Key Points:

If you are a foreign person or are proposing to enter into a transaction with a foreign person, be aware of the new regime and the latest draft of the Regulations.

The release on 13 October 2015 of the revised draft Foreign Acquisitions and Takeovers Regulation 2015 informs stakeholders of some missing details applicable to Australia's foreign investment reforms which are due to commence on 1 December 2015.

On 23 November 2015 the Senate passed the Foreign Acquisitions and Takeovers Legislation Amendment Bill 2015 with two Greens amendments. These amendments were agreed to by the House of Representatives on 24 November, and the Bill assented to on 25 November.

The Foreign Acquisitions and Takeovers Fees Imposition Bill 2015 which was passed by the Senate two weeks prior is supplementary to the Bill, and sets various fees which are payable in respect of the different categories of applications.

In essence, the Bill is a rewrite of the existing Foreign Acquisitions and Takeovers Act 1975. We set out below some of the key items arising from the Bill and proposed Regulation.

The regime

The Treasurer will be able to make a range of orders in relation to significant actions and notifiable actions.

Significant actions

A significant action includes:

  • acquiring an interest in securities, assets or Australian land above the monetary thresholds set by the Regulations;
  • engaging in actions that change the control of corporations, unit trusts and businesses above the monetary thresholds set by the Regulations; or
  • an action prescribed by the Regulations, including a foreign government investor:
    • acquiring a direct interest in an Australian entity or business;
    • starting an Australian business; or
    • acquiring a legal or equitable interest in a mining, production or exploration tenement or an interest of at least 10% in securities in a mining, production or exploration entity.

An acquisition includes entering into an agreement or option (or materially altering it) including where it is dependent on the fulfilment of a condition.

Notifiable actions

Notifiable actions include:

  • an acquisition of a direct interest in an agribusiness over the relevant monetary threshold;
  • an acquisition of a substantial interest in an Australian entity over the relevant monetary threshold;
  • an acquisition of an interest in Australian land over the relevant monetary threshold; or
  • an action prescribed by the Regulations, including a foreign government investor:
    • acquiring a direct interest in an Australian entity or business;
    • starting an Australian business; or
    • acquiring a legal or equitable interest in a mining, production or exploration tenement or an interest of at least 10% in securities in a mining, production or exploration entity.

Notification requirements will apply to all Australian land, including agricultural land, commercial land, residential land or a mining or production tenement unless an exemption applies.

An interest in land does not include an interest under a lease or licence for less than five years.

Thresholds for entities and businesses

The current monetary thresholds that must be reached for an action to be classified as a significant action in relation to entities and businesses that are not agribusinesses are prescribed by the Regulation as:

  • $1,094 million for investors from USA, New Zealand, Chile, Japan and South Korea (barring sensitive businesses); and
  • $252 million for other foreign investors.

These thresholds do not apply if the significant or notifiable action has been prescribed by the Regulations, for example an action by a foreign government investor, meaning that any acquisition of those interests for any amount of consideration will be notifiable.

Revised thresholds for land

The monetary thresholds for land (for both significant actions and notifiable actions) are:

  • no threshold for residential land, vacant commercial land, mining or production tenement land or any land being acquired by a foreign government investor;
  • $15 million for investors acquiring agricultural land (other than for investors from USA, NZ, Chile or for an enterprise or national of Singapore or Thailand);
  • for all "other" land (for instance developed commercial land):
    • $1,094 million for investors from USA, NZ, Chile, Japan and South Korea;
    • $50 million for land being acquired by an enterprise or national of Singapore or Thailand used wholly or exclusively for a primary production business;
    • $55 million for land that is acquired by a foreign person (except for investors from USA, NZ, Chile, Japan and South Korea) where such land meets the conditions set out in section 48(6) of the Regulation including the land is not vacant commercial land, the interest being acquired gives a right to occupy the land, and it is being used for various specified purposes like, it will be leased to the Commonwealth, a State or Territory or the land will be fitted out for a business providing storage of bulk data; and
    • $252 million for all other foreign investments.

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.

Like the thresholds for entities and businesses, these thresholds do not apply if the Regulations exclude their application, for example for some acquisitions of land from the Commonwealth.

