The rules regulating foreign investment into Australia are generally set out in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA).  However, Australia’s Foreign Investment Policy (Policy) is increasingly being used to impose additional notification and approval requirements for foreign investors that are more onerous than the legal requirements under the FATA.  Recent changes to the Policy have highlighted this trend.

Background

Foreign investors generally need to obtain approval from the Foreign Investment Review Board (FIRB) before investing into Australia; however certain investments under the specified monetary thresholds can proceed without approval.  FIRB will only approve an investment proposal by a foreign investor if it is not contrary to the Australian national interest.  The Policy sets out some guidelines as to what factors the Treasurer will consider in determining if a proposed investment is contrary to Australia’s national interest.

There have also been some high profile (and somewhat controversial) announcements concerning further proposed changes to the foreign investment rules which are set out below.

Summary of changes

The recent changes to the Policy (implemented with effect from 1 March 2015) primarily related to decreasing the threshold for acquisitions of rural land by foreign investors.

Further changes that are proposed to take effect from 1 July 2015 include:

  • fees for FIRB applications (up to 1% of the investment value for certain land acquisitions)
  • greater information gathering, review and audit powers for the Government to ensure compliance
  • greater penalties for non-compliance
  • new, lower thresholds for acquisitions of Australian agribusinesses
  • restrictions to advanced ‘off the plan’ approvals for developers, and
  • changes to the different categories of land with consequent changes to the notification requirements for investment in those land categories.

Changes from 1 March 2015

These changes affect the purchase of land that, at the time of the acquisition, is used wholly and exclusively for carrying on a business of primary production (Rural Land).  Prior to the changes, foreign investors could purchase Rural Land valued up to AUD$252 million without the prior approval of FIRB.  This threshold applied to each separate acquisition by a foreign investor and was not restricted by the cumulative value of Rural Land already held by that investor.

From 1 March this year, any acquisition of Rural Land by a foreign investor with a total portfolio of Rural Land valued at more than AUD$15 million (including the proposed purchase) will require prior FIRB approval.  This is a significant change to the current investment policy as foreign investors will need to seek approval for even the smallest acquisitions of Rural Land if their total holding of Rural Land is valued at AUD$15 million or more – regardless of where the land is located and its intended usage following the purchase.

Proposed changes from 1 July 2015

On 26 February 2015, the Australian Treasury Department released a consultation paper titled ‘Strengthening Australia’s Foreign Investment Framework’ (Discussion Paper).  The Discussion Paper provided some details of the proposed changes to the foreign investment rules and requested feedback from stakeholders.  Although these changes are still in the consultation stage, the Discussion Paper gives a clear picture of the types of changes that are likely.

Penalties and divestment

In a recent parliamentary enquiry, FIRB was found to be essentially ‘asleep at the wheel’.  No foreign investors had been prosecuted for breaches of the FATA in the past eight years despite evidence of widespread non compliance (particularly in the residential land sector).  Enforcement of FIRB approval conditions was minimal and FIRB’s capacity to identify and penalise foreign investors who breached the rules was found to be inadequate.

However, following this enquiry, the Treasurer has clearly adopted a harder line and FIRB is now actively investigating a number of potential breaches.  In fact, the first divestiture order in years was issued in March 2015 to a company associated with a Chinese billionaire who had bought an AUD$39 million mansion on Sydney harbour without approval.

The proposed changes to the foreign investment rules include a wider range of potential penalties such as:

  • criminal penalties including fines and imprisonment
  • civil penalties, including forced divestiture and fines (with fines ranging from fixed amounts, to a proportion of the purchase price, to any capital gain made on sale), and
  • penalties for any third parties who assist a foreign investor to breach the rules (this will impact real estate agents, legal advisers and accountants etc. who have assisted in putting in place structures that facilitate the violation of the FATA).

Additional information gathering powers and the introduction of fees

The government is also proposing an increase in information gathering, review, and enforcement activities relating to foreign investment.  It is proposed that much of that activity will be undertaken by a new department within the Australian Taxation Office, which already has well established investigatory and data matching capabilities and experience in enforcement proceedings.

