The Prime Minister and Treasurer issued a joint press release on Saturday 2 May (yes, Saturday!) announcing the Australian Government’s changes to the foreign investment regime including new fees and penalties that will apply to applications for approvals from 1 December 2015. The changes will also include the Australian Taxation Office taking over enforcement of the Foreign Investment rules from 4 May 2015.
A range of new fees will come into effect from 1 December 2015. The fees to be applied are at 4 levels:
- $5,000 – for residential and rural land acquisitions of less than $1 million
- $10,000 – for acquisitions of vacant land and new business proposals. Acquisitions of residential land and rural land will have a $10,000 fee from $1 million rising in $10,000 increments for each million dollars of acquisition. (Rural land fees will be capped to a maximum of $100,000.) Internal reorganisations of any value will have a $10,000 fee.
- $25,000 – for annual programmes, off the plan approvals, developed commercial property acquisitions, and business and corporation acquisitions including agribusiness acquisitions (less than $1 billion),
- $100,000 – for business and corporation acquisitions including agribusiness acquisitions ($1 billion or more).
These are large fees and will need to be factored into the decision making processes for investing into Australia.
There is no reference in the joint announcement to a waiver power or what approach will be taken in competitive bid situations. With the legislation to be introduced in the Spring Sittings of Federal Parliament, we encourage the Government to allow concessions for parties that are not successful at an auction or tender as well as to allow for an annual fee to be paid by regular investors.
A range of strengthened penalties have been announced as well as the introduction of infringement notices. The government has clearly taken aim at the residential land sector, but in the process will have a wide impact.
Breaches of the rules will see increased penalties for most breaches amounting to:
- Individuals – 750 penalty units ($127,500) or 3 years imprisonment; and
- Company – 3,750 penalty units ($637,500).
In the residential space there are also civil penalties aimed at ensuring that defaulting foreign persons do not profit from their breach (including a 10% penalty applied to purchase price or market value). Infringement notices will also apply to residential land defaults. (Either an infringement notice or civil penalty would be sought but not both.) The infringement notice regime does not appear to apply to business proposals.
There is also the introduction of a third party penalty aimed at persons who assist investors to breach the rules both in respect of residential land and business acquisitions.
After much debate at various levels including amongst the bureaucrats and their Ministers as well as media commentary, the Prime Minster and Treasurer’s joint announcement provides the following proposed definition:
Agribusiness – will include primary production businesses (generally those within Division A of the Australian and New Zealand Standard Industrial Classification Codes) and certain first stage downstream manufacturing businesses (including meat, poultry, seafood, dairy, fruit and vegetable processing and sugar, grain and oil and fat manufacturing).
Whilst there will be grey areas in applying the definition to some undertakings, particularly vertically integrated businesses, the definition is not as wide as what had been canvassed by some and sensibly refers to the well understood Industrial Classification Codes.
The announcement confirms that that there will be a $55 million threshold for investments in agribusinesses. Given the new fees and penalties and the sensitivity to investment in the agri sector, care will need to be taken to ensure of the right foreign investment outcome when looking at investment in the sector.
There is also a new “agricultural land” definition to be introduced which will broaden the current “rural land” definition. “Agricultural land” will be defined as ‘land used, or that could reasonably be used, for a primary production business’. This moves away from the current approach of land used “wholly and exclusively” for primary production and will capture a wider range of interests.
Making for a busy week in the foreign investment space, the FIRB annual report for the 2013/14 year was released on 30 April. Confirming what we have been seeing by simply looking at FIRB’s file numbers, the FIRB workload all but doubled over the previous period. What is often a surprise to those in the commercial sector is that the bulk of FIRB’s work is in residential real estate with over 90% of applications being in that sector.
For the first time, China has risen to be the number one source of investment by value for a FIRB reporting year. For many years investors from China have comprised the largest number of investors from a single country (mostly in the residential sector), but this year sees China become the largest by value. (Care should always be taken with the FIRB numbers as they are not reflective of actual investment, but merely proposed investment and ultimately are only in respect of investments that meet the FIRB’s thresholds, so do not include all foreign investment, in particular, investments direct from prescribed investor countries such as the USA and New Zealand.)
Maintaining the usual high level of approvals, of the more than 24,000 applications received, only three proposals were rejected (compared with no rejected proposals in 2012-13). Of the three proposals rejected, two related to residential real estate and the other related to the rejection in November 2013 of Archer Daniel Midlands’ proposed takeover of GrainCorp Limited. The Graincorp rejection is only the third non-real-estate rejection since 2000.
The release on Saturday 2 May is the first in what will likely be a series of changes to the foreign investment regime over the coming months. The Government’s Options Paper issued in February invited submissions on the modernising of the framework and for other sensible and much needed changes to be considered.
The Government has not yet addressed all of the issues canvassed in the Options Paper and we look forward to seeing progress made in updating and improving the regime, in particular now that applicants will be paying for the service.