Treasurer's powers explained

If a party notifies the Treasurer of a significant action, the Treasurer has 30 days (unless extended by up to 90 days) to determine whether to issue a "no objection" notice, impose conditions on the proposed action, or block it altogether.

If the Treasurer fails to notify the notifier (or its nominee), or publish the decision in the Gazette before the end of 10 days after the decision is made (and the person has not taken the action by the end of the decision period), then the Treasurer is barred from making an order or decision relating to the significant action.

If a party does not inform the Treasurer of a significant action, the Treasurer may make a disposal order blocking or unwinding the significant action if the Treasurer determines that the significant action is contrary to the national interest.

The acquisition of the notifiable action cannot proceed unless the Treasurer gives his approval, and then only subject to the conditions of that approval.

Disposal orders can be made by the Treasurer if notifiable actions proceed without the Treasurer's approval.

Exemptions and exclusions

The Bill provides for exemptions and exclusions that a foreign person may be able to take advantage of in a given set of circumstances.

For instance, a foreign person will not need to notify the Treasurer of the acquisition:

  • of a new dwelling where an exemption certificate (previously referred to as an advanced off-the-plan certificate) has been granted in advance to a developer selling the new dwelling; and
  • where the acquisition of the interest in land is not a significant action, like an acquisition of agricultural land valued under $15 million.

Offences and civil penalties

A person may commit an offence or become subject to a civil penalty if, for example, the person:

  • fails to give a notice to the Treasurer before taking a notifiable action;
  • gives a notice to the Treasurer of a proposed significant action and takes the action before the Treasurer gives a "no objection" notice or becomes barred from making an order or decision;
  • contravenes an order by the Treasurer in respect of a significant action; or
  • contravenes a condition in a "no objection" notice or an exemption certificate.

The Bill provides for additional civil penalties in respect of residential land (see below).

Important concepts

A broader definition of foreign person

The concept of a foreign person will include:

  • an individual not ordinarily resident in Australia (including expatriate Australians);
  • 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 person prescribed by the Regulation.

Although a "foreign person" includes expatriate Australians, the Regulations exclude the application of the Act for land acquisitions by Australian citizens not ordinarily resident in Australia.

Definition of foreign government investor

The concept of a foreign government investor will include:

  • a foreign government (whether it be at national or sub-national level); or
  • a corporation, trustee of a trust, or a limited partnership in which:
    • a foreign government (or a foreign government investor) or its agent, alone or together with one or more associates, holds a substantial interest; or
    • foreign governments (or foreign government investors) or their agents of more than one foreign country (or parts of more than one foreign country), together with any one or more associates, hold an aggregate substantial interest.

What is a substantial interest?

This is where a person (alone or together with an associate or associates) holds at least a 20% interest in an entity, which brings the Act into line with the Australian takeovers regime. Similarly, for trusts, a substantial interest is a beneficial interest in at least 20% of the income or property of the trust.

What is an aggregate substantial interest?

This is where two or more persons (who are not associates to each other), together with any associate or associates of any of them, hold:

  • at least a 40% interest in an entity; or
  • beneficial interests in at least 40% of the income or property of the trust.

What is a direct interest?

A direct interest in an entity or business means an interest of:

  • at least 10% in the entity or business;
  • at least 5% in the entity or business if the person who acquires the interest has entered a legal arrangement relating to the business of the person and the entity or business; or
  • any percentage in the entity or business if the person who acquired the interest is in a position to influence or participate in the central management and control, or policy, of the entity or business.

Associate

The meaning of "associate" under the new provisions is broader than the definition of the same phrase in the current Act. For example, an "associate" of a person under the new definition includes any person with whom the person is acting, or proposes to act, in concert in relation to an action by the person to which the Act may apply. In addition, the Bill provides for additional classes of entities which are treated as an associate in the context of an acquisition of an interest in residential land.

A wider meaning of agricultural land

Agricultural land means land in Australia that is used, or that could reasonably be used, for a primary production business consistent with the Income Tax Assessment Act, which is broader than the current concept of "rural land" being land in Australia used wholly and exclusively for carrying on a business of primary production.

