New foreign investment rules came into effect in Australia on 1 December 2015. The basic process (including a 30 day examination period and a 10 day notification period) remains the same, but there are a number of important changes to the way Australia’s foreign investment screening regime works.
What is new?
- ‘Notifiable actions’ and ‘significant actions’: Transactions that are ‘caught’ by the legislation are either ‘notifiable actions’ (transactions which must be notified, with failure to do so being an offence) or ‘significant actions’ (these technically speaking do not have to be notified, but the Treasurer has the power to block or unwind them unless they are notified and a statement of no objection is received).
The following acquisitions by foreign persons are ‘notifiable actions’:
- acquisitions of 20% or more in Australian entities valued above the current monetary thresholds (currently $252 million for most investors, and $1094 million for investors investing in non-sensitive businesses directly from certain treaty countries);
- acquisitions of ‘direct interests’ (generally, 10% or more; or 5% or more when coupled with certain kinds of arrangements; or transactions which result in the acquirer having influence, like being able to appoint a director) in Australian agribusinesses above the current monetary thresholds (currently $55 million investment value, with different thresholds for certain treaty country investors);
- acquisitions of interests in Australian land above the current monetary thresholds (which differ depending on the type of land and the nature of the acquirer, and can be nil);
- acquisitions of 5% or more in an Australian media business; and
- acquisitions of ‘direct interests’ (defined above) or interests in land by foreign government investors, or a foreign government investor starting a new business in Australia.
In general, offshore transactions are not caught by the mandatory filing regime, with the important exception of offshore transactions involving a foreign government investor acquirer (see ‘foreign government investors’ below).
Significant actions cover a broader range of transactions, including a range of ‘control’ transactions both in Australia and overseas (if there is a sufficient connection to Australia). It remains to be seen whether the introduction of fees will affect acquirers' decisions about whether to seek approval for significant actions that are not notifiable actions.
- Relaxation around definitions of ‘substantial interest’ and ‘aggregate substantial interest’. The concepts of ‘substantial interest’ and ‘aggregate substantial interest’ are important ones under Australia’s foreign investment rules, as they are used to determine whether a person is a foreign person, whether a person is a foreign government investor and to determine whether an acquisition of an Australian entity is a notifiable action. The threshold for a ‘substantial interest’ has increased from 15% to 20%. While the concept of ‘aggregate substantial interest’ (cumulative 40% interests) has been retained, certain listed companies are now able to disregard small shareholdings (below 5%) to determine whether the 40% threshold is met for purposes of determining 'foreign person' status. While it is still the case that a listed company’s status as a foreign person could change unexpectedly, this should make it less likely that ASX-listed companies that are essentially Australian will find themselves caught as ‘foreign persons’ under Australia’s foreign investment rules.
- New concepts of land. The new foreign investment rules have done away with the concept of ‘Australian urban land’, which arbitrarily captured a wide variety of transactions. The new legislation covers agricultural land, commercial land, residential land and certain mining tenements (noting that land can be classified as more than one type), and regulates all land transactions to some extent (with different thresholds applying to different kinds of land).
- Application fees. As flagged in our previous alerts, all applications will now incur fees. The fees vary depending on the kind of application being made, but most business transactions will attract a fee of $25,000 ($100,000 for transactions valued over $1 billion). In practice, applications will still be lodged online, the fee will be assessed based on information provided in the application and a unique payment identifier will be provided to the applicant, who must then pay the fee in order to start the statutory ‘clock’ on the application.
- Flexibility. A key feature of the new rules is the degree to which flexibility has been built into the legislation for changes to be made through regulation. That is, the regulations may provide that the legislation or specified provisions of the legislation do not apply to certain kinds of acquisitions, interests, businesses or persons. The Treasurer also has power to grant exemption certificates to a particular person specifying that an interest does not give rise to a ‘significant action’ or ‘notifiable action’. At present, these powers are limited to certain land acquisitions, and for underwriters who acquire securities in the ordinary course of their underwriting business, but the legislation provides that regulations may allow for additional kinds of exemption certificates in the future. Finally, the Treasurer has the power to grant relief from application fees in exceptional circumstances (although we understand that this will only be granted in very limited circumstances).
- Special rules for acquisitions of agricultural land. The new legislation includes special rules relating to acquisitions of agricultural land:
- agricultural land is any land that is or could reasonably be used for primary production;
- existing ownership of agricultural land must be registered with the ATO by 31 December 2015, and any new purchases must also be registered;
- the threshold for agricultural land acquisitions (certain treaty country investors have different thresholds) is a cumulative $15M (taking into account past acquisitions and the current acquisition).
It remains to be seen how the element of judgment inherent in the definition of agricultural land will affect registration and calculation of thresholds.
Winners and losers
- Foreign government investors. Perhaps the biggest loser in the new regime, foreign government investors have formally been captured by the legislation, with little relief. The definition of ‘foreign government investor’ will continue to capture a wide variety of acquirers where the connection to any foreign government is tenuous at best, tracing rules may then ‘infect’ targets in Australia with foreign government investor status, most activities by any of the foregoing – including offshore transactions – will require approval as notifiable actions (that is, mandatory approvals) and substantial application fees will apply. The following limited relief is available:
- unlike under the prior regime, foreign government investors will be eligible to apply for exemption certificates for programs of land acquisition;
- foreign government investors already operating in Australia will be able to establish wholly owned subsidiaries to carry on existing business without seeking FIRB approval;
- there is a de minimis rule that excepts offshore transactions with very little connection to Australia out of the mandatory filing regime, although in our experience thus far very few transactions manage to fit within this exception.
- Commercial property developers. Commercial property developers are the big winners under the new regime, with the following important changes:
- the threshold for most commercial property transactions has been raised from $55M to $252M (the higher $1094M still applies to investors from certain treaty countries);
- an expansion of the concept of commercial property to capture land that might previously have been considered residential (and therefore subject to stricter regulation).
- Moneylenders. Another big winner is the ordinary course moneylender. The previous moneylending exemptions were narrowly applied and technically failed to exempt an array of common security transactions. The new legislation ensures that security trustees that are subsidiaries of the lender and lenders that are foreign government investors are much less likely to have to apply for approval either to take security or to enforce it (in the latter case, so long as assets acquired as a result of enforcement are not retained for 6 months (where the foreign government investor lender is not an ADI) or 12 months (where the foreign government investor lender is an ADI).