The Government has issued a new policy and intends to legislate to give effect to changes to strengthen Australia’s foreign investment framework by 1 December 2015. In addition, the Government has recently consulted on proposals to modernise and simplify Australia’s foreign investment framework. This alert considers some of the less well documented side effects of the proposed changes for business transactions and provides an update on the modernisation consultation process.
Australia’s foreign investment framework
At present, Australia’s foreign investment rules consist of a mixture of law and policy. The policy has developed to fill in the gaps in the aging statutory framework – it not only sets out the way that the Foreign Investment Review Board (FIRB) interprets the statutory framework but also introduces new limbs for approval. Under this mixture of law and policy, there are broadly three kinds of transactions:
- Those transactions that must be notified to the Treasurer through FIRB – failure to notify is an offence under the law and the Treasurer has the power to block or unwind these proposals if he or she deems them to be contrary to the national interest. This primarily includes acquisitions of shares in Australian companies with assets of more than $252 million (indexed annually) and many acquisitions of interests in Australian urban land.
- Those transactions where failure to notify is not an offence under the law, but the Treasurer still has the power to block or unwind these proposals if he or she deems them to be contrary to the national interest. This primarily includes asset acquisitions, a variety of control transactions and some offshore transactions, where the target has Australian assets of more than $252 million (indexed annually).
- Those transactions that fall under the policy only – failure to notify is not an offence under the law, and the Treasurer has no statutory powers in relation to them, but foreign persons are expected to apply for a statement of no objection before proceeding with such transactions. This primarily includes most investments by ‘foreign government investors’, many investments in the media sector and (as of 1 March 2015) many acquisitions of interests in rural land.
In separate announcements in recent months, including a new policy released this week, the Government has announced proposed changes to the Foreign Acquisitions and Takeovers Act 1975 (Cth), with the intention being the changes will be legislated in sufficient time to come into effect on 1 December 2015. Key proposed changes have been well documented and include:
- the transfer of all residential real estate functions to the Australian Taxation Office;
- the introduction of substantial application fees which will vary depending on the type of application. Proposed fees include:
- $5,000 for residential properties worth up to $1 million and $10,000 for residential properties worth more than $ 1million (with a $10,000 incremental fee per additional $1 million in value);
- $5,000 for rural land worth less than $1 million and $10,000 for rural land equal to or greater than $1 million (with a $10,000 incremental fee per additional $1 million in value, capped at $100,000);
- $25,000 for developed commercial real estate; and
- $25,000 for business acquisitions (including agribusiness) where the transaction is worth up to $1 billion, $100,000 for business acquisitions (including agribusiness) where the transaction is worth more than $1 billion and $10,000 for internal re-organisations;
- stricter penalties including:
- increased criminal penalties (of $127,500 for individuals and $637,500 for companies) and supplementing divestment orders with civil pecuniary penalties and infringement notices for less serious breaches of the residential real estate rules; and
- widening of civil and criminal penalties to capture third parties who knowingly assist a foreign investor to breach the rules.
- increased scrutiny around foreign investment in agriculture, through:
- the introduction of a new definition of 'agricultural land' for the purposes of the screening threshold that currently applies to ‘rural land’ (currently $15 million taking into account all Australian 'rural land' holdings of the acquirer). The new definition is intended to capture 'productive' agricultural land (including land that could reasonably be used for primary production);
- the introduction of a $55 million threshold (based on the value of investment) of investments in “agribusiness”, with agribusiness to include primary production businesses and certain first stage downstream manufacturing businesses; and
- introduction of a comprehensive land register - from 1 July 2015, agricultural landholders are requested to register with the ATO their existing interests by 31 December 2015 and any new interests within 30 days of acquisition, and it is anticipated that this will be expanded to include other types of real estate.
The Government has also sought views on proposed options to modernise and simplify Australia's foreign investment framework. The proposed options include:
- incorporating policy only notification and prior approval requirements under Australia's Foreign Investment Policy into the legislative framework;
- updating the legislation to reflect current administrative practices and regulatory concepts, as well as for modern business and corporate finance practices;
- exempting proposals that are unlikely to affect the national interest and increase the consistency of exemptions across the different acquisition types;
- amending the legislation so that it applies irrespective of the transaction structuring (for example, moving from shares to securities (inclusive of units in trusts), and providing similar outcomes where an acquisition is direct or indirect (for example, acquiring a property or its holding company)).
