The successful negotiation of the China-Australia Free Trade Agreement (ChAFTA) is a historic step in the development of this important trading relationship. ChAFTA puts Chinese businesses in the same privileged position as those of Australia’s other long-standing major trading partners, the United States,Japan, New Zealand and Korea, when seeking to invest in Australia. We survey the key benefits of ChAFTA and outline some key foreign investment considerations for Chinese businesses when investing in Australia.
Benefits of ChAFTA to Chinese investors
The announcement of the conclusion of negotiations of the ChAFTA is the culmination of almost a decade of work between China and Australia to liberalise trade between the two countries. The final text of the agreement is still to be released and will need to be ratified by each country through its domestic approval process, however ChAFTA promises a number of important benefits for Chinese businesses seeking to invest in Australia, notably:
- Raising the Foreign Investment Review Board (FIRB) screening threshold
The screening threshold for Chinese private investors in non-sensitive sectors is raised to $1,078 m. It is a significant increase from the current threshold of $248 m and puts those Chinese investors on a level playing field with investors from United States, New Zealand and, once the respective free trade agreements are ratified, Korea and Japan.
- Abolition of tariffs
Tariffs on resources, energy and manufactured goods will be eliminated immediately, whilst tariffs in certain sensitive industries such as automotive, steel, aluminium, plastics, canned fruit, carpets, clothing and footwear, will be phased out within two to four years.
- Liberalisation of visa and immigration requirements
Liberalisation of visa and immigration rules, including:
- Chinese owned Australian registered companies undertaking large infrastructure development projects with capital expenditure exceeding $150 m will be able to negotiate concessions on visa entry requirements under proposed Investment Facilitation Arrangements. This is an important development, providing ultimately Chinese owned companies with the ability to involve proprietary technology specialists, allowing quick allocation and application of resources from China to Australia
- guaranteed access to up to four years of temporary work visas for intra-company transferees, independent executives and contractual service suppliers
- up to 90 days stay for business visitors, or 6 months for business visitors who are service sellers, and
- up to three months temporary work visas for installers of imported equipment and after-sales servicers.
It is important to note that both governments recognise the need for further trade liberalisation. Accordingly, it is proposed that ChAFTA will incorporate a built-in mechanism that allows both governments to review their positions within three years of the ChAFTA coming into force.
Australia’s foreign investment regime
The Australian Government welcomes foreign investment and recognises the significant role it has to play in the continued growth and development of the Australian economy. The Government is focused on ensuring that foreign investment is in the Australian national interest and has established a sophisticated process of screening prospective investments under the Foreign Acquisitions and Takeovers Act 1975 (the Act) and Australia’s Foreign Investment Policy (Policy), administered by FIRB.
The Australian foreign investment review process is centred around the discretion conferred on the Treasurer, on the advice of FIRB, to review prospective investments on a case-by-case basis and approve those found to be in the Australian national interest. This is in contrast to the more prescriptive rulesbased approach in some other countries. In order to manage the potentially large number of investments that must be reviewed, the Act focuses on a number of key areas, namely:
- large investments
- investments in sensitive sectors of the economy, and
- investments made by government businesses.
In summary, the types of transaction that Chinese investors will typically need to notify FIRB of are:
- acquiring a 15 per cent or more interest in an Australian business valued above $1078 m (currently $248 m)
- acquiring an interest in developed commercial real estate whose value exceeds $1078 m (currently $54m)
- acquiring an interest in agricultural land whose value exceeds $15 m or an agribusiness whose value exceeds $53 m
- acquiring shares or units in Australian urban land corporations or trust estates (some exemptions apply)
- acquiring an interest in residential property or vacant non-residential land, regardless of its value, and
- any investments by a State Owned Enterprise, regardless of its size.
'The Australian Government will impose the lower screening threshold of $248 m to investments by Chinese investors in sensitive sectors, as is the case with the United States and New Zealand and expected to be the case for Japan and Korea. The prescribed sensitive sectors include media, telecommunications and transport. There are also specific restrictions relating to acquisitions of interests in companies involved in the financial services sector.
FIRB is widely regarded to operate in a transparent and non-discriminatory way and in 2012-13 investments worth more than $15.8 billion were approved by FIRB, so investors should not be deterred by the foreign investment review process. It is, however, important to consider FIRB approval early in the investment process and obtain professional advice to ensure that the proposed foreign investment is compliant with the Act and Policy. There are significant penalties that can apply to those who fail to notify FIRB prior to undertaking an investment that is required to be notified, including orders unwinding the transaction and prosecution of those involved in a contravention.
- Chinese investors may be surprised by the degree of regulation imposed on business at a Commonwealth, state/territory and local government level. In Australia, some areas to note in particular:
- substantially legalised workplace relations framework
- comprehensive standards on terms and conditions of employment
- well policed work health and safety requirements
- substantial considerations on environmental protection and environmental sustainability
- well developed and regulated corporate governance and directors’ and officers’ liabilities regime, and
- comprehensive industry regulation (eg financial services licensing).
Chinese businesses considering investing in Australia should factor in Australia’s regulatory landscape prior to undertaking any investment. This should be explored early in the process to ensure the appropriate investment structure is adopted and to avoid unnecessary delay or any breach of law.