THINGS YOU NEED TO KNOW

  • Changes to foreign investment rules will allow certain Korean, Japanese and Chilean enterprises to bypass Foreign Investment Review Board (FIRB) approval for acquisitions of certain types of Australian assets.

WHAT YOU NEED TO DO NEXT

  • Due to the restrictive definitions of the changes, investors are advised to seek legal advice before relying on increased thresholds.

Changes to the foreign investment rules for South Korean, Japanese and Chilean investment into Australia were announced as part of the Korea-Australia Free Trade Agreement (KAFTA), Japan-Australia Economic Partnership Agreement (JAEPA) and Australia-Chile Free Trade Agreement (ACFTA).

These agreements are now all in effect with KAFTA and ACFTA coming into force on 12 December 2014 and JAEPA coming into force  15 January 2015 through amendments to the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) (Regulations).

Background

These three agreements seek to provide greater access for foreign investors to Australian investment opportunities while also allowing Australian exporters and investors increased market access.  In particular KAFTA and JAEPA intend to enhance two of Australia’s most important trading relationships by reducing trade restrictions and encouraging foreign investment into Australia.

Key impacts

The Regulations set out the monetary thresholds below which foreign investors do not require the approval of the FIRB for acquisitions of certain types of Australian assets.  The general threshold for farm land, non-land business assets and shares in certain companies is AU$252 million while the general monetary threshold for acquisitions of developed commercial real estate is AU$55 million.  In both instances these have now been increased to AU$1,094 million for South Korean, Japanese and Chilean investors (although this excludes investment into certain sensitive sectors).

However, the benefit of this increased threshold is unlikely to be available to many investors.  This is because of the very restrictive definition of ‘enterprise’.Importantly, it does not cover an Australian subsidiary of a relevant investor, which will in practice exclude most investment structures (particularly for investment into Australian assets rather than shares) from accessing these increased thresholds.  This limitation is the same for all countries with the increased threshold (including USA and New Zealand).

It is important to note that restrictions still apply to the acquisition of most types of Australian urban land, regardless of value or the nationality of the investor, and further changes are also expected in relation to the rural land thresholds.

Benefits

South Korean, Japanese and Chilean investors who are able to satisfy the restrictive definition in the regulation will enjoy a competitive advantage over other foreign investors investing in Australia.  This is because they will be able to avoid the FIRB approval process for most transactions and most importantly the delays FIRB conditions can cause in reaching unconditional agreements.  However, given the technical nature of these rules, the significant penalties that may be imposed for breaches of the FIRB notification and the likely increase in FIRB audit activity, it is important investors seek professional legal advice before relying on these increased thresholds.