions and Takeovers Act that is adopted for this purpose. If so, how does one identify a 'foreign person' merely by a 'stocktake' of the land titles office records or even a company search? For example, this definition includes a 15 per cent upstream control test. What additional red-tape will the ATO need to impose in order to obtain this information? What powers, if any, would the ATO have to compel compliance with this survey? These are not just academic legal points, as they to go to assurances over the accuracy and reliability of the information and hence whether gathering this information justifies the cost.
Moving beyond implementation, in our own consultations with stakeholders, the most prominent concern has been the extent to which they will be required to disclose commercially sensitive information and whether it will be available to the public.
This has not been a concern with Queensland's existing Foreign Ownership of Land Register because the information required is quite limited and public disclosure of that information is made on an aggregated basis. Having the national register follow this approach would be consistent with the apparent purpose of the register, which is to enable the Government and the community to understand, at a macro level, the extent of foreign investments and its trends rather than to track individual investments. The Senate Standing Committee on Regional and Rural Affairs has previously recommended aggregated reporting of data such as country of origin4.
IS FOREIGN INVESTMENT IN AUSTRALIAN AGRICULTURE STILL WELCOME?
Yes, but it's a good question as, globally, restrictions on foreign investment in agriculture are on the rise.
In its press release the Australian Government emphasised that it continued to welcome foreign investment. Most official statements about foreign investment begin with a reminder of its importance.
In our view, the changes that have been announced are directed mostly at ensuring the Government is seen to be exercising oversight of foreign investment in order to win community acceptance of it. They are not intended to prohibit or limit foreign investment in agricultural land.