Register for agricultural land

All foreign persons who hold interests (including a right to occupy under a lease or licence likely to exceed 5 years) in agricultural land as at 1 July 2015 must register those interests by 31 December 2015 with the Australian Taxation Office (ATO) regardless of the value of that land. The ATO will use this information to develop a national register to be made available to the public in 2016.

Register for water entitlements

The amendments to the Bill passed by the Senate on 23 November and agreed to by the House of Representatives on 24 November will require all foreign persons who hold interests in water entitlements to register those interests. The obligations around water entitlements will be prescribed in further legislation to be enacted before 1 December 2016.

An expansion of what constitutes agribusiness

Agribusiness will capture primary production businesses plus certain downstream activities with links to primary production. Acquisitions of a direct interest in agribusiness over $55 million (with exceptions for investors from the USA, New Zealand and Chile) will need to be notified to the Treasurer.

Changes to investment in mining and petroleum tenements

All private foreign persons need to apply to acquire a direct interest or a substantial interest in:

  • a mining and petroleum production tenement irrespective of the value of the transaction;
  • an exploration and prospecting tenement where it provides a right to occupy land (either agricultural, or commercial land, subject to the monetary thresholds above) for a term of more than 5 years (including any extension or renewal).  

Foreign government investors must notify and get prior approval to acquire or increase their interest in:

a legal or equitable interest in a mining or petroleum prospecting, exploration, mining or production tenement regardless of the value of the investment; or

an interest of at least 10% in securities in a mining or petroleum prospecting, exploration, mining or production tenement regardless of the value of the investment.

Fees for notices

Application fees will be introduced for notifications of acquisitions, applications for exemption certificates and variations to exemption certificates and objection notices.

The fees for notifications for both residential and agricultural land start from $5,000.

Exemption certificates (some were previously referred to as advanced off-the-plan certificates) and investments in commercial land (that is not vacant), business and the agriculture sectors, as well as acquisitions of direct interests in agribusiness and acquisitions of securities or assets in an entity or Australian business, will attract application fees from $25,000.

The application fee for a variation of an exemption certificate will be $5,000 and the fee to acquire an interest in vacant commercial land will be $10,000.

Exemption certificates for the sale of off-the-plan new dwellings will also attract a further fee payable every six months based on the number of foreign sales achieved in that six month period.

If the agreement covers more than one action for which a fee is payable (disregarding any acquisitions of interests in residential land in which a separate fee is payable for each acquisition of an interest), the fee payable will be the highest of the amounts for those actions.

A fee of $10,000 will be payable in relation to one or more actions that constitute an internal reorganisation.

These fees are to be indexed each financial year noting, however, that a ratchet applies and the indexation will only allow the fees to increase.

Penalties for offences

The Bill sets out tough criminal and civil penalties. These include maximum criminal penalties of $135,500 for individuals and $675,000 for companies, up to three years' imprisonment and divestment orders, including for developers with exemption certificates who fail to advertise their new dwellings in Australia in accordance with the conditions of their exemption certificate.

The additional civil penalties in relation to the acquisition of residential land are extensive.

For example, the penalty applicable to a foreign person (who is not a temporary resident) for not notifying the acquisition of an existing dwelling or not complying with a condition of acquisition is the greater of:

  • the amount of capital gain;
  • 25% of the consideration of the acquisition; and
  • 25% of the market value.

It is likely that any penalty paid equivalent to the amount of capital gain will not be deductible for the purposes of calculating tax payable to the ATO.

Infringement notices will be introduced for individuals and companies.

These penalties potentially extend to third parties such as company officers, lawyers, accountants and real estate agents.

Unpaid penalties for failure to notify, for entry into agreements in contravention of the law, for contravening an order or for contravening a condition will result in a charge against the land. This will need to be cleared before transfer of the land much like the charge for unpaid land tax or council rates.

What should you do?

If you are a foreign person or are proposing to enter into a transaction with a foreign person, be aware of the new regime and the latest draft of the Regulations. Seek assistance to ensure that you are fully aware of your rights and obligations before entering into any agreements.