New Rural Rules
The rules for acquiring rural land were released last night in the 2015 version of Australia’s Foreign Investment Policy (Policy).
The release of the rules supports the Government’s 11 February announcement of changes to the rural land threshold which is now at A$15 million. For many investors that already hold A$15 million of rural land the effect of the cumulative threshold is that all of their proposed acquisitions now require notice for prior approval under the Policy.
Under the new rules foreign persons must notify the Government and get prior approval for a proposed acquisition of an interest in rural land. An “interest in rural land” includes interests acquired:
- Directly (for example, acquiring a legal or equitable interest); and
- Indirectly (for example, acquiring a substantial interest in a corporation or trust where more than 50 per cent of the assets of the corporation or trust comprise of rural land).
The obvious gap in the Government’s 11 February 2015 release was the lack of a definition of agribusiness. Whilst the options paper released this week for consultation (discussed below) seeks views on defining “agribusiness”, the Policy gives clarity around rural land rich entities being subject to the notice requirement and the lower threshold. In addition, the value of such corporations / trusts is to be included when calculating the existing land holdings of the acquirer.
The A$15 million cumulative threshold for rural land acquisitions does not apply to Chilean, Singaporean, Thai, New Zealand and United States investors. Instead:
- Singapore and Thai investors will require approval for acquisitions of 15% or more in a primary production business valued above $50 million.
- United States, New Zealand and Chilean investors will require prior approval for acquisitions of 15% or more in a primary production business valued above $1,094 million.
While these higher thresholds appear favourable to investors from these countries, the reality is that the higher thresholds are not often relied on. The higher thresholds are only available to an acquirer incorporated or formed in the prescribed investor country. Having an onshore entity as the acquirer will often be a more effective structure.
In assessing foreign investment applications in rural land, the new rules provide that the Government will typically consider the effect of the proposal on:
- The quality and availability of Australia’s agricultural resources, including water; land access and use
- Agricultural production and productivity
- Australia’s capacity to remain a reliable supplier of agricultural production, both to the Australian community and our trading partners
- Employment and prosperity in Australia’s local and regional communities.
Applications will need to address these considerations where relevant.
Rural Land – Exceptions
The new rules provide that approval is not needed for acquisitions of rural land:
- By will or devolution by operation of law
- From the Government (Commonwealth, State or Territory, or local), or a statutory corporation formed for a public purpose
- Solely to hold as security or by way of enforcement of a security, for the purposes of a money lending agreement.
This is consistent with the legislation. It remains to be seen whether the exemptions available under the regulations to the legislation in the urban land category will also be applied to rural land acquisitions – for example the responsible entity exemption. This will no doubt become clearer when the new regulations are made. In the meantime though, a broader category of proposals will be captured under the rural land rules than urban land.
Annual Programme Approval for Incidental Rural Land Acquisitions
One relaxation that the rules sensibly provide for is allowing a pre-approval process for acquisitions of rural land that are incidental to an activity other than agriculture. The rules note an example of acquiring interests in rural land for easements for pipelines.
The requirements to obtain a pre-approval include:
- The investment is limited to a certain monetary value
- The Annual Programme is provided for no more than 12 months
- The acquirer will report to FIRB the details of each acquisition made during the preceding three months. Regular reporting is an indicator of the government’s continuing sensitivity to rural land investment.
The Government has a favourable stance towards agricultural investments by foreign persons, stating - “foreign investment in agriculture is important for growth and innovation, and can contribute to the prosperity of local businesses, rural communities and the Australian economy.”
Nonetheless, it makes clear that compliance with the Policy should be a priority for all investors - “the expectation that all investors (both foreign and domestically-owned) comply with Australia’s laws and maintain high standards of conduct at all times”.
The Government remains committed to considering proposals made under Policy within 30 days. Given the expected increase in the number of applications that will now fall within the notification thresholds and the consequential increase in workload for Treasury, we hope this timeframe can be maintained.
Proposed Strengthening of the Foreign Investment Regime
Foreign investment is attracting a lot of attention and is a hot topic in the current political climate.
The Government continues to state that foreign investment is welcome, however, following its rhetoric, particularly in the residential and rural land sectors, the Government has announced a proposed strengthening of the foreign investment regime.
At this stage the announcement is a proposal only with opportunity provided to comment on the proposal. Comments are required by 20 March 2015.
The general thrust of the Government’s intentions to strengthen the process is clear. In particular, the Government proposes the introduction of:
- Infringement notices and civil penalties to add to the criminal offences in the legislation. These will be easier to impose than criminal provisions and will be applied against failures to comply with requirements under the legislation, including notice requirements.
- Penalties in the residential land sector are proposed to include forced sales and forfeiture of up to 25% of sale proceeds/market value.
- A new system of penalties (civil and criminal) to be applied to third parties that bring about a breach of the legislation or conditions attached to approvals.
- The imposition of fees, not only to residential acquisitions as proposed by the recent House of Representatives Committee but across commercial acquisitions as well. No surprise that fees will be introduced in the Treasury Department when the Treasurer is looking for any increase in Government revenue. Foreign persons need to be prepared for these fees which in some cases will be quite high – proposed fees range from A$5,000 for certain residential acquisitions up to A$100,000 for proposals involving A$1 billion of Australian assets. The approach to fees and possible multiple applications needs to be addressed. Also when the fee should be raised, particularly in competitive bids where the foreign bidder is not successful.
- A new compliance enforcement unit which is surprisingly proposed to be based out of the Australian Taxation Office to support FIRB. The unit will monitor non-compliance with a view to returning some confidence in the system to the public.
- Changes to the definitions of “rural land” and “urban land” as well as the addition of “residential land” and “other land”. A new term “agricultural land” will replace the current “rural land” definition. This approach appears confusing. Perhaps a better approach will be to simply refer to “land” in the legislation and make regulations that apply to particular categories of land.
- Changes to the off the plan approval process. This will include penalties for developers not marketing offshore or for failures in reporting. Limits on the amount of units individual foreign persons may acquire will be imposed. There will also be a fee imposed which appears to be variable under the current proposal. The end result will likely see developers not being prepared to use the pre-approval process despite the benefits as the new rules will simply make the process too expensive and too great an exposure to adverse outcomes.
The Government is also seeking comment on:
- The definition of agribusiness. This has clearly caused the Government difficulty with various approaches under consideration - from the farm gate, some value add or all the way up to food and beverage manufacture. Eventually a threshold of A$55 million is proposed for agribusiness investment.
- The operation of the proposed register of foreign ownership of rural land. It appears that lawyers and advisers will have an obligation to ascertain if their clients are foreign prior to registering the land interest.
- Finally, the Government is seeking submissions on modernising and simplifying the framework as well as harmonising the operation of the process with other sector legislation. It appears all thoughts are welcome!
The changes have been triggered by a perceived lack of compliance and enforcement of the rules. The Government is moving to increase enforcement of the foreign investment rules and towards a user pays system.
Care must be taken that in doing so, good investment is not driven away or bad investment driven to engage in avoidance activity. In particular, a sensible approach needs to be taken to the imposition of the new fees and penalties regime.
Ultimately the intent is to restore confidence in the foreign investment review system. Following the consultation process, these changes will likely be introduced via amendments to the Foreign Acquisitions and takeovers Act 1975 and its regulations. These amendments will need to be carefully monitored by all foreign persons intending to invest in Australia.