However, the Government’s view is that the costs associated with enforcing the FATA and Policy should not fall on the Australian taxpayer.  On that basis they are proposing to introduce a new multi level fee system for different types and values of acquisitions to fund the additional administrative work associated with regulation of foreign investment into Australia.

Relevantly, the proposed fee regime set out in the Discussion Paper includes the following:

  • for acquisitions of Rural Land and Residential Real Estate a foreign investor would pay AUD$5,000 for any acquisition valued at AUD$1 million or less and a further AUD$10,000 for each subsequent million dollars (for example, a property valued at $10 million will have an application fee of AUD$95,000)
  • for acquisitions of Non-Residential Urban Land and Commercial Real Estate a foreign investor would pay a fixed fee of AUD$10,000 and AUD$25,000 respectively, and
  • for acquisitions of Businesses (including agribusinesses) a foreign investor would pay a fixed fee of AUD$25,000 (increased to AUD$100,000 where the value of the assets of the business is greater than AUD$1,000 million).

The Government has also confirmed the establishment of a national foreign ownership of land register which will be used to monitor foreign investment in Rural Land.  The relevant information will be collected from the Australian Taxation Office and each State and Territory’s land titles offices.  It is expected that a similar register will also be implemented for residential land in due course.

Off-the-plan approvals

The Discussion Paper specifically addresses the process for advanced off-the-plan FIRB approval.  Currently, property developers who seek to construct 100 or more residential apartments in a single development can apply for advance, off-the-plan approval allowing sales to foreign investors without the need for those foreign investors to obtain individual FIRB approval.  This advance approval is only granted on the condition that the property developer markets the properties to domestic as well as foreign buyers, a condition that the Australian Government has previously had difficulty enforcing.

The Discussion Paper sets out two proposed amendments to off-the-plan approvals, while retaining the obligation to actively market the properties in Australia.  Firstly, it has been recommended that a fee should be introduced calculated on value of properties sold to foreign buyers.  The second proposed amendment is that the total value of all apartments that can be bought by a single foreign investor should be limited to AUD$3 million in any one single development.  Both of these proposed changes could have significant impact on the utility of a property developer acquiring advance off-the-plan approval and would need to be factored into the sale price to foreign buyers.  The broader range of penalties is also expected to be used to ensure that the conditions are satisfied.

Amendments to the FATA

The Discussion Paper calls for comments in relation to proposed amendments to definitions in the FATA, including ‘Rural Land’ and ‘Australian Urban Land’.

‘Rural Land’ is currently defined as ‘land used wholly or exclusively for carrying on a business of primary production’ and ‘Australian Urban Land’ is everything else.  This understandably causes some confusion as mining leases, industrial properties and mixed use farming land therefore all fall within the definition of Australian Urban Land.

The Australian Government obviously regards residential land as a particularly sensitive sector and there are some clear rules in the Policy as to when acquisitions of residential land will be contrary to the national interest.  The recent changes to the Policy regarding the lower threshold for Rural Land acquisitions also indicate a growing awareness of the national interest significance of foreign investment into Australian farm land.

One positive that may come out of the proposed amendments is a new category of ‘other’ land that is not subject to the same strict notification and approval rules as residential land and farm land.  This is likely to include industrial and commercial land (including mining tenements) and may be subject to higher monetary thresholds before FIRB approval is required.

Next steps

McCullough Robertson recently hosted the Chairman of FIRB, Brian Wilson, and executive member of FIRB Board, Rob Donnelly, at our offices for a discussion forum on the matters outlined in the Discussion Paper and the policies and practices of FIRB generally.

The Chairman commented that FIRB continues to approve the vast majority of applications once sufficient information about the transaction and the foreign investor has been provided, and this is likely to continue.  The comments made by the Chairman were in line with the Australian Government’s position that foreign investment is welcomed in Australia.