Australia’s foreign investment regime is about to undergo a shake-up following the recent introduction into Parliament of the following package of bills:
- Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015
- Foreign Acquisitions and Takeovers Fees Imposition Bill 2015
- Register of Foreign Ownership of Agricultural Land Bill 2015.
Broadly, the aim of this package is to strengthen the integrity of Australia’s foreign investment framework by increasing transparency of foreign ownership and promoting stronger enforcement and better compliance with the foreign investment rules. Central to the foreign investment review framework is the need to strike the right balance between maintaining community confidence in foreign investment, protecting the national interest and ensuring that Australia remains an attractive destination for foreign investors.
In summary, the key changes are:
- Extending the meaning of foreign person so that it applies to foreign governments
- Increasing the substantial interest threshold for an entity or trusts from 15% to 20%
- Dividing transactions between notifiable actions and significant actions
- Lowering screening thresholds for investments in Australian agriculture to ensure greater scrutiny
- Establishing a register of foreign ownership of agricultural land and broadening its meaning
- Imposing application fees
- Introducing civil penalties and additional, tougher criminal penalties.
As the changes apply from 1 December 2015, foreign persons or parties dealing with foreign persons, need to be aware of the new foreign investment regime to ensure compliance. For more information, please contact Carrie Follas, Marko Komadina or Teresa Lusi.
Meaning of foreign person expanded
The Bill amends the meaning of foreign person so that it now means:
- an individual not ordinarily resident in Australia;
- a corporation (or a trustee of a trust) in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds a substantial interest;
- a corporation (or a trustee of a trust) 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;
- a foreign government; and
- any other person prescribed by the regulations.
Increasing substantial interest threshold
Under the Bill, the substantial interest threshold has increased from 15% to 20%. This means a person holds a substantial interest in an entity (being a corporation) or trust if the person holds:
- for an entity – an interest of at least 20% in the entity; and
- for a trust (including a unit trust) – a beneficial interest in at least 20% of the income or property of the trust.
The meaning of aggregate substantial interest remains unchanged and requires that two or more persons hold an aggregate interest of at least 40% in the entity or beneficial interests in at least 40% of the income or property of the trust.
In determining if a person holds a substantial interest, or two or more persons hold an aggregate substantial interest, interests of associates of the person or persons are also taken into account. Therefore, the ‘foreign person’ definition would take into account indirect interests that make a corporation or trustee a foreign person.
Notifiable actions, significant actions, thresholds and Treasurer’s powers
The Bill gives the Treasurer powers to make orders in relation to significant actions and notifiable actions.
A significant action is largely an action to acquire interests in securities, assets or Australian land, or otherwise engage in action that changes the control of corporations, unit trusts and businesses, that have a connection to Australia. An action is only a significant action if the entity, business or land meets the applicable monetary threshold test. A different threshold test applies for certain significant actions taken in relation to agribusiness.
Broadly, a notifiable action is a proposed action to acquire:
- a direct interest in an agribusiness;
- a substantial interest in an Australian entity; or
- an interest in Australian land.
The regulations may also prescribe actions that are significant actions or notifiable actions including a foreign government investor acquiring a direct interest in an Australian entity or business or an interest in Australian land or a foreign government investor starting an Australian business.
Unless an exemption applies, notification requirements will apply to all Australian land including agricultural land, residential land, commercial land or a mining or production tenement. For example, foreign investors from USA, NZ, Chile or an enterprise or national of Singapore or Thailand are not required to apply for approval to acquire agricultural land. Additionally, foreign investors from USA, NZ or Chile are not required to notify the Treasurer of an acquisition of a direct interest in agribusiness.
The current monetary thresholds for a significant action in relation to entities, businesses and agribusinesses and for land (for both significant actions and notifiable actions) are set out in the table below.
Click here to view the table.
If a foreign person notifies the Treasurer of a significant action, the Treasurer has 30 days to issue a statement of no objection, impose conditions on the proposed action or block it altogether as being contrary to the national interest. If the significant action has already taken place which is contrary to the national interest, the Treasurer may make a disposal order blocking or unwinding the action.
Notifiable actions must be notified to the Treasurer. However, if the Treasurer’s approval is not obtained to a notifiable action and the acquisition proceeds, the Treasurer can make a disposal order blocking or undoing the action.
Register for and broadening meaning of agricultural land
All foreign persons holding interests in agricultural land as at 1 July 2015 must register those interests with the Australian Taxation Office (regardless of the value of that land). All existing holdings must be registered by 31 December 2015 and any new interests must be registered within 30 days. An interest includes a freehold interest and a right to occupy agricultural land under a lease or licence where the term is likely to exceed 5 years.
The meaning of agricultural land is broadened to mean land in Australia that is used, or could reasonably be used, for a primary production business. ‘Primary production business’ has the same meaning as in the Income Tax Assessment Act 1997 (Cth) and essentially refers to production resulting from the cultivation of land, animal husbandry/farming, horticulture, fishing, viticulture or dairy farming.
Foreign persons must pay significant application fees for notifications of acquisitions, applications for and variations to exemption certificates, and objection notices. Failure to do so will mean notices and applications will not be considered by the Treasurer.
The fees for certain notifiable actions and exemption certificates is set out in the table below, starting from $5,000 for notifications in respect of residential and agricultural land and $25,000 for exemption certificates and acquisitions in direct interests in agribusiness and securities or assets of an Australian entity or business.
Click here to view the table.
Tie breaker rules remove doubt about the relevant fee that apples if multiple fees could apply and if a transaction covers multiple acquisitions.
Offences and civil penalties
The Bill imposes stricter criminal and civil penalties commensurate with the seriousness of the contravention, sending a clear message and strong disincentive to foreign investors and developers for non-compliance.
The penalties range from maximum criminal and civil penalties of $135,000 for individuals and $675,000 for companies, up to 3 years’ imprisonment and divestment orders, to issuing infringement notices for less serious offences. Developers will be caught if they fail to advertise new dwellings in Australia in accordance with the conditions of their exemption certificate.
Foreign persons who fail to notify the acquisition of interests in residential land or do not comply with a condition of acquisition will face tougher civil penalties. For example, the penalty for a foreign person (who is not a temporary resident) for failing to notify the acquisition of an existing dwelling or not complying with a condition of acquisition is the greater of:
- the amount of the capital gain;
- 25% of the consideration of the acquisition; and
- 25% of the market value.
These criminal and civil penalties are far reaching and could potentially extend to third parties including company officers, lawyers, accountants and real estate agents.
The Treasurer will have power to register a charge against the land to secure payment of unpaid civil penalties for failure to notify or not complying with a condition of acquisition, among other circumstances. This is akin to a charge for unpaid land tax or council rates and will need to be cleared before transfer of the relevant interest in land to a third party can occur.