Side effects of proposed changes
Most of the media interest around the proposed changes revolves around foreign investment in residential real estate and to a lesser extent agriculture, but less attention has been paid to the impact of proposed changes on business applications generally.
While we support the introduction of fees to fund or partially fund the operations of the FIRB Secretariat, the level of application fees proposed to be introduced is high by international standards, and as a result a particular area of focus in our submissions in the consultation process is alleviating the burden of these fees on high volume applicants.
There are a range of high volume applicants in the market – private equity funds and other alternative asset managers (and their Australian investee entities), real estate developers, retailers and agribusinesses that already own $15 million worth of rural land, to name a few.
The burden of high fees for these repeat applicants falls most heavily on the excessive number of applicants that are considered to be ‘foreign government investors’ (thanks to the extremely broad definition of that term applied by FIRB), given the zero dollar thresholds applying to business and land acquisitions by foreign government investors meaning most such acquisitions must be notified. While being considered to be a ‘foreign government investor’ under the existing regime is an annoyance in terms of the volume of applications that need to be lodged, the introduction of fees represents a real cost to doing business in Australia.
We have suggested a number of avenues of relief, including:
- narrowing the definition of ‘foreign government investor’ to exclude:
- certain categories of people that are frequently regulated as ‘foreign government investors’ (such as public sector pension funds);
- investments that are functionally passive (current practice is to consider whether an investment is passive based on a straight percentage interest test, which fails to capture larger passive investments through private equity funds);
- giving the Treasurer the ability to specifically exempt a ‘foreign government investor’ from the zero dollar thresholds, where the situation warrants.
By way of example, a private equity fund may have passive foreign government investors in it and, as a result, be considered to be a foreign government investor itself. This status then infects each target that the private equity fund acquires in Australia, and any bolt on or land acquisitions that the target itself later makes in Australia. The fees can add up quickly when every small acquisition of a business or land (including long term leases) must be notified. While the regulation of the private equity fund as a ‘foreign government investor’ can be debated, there is certainly no benefit in terms of protecting Australia’s national interest in regulating the Australian target as a ‘foreign government investor’ once the initial acquisition of it has been made – the actual ‘foreign government investor’ in the equation most likely does not even know the subsequent downstream acquisitions are occurring.
Failing any kind of substantive approach to determining whether a foreign person is a ‘foreign government investor’, we have suggested at a bare minimum the introduction of an annual cap on fees payable.
This burden also will fall heavily on foreign-owned agribusinesses that already own $15 million worth of rural land, as they are required to lodge applications to acquire even the smallest parcels of land (some of which have values similar to the fees they will be charged). Although the Government has announced that it will be possible to apply for approval for a land acquisition program under a single application fee of $25,000, it is not yet clear the extent to which high volume applicants can rely on this relief – for example, where not enough details about the specific plots of land that are to be acquired are known. An annual cap would help to alleviate this issue.
Aside from the impact of fees, we have made submissions on a range of other issues affecting the application of Australia’s foreign investment rules, including:
- bringing Australia’s foreign investment rules more in line with the Corporations Act by raising the threshold at which notifications of acquisitions substantial interests are required from 15% to 20%, in line with the takeovers requirements;
- the application of Australia’s foreign investment rules to ‘incidental foreigners’ – at present a person is deemed to be ‘foreign’ if they have 40% or more aggregate foreign ownership, and as a result listed companies that are majority Australian owned and governed may become foreign on any given trading day due to having foreign ownership of 40% or more. We have submitted that the 40% aggregate foreign ownership test should be supplemented with an additional widely held test so that a person is not deemed to be foreign due solely to widespread but small foreign shareholdings;
- the application of the announced $55 million investment threshold for agribusiness to the acquisition of stakes in listed agribusinesses – we have suggested that relief should be granted so that persons acquiring less than 15% of a listed agribusiness are exempt from the requirement to obtain approval (currently such an exemption already exists for acquisitions of interests in listed urban land corporations);
- the application of treaty relief – at present, acquirers from countries that have signed free trade agreements in Australia have the benefit of higher thresholds for many transactions (meaning fewer transactions by them require approval). However, current policy is not to apply the thresholds where the acquirer uses an Australian bidco. We have submitted that the existing tracing rules can be used to determine the country of ultimate control of the acquirer and hence the applicability of treaty relief;
- the application of the ‘urban land rules’ to the mining sector – at present mining tenements are regulated as ‘Australian urban land’, but this can lead to different outcomes for different kinds of tenements in different states. We have submitted that a separate regulatory framework should apply to mining tenements.