Key Points:

The data in the Working Paper acts as a benchmark for assessing the impact of Free Trade Agreements and changes to the foreign investment regime on particular sectors of Australia's economy.

Calendar year 2015 saw Australia enter into several free trade agreements and the introduction of changes to Australia's foreign investment regime on 1 December. With these changes front of mind, in January 2016 the Treasury Department published a working paper, "Foreign Investment into Australia", setting out key findings and trends in this space, with a number of key takeaway points for a variety of sectors.

Foreign investment in Australia at a glance

Despite there not being a single authoritative source of foreign investment data, the Treasury report was able to set out a number of trends in foreign direct investment in Australia for 2014-2015.

One of Treasury's key findings was that the benefits of foreign investment in Australia are not well understood, despite the total value of foreign investment in Australia standing at $2.8 trillion at the end of 2014.

The available data suggests that, by international standards, the levels of foreign direct investment in Australia are low. According to the International Monetary Fund, Australia's foreign direct inflow was less than 40% of its GDP; by comparison, the United Kingdom's amounted to 60%, and New Zealand's was 43%, of GDP.

Mining and quarrying

Key findings

The key findings were:

  • there are 26 major projects in Australia worth $2 billion or more either underway or in early stages;
  • most of these projects are joint ventures, with 90% of these projects having some level of foreign ownership;
  • the highest levels of foreign investment in these projects are from the United Kingdom (27%) and the United States (26%); and
  • surprisingly, China's share of foreign investment in these projects is only 3%.

Between 2010 and 2014, there was significant growth in the amount of foreign direct investment in mining and quarrying, with stocks increasing from $147.5 billion to $264.7 billion in this period. Not only was there significant growth during this period, but the Australian Government's current approach to liberalising international trade (for example, in considering free trade arrangements with the EU), also suggests that this is an area of expected continuing growth.

For example, during the Trans-Pacific Partnership Agreement (TPP) negotiations concluded on 6 October 2015, mining and quarrying was an area of focus, with the TPP looking to promote foreign investment in resources and energy in Australia. This will be done by increasing the screening threshold, above which private foreign investments in the mining and energy sectors are considered by the Foreign Investment Review Board, from $252 million to $1.09 billion for all TPP counties (except in relation to uranium and plutonium extraction and nuclear facilities).

Future trends

We expect that when the TPP becomes operational, Australian companies will have the opportunity to expand their exports and benefit from:

  • duty-free access for exports of mining equipment. The TPP will lock in tariffs at zero in countries where Australian exports already have duty-free access; and
  • TPP countries agreeing to guarantee access for Australian mining equipment, technologies and services providers.

This, combined with the TPP focus on promoting foreign investment in resources and energy, should see the trend of growth in the amount of foreign direct investment in mining and quarrying in Australia continue to increase.

Agriculture

Key findings

Agriculture has been identified as an area for potential significant growth in foreign investment. Despite this opportunity, in the past, the Treasury's understanding of foreign investment in this sector has been limited because of a lack of data.

Nonetheless, this is an area where there is still tremendous potential for growth, primarily because agricultural assets in Australia are still primarily locally owned. In 2013, local ownership of agricultural business in Australia exceeded 96% and, for agricultural land, just under 90% of Australia's farmland is fully Australian-owned.

The establishment of the ABS Agricultural Land and Water Ownership Survey is an attempt to get more data and thus a clearer picture of foreign agricultural land ownership. On 1 July 2015, the Australian Taxation Office also began to collect information on new foreign investment in agricultural land, such as the location and size of property and the size of the interest acquired. This data will be made available beginning in 2016.

The Government is also currently seeking views on a proposed national register of foreign ownership of water access entitlements. This will further enhance transparency of foreign ownership in the agricultural sector and be a useful tool to gauge emerging investment trends.

Despite a lack of data, the available data reflects the importance of agriculture as a sector for the Australian economy, particularly following entry into various free trade agreements.

For example, there has been a dramatic increase in food exports since entry into the Korea-Australia Free Trade Agreement. In 2015, Australian exports of fresh beef to Korea increased 37% to $396.6 million and exports of fresh cherries increased 1,105% to $4.3 million.

Similarly, following entry into the Japan-Australia Economic Partnership Agreement, Australian exports of fresh table grapes to Japan have increased 1,025% to $6.5 million and exports of shelled almonds have increased 1,413% to $5.4 million.

Future trends

We expect that in the agricultural sector, a key focus going forward will be on obtaining comprehensive data. Opportunities in this sector will continue to grow as we better understand data from:

  • as set out above, the ABS Agricultural and Land and Water Ownership Survey; and
  • a register of foreign ownership of water access entitlements, if established.

The benefits of the various free trade agreements are being realised and we expect that food exports, particularly to Korea, Japan, China and the TPP countries (when the TPP becomes operational) to continue to grow.

However, changes to the foreign investment regime, which has introduced a general business threshold applied to purchases of agricultural land will increase the red tape for foreign investors in agricultural land and may act as a deterrent to foreign investment.

Additionally, the Government has announced a new set of standard conditions to be imposed on foreign investment approvals which will require multinational companies to comply with Australian tax law and ATO directions to provide information in relation to the investment. These conditions have been drafted broadly and may also prove a burden to foreign companies seeking to invest in Australia.

Surprising trends: who's investing in Australia

What may come as a surprise are the overseas sources of foreign investment. The United States remains the largest source of foreign direct investment into Australia, followed by the United Kingdom and then Japan. China is a relatively minor source of foreign direct investment into Australia and currently represents only 4.4% of the total (despite its becoming the largest source of proposed foreign direct investment in Australia in 2013-2014).

In the context of the China-Australia Free Trade Agreement and the continued rise of real estate applications from $25.8 billion in 2003-04 to $74.6 billion in 2013-2014, we expect that China's share of foreign direct investment into Australia will continue to grow (particularly as it is starting from a low base).

Conclusion: Foreign investment is an opportunity for Australia

The increased numbers of multilateral and bilateral trade agreements aim to promote increased export and import opportunities for Australia and its neighbours. The Australian Government is also working towards a free trade agreement with the European Union. As the benefits of these free trade agreements are realised, countries like Japan, Korea and China should become even bigger players and contributors to Australia's foreign direct investment.

While the data in the Working Paper is limited to 2014-15, it does provide a useful base for discerning trends in foreign investment in particular sectors, and, the next time data is released, allow us to assess the impact of the recent legislative changes more effectively.